Michael A. Rios and Janelle R. Rios
DECISION AND ORDER MODIFYING AUTOMATIC STAY
The issue presented in this case is whether the Internal Revenue Service is entitled to relief from the automatic stay based on a lack of adequate protection of its alleged interest in the Debtors’ Social Security benefits. For the reasons set forth below, the Court will modify the stay.
The Debtors in this Chapter 13 case owe federal taxes dating back to 2005. Claim No. 7-5; Schedule E/F, Docket No. 1 at 22. According to the IRS‘s proof of claim, the Debtors owe the IRS a total of $260,611.60 for their past due federal taxes. Claim No. 7-5. The IRS has offered the following breakdown of its claim: a secured claim in the amount of $220,204.28, an unsecured priority claim in the amount of $31,805.45, and a general unsecured claim in the amount of $8,601.87. Id. The IRS has acknowledged that it did not file a notice of federal tax lien covering the taxes at issue. Docket No. 41 at 5 n.3.
In their bankruptcy schedules, the Debtors reported that most of their income consists of Social Security benefits. Schedule I, Docket No. 1 at 36-37. Mr. Rios receives $2,138 per month in Social Security benefits. Id. He also receives $1,578 in monthly take-home pay from his work as a security guard and counts monthly prorated tax refund income of $102 for a total monthly income of $3,818. Id. Mrs. Rios is retired. Id. She receives $1,166 per month in Social Security benefits and $808 per month in pension or retirement income for
The Debtors proposed a Chapter 13 plan calling for payment of their monthly net income of $2,258 to the Chapter 13 Trustee. See Amended Chapter 13 Plan, Docket No. 36. The plan payments will be used to pay the $30,007.86 arrearage on the first mortgage on the Debtors’ home, the $28,148.28 arrearage on the second mortgage on the Debtors’ home, a $7,725.00 claim secured by the Debtors’ 2010 Toyota Prius, a $23,466.22 secured claim held by the Wisconsin Department of Revenue, the Chapter 13 Trustee‘s fees, and the Debtors’ attorneys’ fees. See Chapter 13 Plan, Docket No. 2; Claim No. 14-1; Claim No. 12-1, Claim No. 15-1. The Debtors also proposed to pay a priority claim held by the Wisconsin Department of Revenue in the amount of $612.00 and the priority portion of the IRS claim, which they assert is $31,716.26.1 Chapter 13 Plan; Claim No. 15-1; Docket No. 32 at 9. Their plan proposed no payment on general unsecured claims.
The Debtors and the IRS disagree about the status of the IRS‘s claim in this case and the permitted treatment of the claim in the Debtors’ Chapter 13 plan. That disagreement has resulted in three matters pending before the Court. The Debtors have objected to the IRS‘s proof of claim, asserting that the IRS‘s entire claim is unsecured and $31,716.26 of the claim is entitled to be treated as a priority claim under
The IRS seeks relief from the automatic stay to implement its right of setoff and/or to enforce its statutory liens on the Debtors’ Social Security benefits. Docket No. 41, p. 15. The IRS filed the motion because the filing of the Debtors’ bankruptcy petition automatically stayed “any act to collect, assess, or recover a claim against the [Debtors] that arose before the commencement of the case” and automatically stayed “the setoff of any debt owing to the [Debtors] that arose before the commencement of the case.”
- requiring cash payments to the entity to the extent the automatic stay or use of the property results in a decrease in the value of such entity‘s interest in such property;
- providing to the entity an additional or replacement lien to the extent that such stay or use of property results in a decrease in the value of such entity‘s interest in such property; or
- “granting such other relief, other than entitling such entity to compensation allowable under section 503(b)(1) of this title as an administrative expense, as will result in the realization by such entity of the indubitable equivalent of such entity‘s interest in such property.”
In ruling on a motion for relief from stay, the Court only determines whether the creditor has a “colorable” claim against a debtor‘s property and “questions of the validity of liens are not generally at issue.” In re Vitreous Steel Prods. Co., 911 F.2d 1223, 1234 (7th Cir. 1990); In re Bailey, 574 B.R. 15, 17 (Bankr. D. Me. 2017) (“There is no dispute that the IRS, as a creditor of [the debtor] with a ‘colorable’ tax claim against [the debtor‘s] property, has standing to seek relief from stay.“); In re Pansier, 2019 WL 949898 (Bankr. E.D. Wis. 2019) (in ruling on the IRS‘s motion for relief from stay, “the Court is not deciding whether or to what extent the [IRS] may enforce its lien against [the debtor‘s] pension - only whether the [IRS] has a colorable claim to the property, which is sufficiently plausible, to allow the IRS to pursue its rights elsewhere.“). The “decision to lift the stay is not an adjudication of the validity of the claim, but only a determination that the creditor‘s claim is sufficiently plausible to allow its prosecution elsewhere.” Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 34 (1st Cir. 1994).
The IRS has demonstrated a “colorable” interest in the Debtors’ property. Pursuant to
If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any
costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.
