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Sixth Circuit Permits Chapter 13 Debtor to Include State Tax Debt in Bankruptcy Plan - In re Hight

March 12, 2012

Vincent Howard and our Rancho Cucamonga consumer bankruptcy attorneys were interested to see an appeals case giving a debtor the opportunity to repay a post-petition tax debt as if it were pre-petition. In In re Hight, Dianette Hight of Michigan filed for Chapter 13 bankruptcy in January of 2009 and later submitted her state tax return, which showed she owed $4,900 in state taxes. Instead of paying by April 15, she filed a claim on behalf of the Michigan Treasury Department that rolled this debt into her Chapter 13 payment plan. The Treasury Department objected, but the bankruptcy court found that although this was a postpetition claim, it can be treated like a prepetition claim under the bankruptcy code. The district court upheld that finding, and the Sixth U.S. Circuit Court of Appeals affirmed, finding Hight is permitted to file a prepetition claim for a creditor who fails to timely file.

Hight filed for bankruptcy in late January of 2009 and filed her taxes on April 8, but did not pay them. In July, she filed a proof of claim on behalf of the Treasury Department, which meant her taxes would be part of her repayment plan. The Treasury Department had not yet filed any claims in the case. But after Hight filed on its behalf, it raised an objection that she couldn't legally do that, because a debtor may not file a postpetition claim for the creditor. The bankruptcy court overruled, holding that while it was indeed a postpetition claim, section 1322(a) of the bankruptcy code required the court to treat it like a prepetition claim. The district court affirmed, finding that this section and others in the bankruptcy code showed a Congressional intent to roll taxes for the previous tax year into the bankruptcy plan by treating them as prepetition claims. Treasury appealed.

The Sixth Circuit affirmed. It agreed with Treasury that the plain language of the bankruptcy code does not permit debtors to file postpetition claims on behalf of creditors. However, it then agreed with Hight that this does not restrict other parts of the bankruptcy code, which carve out exceptions, from operating. One of the sections of the bankruptcy code identified by the district court is instructive, the court said; it permits "priority" tax debts to be treated like a prepetition claim. And the tax debt in question is a priority debt because it was last due within the last three years before the bankruptcy was filed. It rejected Treasury's attempt to argue that this three-year period ended on the date of filing, finding no evidence of a specified end date. Furthermore, it would conflict with another provision regarding taxes that come due after filing, the court said, making it logically impossible for any claim to qualify. Thus, Hight was entitled to file a claim on behalf of the Treasury Department, the court said.

Vincent Howard and our Santa Ana personal bankruptcy lawyers are interested to see this case, in part because it's advantageous for the bankruptcy filer. Normally, taxes in bankruptcy are not great news because they are not dischargeable in bankruptcy; you must pay the full amount. However, this case gives an advantage of a sort to the debtor because it permits her to add her tax debt to her other debts. Presumably, the Michigan Treasury Department would have preferred to collect on her debt all at once, in the way that non-debtors would ordinarily pay their taxes. Our Escondido individual bankruptcy attorneys also note that the Treasury Department may have been penalized for failure to act quickly enough to file its own petition, which may have given it more flexibility.

If you're feeling overwhelmed by your debt and you're ready to talk to an experienced bankruptcy lawyer about your options, call Vincent Howard and the team at Howard Law, P.C. You can send us an email or call 1-800-872-5925.

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