The Government Will Get Theirs (Most of the time)

By: Clayton J. Lewis

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

         In the case of In re Brown, the Bankruptcy Court for the Middle District of Florida held that a tax debt owed to the IRS was excepted from a hardship discharge, and accordingly was not excused from payment.[1]  The debtors in In re Brown filed for Chapter 13 bankruptcy relief and initially implemented a payment plan for 100% of their debts, including a total of $303,229 payable to the IRS[2].  The debtors, however, were unable to meet their payment obligations and had to amend their payment plan twice. With over $155,000 still due to the IRS,[3].  the debtors offered to settle theirs debt with the IRS.  The debtors and the IRS were unable to reach a settlement.[4].  The IRS nonetheless suggested that the debtors file for a hardship discharge under section 1328(b) of the Bankruptcy Code[5].  The debtors followed this suggestion and received a hardship discharge, and their bankruptcy case was closed[6].  The discharge order expressly noted that the debt to the IRS, however, was not discharged and was still due in full[7].  When the IRS attempted to collect the debt, the debtors filed a complaint against the IRS in the bankruptcy court, alleging that the IRS had violated the Discharge Order[8]. 

          Applying the plain language of the Bankruptcy Code (“the Code”), the court concluded that the IRS debt was exempted from the hardship discharge.[9]  The debtors argued that the IRS should be precluded from collecting the debt based on equitable principles, but the court rejected these arguments[10].  According to the court,  “[t]he dischargeability of the IRS’s general unsecured claim is governed by the [Bankruptcy] Code,” and held that the debt was due.[11]

         Section 1328(b) of the Code[12] provides for a hardship discharge. Sections 523(a)(1)[13] and 523(a)(7)[14] provide that tax debt, penalties and fines for taxes are not dischargeable, respectively, under section 1328(b). The court in Brown cites Burns v. United States for confirmation that section 523(a) excepts any taxes due from hardship discharge under section 1328(b).[15]

         The In re Brown opinion strikes the reader as calculated and brutal.  In contrast to the general theme of providing debtors with a “fresh start” under the Code[16], this opinion delivers a swift blow to the debtor, summarily concluding that there is no relief for the tax debt due to the IRS because sections 523(a)(1) and 523(a)(7) specifically exclude taxes from the hardship discharge provision, section 1328(b).  Other cases similarly conclude–bluntly, and contrary to the debtors’ contentions that tax debt is excluded from hardship discharge, and is still due to the IRS.[17]  In Andersen, the court found the language of section 523 “clear and unambiguous,” and applied it accordingly.[18]  Likewise, Wood stated that the language of the statute was “manifestly clear,” coming to the conclusion that the tax debt was not discharged, and was due post-hardship discharge.  Most significantly, the Eleventh Circuit in Burns v. United States made clear that “the best indicators of congressional intent . . . are the language and structure of the Code itself” and concluded that taxes and penalties were exempt from hardship discharge.[19]

          The case law makes clear that taxes and related fees and penalties are exempt from hardship discharge under section 1328(b), but why?  According to the courts, Congress has balanced the interests of the debtor and the government against each other through the sections of the Code allowing for hardship discharge and the exceptions thereunder.  The Code is designed, at least in part, to provide debtors with a “fresh start.”[20]  On the other hand, the government has an interest in collecting taxes.[21]  As such, when Congress designed the Bankruptcy Code, it made a value judgment, excluding tax debt from hardship discharge altogether.[22]  As the Supreme Court stated in United States v. Whiting Pools, “Congress carefully considered the effect of the new Bankruptcy Code on tax collection . . . and decided to provide protection to tax collectors, such as the IRS . . . .”[23]  Once Congress had balanced the interests of the IRS against–or over– the interests of debtors, it encoded that value judgment in the provisions of the Bankruptcy Code in plain, manifestly clear, unambiguous language.  Accordingly, the courts in Brown, Wood, and Andersen, could execute Congress’s intent with ease.  Subsequently, any challenge that a debtor might bring against the IRS for collecting on debt not discharged under section 1328(b) is sure to fail, following Congress’s intent that the government collect what is rightly due.