Prior Tax Debt Could Burden a Debtor Post-Discharge

A recent case has left a debtor who has received a discharge pursuant to a Chapter 13 plan saddled with a significant amount of old tax debt. The Bankruptcy Court recently dismissed a debtors complaint and held that their tax debt was unaffected by the bankruptcy because “the lien was not addressed and treated in some fashion during the course of the bankruptcy case.” The debtor in this case filed for Chapter 13 Bankruptcy in 2004 and received a discharge in 2009. Debtor owed real estate taxes on property in Philadelphia for the years of 1992-1996. In 2006 the city filed a secured claim against the debtor in the amount of $47,945.25. The basis for the claim however was unclear and was left unpaid. In May of 2011, 2 years after the debtor received a discharge, the creditors attempted to sell the property at a tax sale.

In response to the initiation of this sale the debtor responded by asserting that the tax claim was paid, and that the collection efforts violated the terms of the bankruptcy plan. The debtor sued the creditors and other named defendants, and the creditors moved to dismiss. The court granted the motion to dismiss. The court addressed that no party filed a proof of claim for the tax debt and that the plan did not suggest that the claim filed by the debtor was to be treated as a comprehensive claim encompassing all the cities pre-petition liens. Since no proof of claim was filed and there was no provision that addressed, affected, or restricted the creditors rights, the court found that the pre-petition tax debt passed through the Chapter 13 plan unaffected.

Had the confirmed plan included a provision to the effect that that “payment of any allowed claims for municipal liens on the debtor’s real property shall be made in full satisfaction of all prepetition municipal liens on the property,” the creditor would have arguably been required to accept the plan distribution from the trustee in full satisfaction of its claims pursuant to Section 1327 of the Bankruptcy Code. However the debtor’s plan did not address the 1992-1996 tax debt. What all of this means is that in order to be protected a debtor should take care to address all of their liens in a bankruptcy case, either by providing for it in a reorganization plan or avoiding it pursuant to the Bankruptcy code. If not a debtor may find his or herself legally obligated to pay debts that should have been discharged in bankruptcy.