A federal tax lien “arise[s] at the time the assessment is made” and continues until the taxpayer‘s liability “is satisfied or becomes unenforceable by reason of lapse of time.”
| Tax Period | Date Tax Assessed |
|---|---|
| 12/31/2005 | 08/16/2010 |
| 12/31/2008 | 12/27/2010 |
| 12/31/2009 | 06/07/2010 |
| 12/31/2010 | 04/29/2013 |
| 12/31/2011 | 04/29/2013 |
| 12/31/2012 | 09/02/2013 |
| 12/31/2012 | 06/08/2015 |
See Claim No. 7-5.
These federal tax liens arose against “all property and rights to property” of the Debtors on the dates of the assessments. See
petition); see also Pansier v. United States, 225 B.R. 657 (E.D. Wis. 1998) (collecting cases and stating that “when a debtor has an unqualified right to receive certain payments, such as disability benefits, prior to the date on which he files bankruptcy, the right to receive those future payments constitutes ‘property,’ or at least a ‘right to property,’ acquired pre-petition for purposes of section 6321.“). The IRS‘s tax liens on the Debtors’ property, including the Debtors’ rights to receive future Social Security benefits, remain in effect until the taxes are paid.
It is undisputed in this case that the IRS did not file a Notice of Federal Tax Lien related to any of the taxes assessed by the IRS pursuant to
The problem with this argument is that it contains an erroneous assumption. It assumes that the Social Security benefits have been exempted from the Debtors’ bankruptcy estate. In fact, the Debtors’ Social Security benefits are excluded from the Debtors’ bankruptcy estate. Social Security benefits are not property of the Debtors’ bankruptcy estate. See
Plan interests were excluded rather than exempted. Property excluded from the estate would be subject to an unfiled tax lien.“). The IRS continues to have a federal tax lien on the Debtors’ right to Social Security benefits in accordance with
The Debtors argue that they do not need to provide adequate protection of the IRS‘s interest in their Social Security benefits because the IRS is not a secured creditor under
In this case, the Internal Revenue Code provides the IRS with an “interest in property.” Before the Debtors filed this bankruptcy
The Debtors offer no proposal to adequately protect the IRS‘s lien on the Debtors’ Social Security benefits. Over the 60-month term of their Chapter 13 plan, the Debtors intend to pay $134,268 to the Trustee. See Chapter 13 Plan, Docket No. 2; Amended Chapter 13 Plan, Docket No. 36. The Debtors intend to use IRS collateral of $198,240 (i.e., their Social Security benefits) to cover their expenses and make their plan payments. The plan proposes to pay the IRS priority claim in the amount of $31,805.45 but does not propose to pay anything to the IRS on the remainder of its $260,611.60 claim. Instead, the rest of the Debtors’ plan payments are slated to go towards paying the arrearage on the first mortgage on the Debtors’ home, the arrearage on the second mortgage on the Debtors’ home, a loan secured by a vehicle, the Wisconsin Department of Revenue, the Chapter 13 Trustee, and the Debtors’ bankruptcy attorney. The Debtors intend to spend their Social Security benefits (i.e., use the IRS‘s collateral) to pay other creditors and to pay their expenses. This will result in a decrease in the value of the IRS‘s lien interest in its collateral. The Debtors do not propose adequate protection to the IRS in exchange for spending its collateral.
Other courts have granted relief from stay under circumstances where debtors offered the IRS more in the way of adequate protection than the Debtors offer here. In one such case, the IRS sought relief from stay to enforce its federal tax liens on the debtor‘s pension accounts and
right to Social Security benefits and apply the funds to past tax obligations. In re Bailey, 574 B.R. 15 (Bankr. D. Me. 2017). The debtor proposed to pay the cash value of the IRS‘s security interests in his pension and Social Security benefits through a third-party loan. The bankruptcy court rejected the debtor‘s contention that this constituted adequate protection of the IRS‘s interest under
The IRS has demonstrated an interest in the Debtors’ property, a pre-petition lien on the Debtors’ Social Security benefits, that is entitled to adequate protection. Because the Debtors have not proposed adequate protection of the IRS‘s interest in that property, the IRS is entitled to relief from the automatic stay. The motion for relief from stay states that “the IRS only plans to levy a combined sum equal to the amount of the Debtors disposable income as reported on their amended Schedule J.” Docket No. 41, p. 1. The Court takes no position on the amount the
The IRS has requested that the Court “modify the automatic stay to allow the United States to levy $2,258 from Debtors’ combined monthly Social Security payments to implement its right of setoff and/or to enforce its statutory liens to the extent the Debtors have ‘rights to property’ under IRC § 6321.” Docket No. 55, p. 14; see Docket No. 41, p. 14-15. During oral argument, counsel for the IRS stated that this would be the first time a court would address head on whether Social Security benefits can be properly set off against pre-petition tax debt. The Court declines the IRS‘s invitation to be the first court in the country to decide that Social Security benefits can be set off against pre-petition tax debt. See Berg v. Social Sec. Admin., 900 F.3d 864 (7th Cir. 2018). The Court has solely determined in this decision that cause exists to modify the stay so that the IRS can enforce its statutory liens on the Debtors’ right to Social Security benefits.
IT IS THEREFORE ORDERED: the automatic stay of
IT IS FURTHER ORDERED: all other relief requested in the motion is denied.
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Katherine Maloney Perhach
United States Bankruptcy Judge