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The Eighth Circuit Court of Appeals reminds us this week that a Chapter 13 plan can't give special treatment to unsecured, non-priority tax claims.
In 2011, the Debtors filed a petition for relief under Chapter 13 of the Bankruptcy Code. Taxing authorities held unsecured non-priority claims in the Debtors' bankruptcy case. Because of the age of the tax debt and the tardy filing of tax returns for pre-petition years, the tax debt was non-priority debt and a substantial portion of it is non-dischargeable.
The issue in this appeal is whether the bankruptcy court erred when it confirmed the Debtors' amended Chapter 13 bankruptcy plan -- over the Debtors' objection -- that did not provide for payment of unsecured non-priority tax claims and tax preparation fees ahead of other non-priority unsecured creditors.
The Debtors' Chapter 13 Plan is a Disposable Income Pot - 60 month plan. The Trustee estimated that, based on claims that had been filed, the Final Plan would provide for a distribution of approximately 78 percent to all unsecured non-priority creditors. The Trustee further submitted that, if the Debtors were permitted to pay the tax claims ahead of other unsecured non-priority creditors, the tax creditors would receive a distribution of approximately 97 percent. The remaining unsecured non-priority creditors would receive nothing.
Here, the Eighth Circuit noted that standard of review on the issue of whether the Debtors' proposed classification discriminated unfairly was not clear, but the outcome -- whether based on de novo review or abuse of discretion -- was the same.
Because a plan proposed by the Debtors providing for special treatment of the tax claims would unfairly discriminate against other unsecured non-priority creditors, the Eighth Circuit concluded that the bankruptcy court's confirmation of the Debtors' plan was proper.