Automatic Stay
As with any creditor, bankruptcy can be a valuable tool in dealing with a State or Federal tax liability. A major benefit applicable for all chapters is the automatic stay that goes into effect immediately upon the filing of the bankruptcy petition. Section 362 of the bankruptcy code provides for the stay of all collection activity. Creditors, including the IRS, must immediately cease any collection action against the debtor. Even telephonic or written communication relating to collection is prohibited. Violations of the stay provisions may constitute contempt and damages can be awarded. The recently enacted IRS Restructuring and Reform Act of 1998 provides for damages against the Service up to $1,000,000 for stay violations. Moreover, the Service has enacted specific procedures to quickly payout damage claims under a certain amount.
The automatic stay provides breathing space to a financially troubled debtor. If the IRS, or any other creditor is threatening to seize assets, a bankruptcy petition will immediately stop any action. Moreover, even if the creditor has already seized or levied on an asset that is necessary for a successful reorganization, as long as the asset is not cash and has not yet been sold, the debtor generally can force the return of the asset or release of the levy. However, if the asset involved does not have an equity cushion in excess of the liability, adequate protection must be provided. This usually involves periodic cash payments to protect the creditor from depreciation of the property during the period the debtor is developing a plan. Since a chapter 13 plan is usually confirmed shortly after the petition is filed, adequate protection is not usually an issue. On the other hand, in a chapter 11, it often takes more than a year before a plan is confirmed. In such case, adequate protection becomes a significant issue.
Bluestein & Muhlbauer, P.C.
333 International Drive
Williamsville, NY 14221
716.633.3200
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