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Debtors May Not Place Unsecured Tax Debts Ahead of Other Creditors - Copeland v. Fink

November 28, 2012

At Howard Law, P.C., our Rubidoux consumer bankruptcy lawyers frequently represent bankruptcy filers who are concerned about making sure a particular debt gets priority. This often grows out of noble intentions to ensure that a particular person is repaid--such as a family member who made a loan--but in bankruptcy, filers have very limited authority to determine the order in which creditors are paid. Rather, bankruptcy laws themselves set some of the standards for how creditors are repaid, and the creditors and trustee can ask the court for a particular ruling. In Copeland v. Fink, the Bankruptcy Appellate Panel of the Eighth U.S. Circuit Court of Appeals ruled that Shawn and Lauren Copeland could not prioritize unsecured tax debt to the IRS and Missouri and Kansas state governments, because this would unfairly discriminate against other creditors.

The Copelands had old tax debts from all three tax agencies when they filed for Chapter 13 bankruptcy. The age of the debts made them unsecured but non-dischargeable, meaning the Copelands would still be obligated to pay them back even after the bankruptcy was finished. They filed a plan making the tax creditors a special class that got paid back 100 percent. The bankruptcy court denied confirmation of this plan, so the Copelands removed the special class, but objected to confirmation of the modified plan. At a hearing on this objection, their trustee argued that it's unfair discrimination to provide special treatment to certain debt just because it's not dischargeable. He estimated that 78% of unsecured claims would be paid under the confirmed plan; the Copelands' plan would provide 97% payment for the tax creditors and nothing for the others. The bankruptcy court ruled in the trustee's favor and the Copelands appealed.

On appeal, the couple argued that the tax creditors deserved special treatment because they were obligated to continue providing services even without payment. Thus, they said, good public policy requires maximum tax collection. The BAP did not accept that public policy rationale, finding instead that the Copelands were proposing the special class because the debt was not dischargeable. And under 1994's Groves v. LaBarge, the court said, non-dischargeability alone is not a proper reason to discriminate against other unsecured creditors. By proposing this plan, the panel said, the Copelands were implicitly asking other creditors to pay for their failure to file their taxes on time. Indeed, it noted, tax creditors are protected even without the special class because they can keep pursuing the debts after discharge. Thus, it upheld the bankruptcy court.

Vincent Howard and our Orange personal bankruptcy attorneys understand why this couple would prefer to get the tax debt discharged in the bankruptcy. Though they will owe the debt either way, there are other unsecured creditors whose debt is dischargeable. By repaying the tax debt as fully as possible within the bankruptcy, the filers would get rid of all or most of that debt, and then get rid of the rest of the debt with a discharge. As things stand, they will repay each creditor a lesser amount, and then pay more to the tax agencies after discharge. As a result, they will end up paying more and in debt longer. Vincent Howard and our Upland individual bankruptcy lawyers can help clients with this kind of past-due tax debt understand their obligations and options in these complex situations.

If you're deep in debt and you're afraid you'll never earn enough to pay it back, call Howard Law to discuss your rights and your legal options. You can send us an email or call toll-free at 1-800-872-5925.

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