Tax Debt Interest

In a recent Chapter 13 bankruptcy case, the bankruptcy court was faced with the issue of how to apply interest on tax debt in a repayment plan.

As stated in the Trustee’s original motion filed in each case to modify the subject claims, Debtors’ respective proposed Chapter 13 plans and their Orders of Confirmation provided for payment of Creditors’ claims without interest. Creditors’ proofs of claim, in stark contrast, provided for 24% interest. In response to the Trustee’s objection filed in each case to pay Creditors’ claims at a significantly reduced interest rate in accordance with Till v. SCS Credit Corporation, 541 U.S. 465, 479 (2004) (holding that the “prime-plus” or formula approach best equates with the “present value” requirement of the Chapter 13 “cram down” bankruptcy provision for allowed secured claims codified in § 1325(a)(5)(B)(ii)), Creditors unsuccessfully argued that their claims were shielded by the anti-modification protections of § 511(a), which was enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”).

There is an important distinction to be made in this Chapter 13 bankruptcy case. Section 511(a) of the bankruptcy code specifically states that tax claims are exempt from modifications to their interest rate. This may include tax claims which have been acquired by third-parties depending on the state in which the bankruptcy is filed.  In the state of Texas, if a third-party acquires a tax lien, that debt retains its secured and priority status, including the protection from “cram downs” in bankruptcy.  However, any interest rate applied to tax debt held by the state or by third-party creditors must be justified. In other words, a creditor cannot simply tack on whatever amount of interest they choose in Chapter 13 bankruptcy.

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