Cite as: Keith M. Lundin, Lundin On Chapter 13, § 58.11, at ¶ ____, LundinOnChapter13.com (last visited __________).
BAPCPA added one new stay to § 362(a) and several new stay exceptions that are less important to Chapter 13 practice than those discussed above.1
The new stay is in § 362(a)(8): a petition operates as a stay of the commencement or continuation of a proceeding before the United States Tax Court “concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title.”2 Chapter 13 debtors occasionally are entangled in tax court proceedings. This new stay makes clear that a Chapter 13 petition stops proceedings before the tax court with respect to prepetition tax liability.
There is a new exception to the automatic stay in § 362(b)(26) for the setoff of income tax refunds:
(b) The filing of a petition . . . does not operate as a stay—
(26) under subsection (a), of the setoff under applicable nonbankruptcy law of an income tax refund, by a governmental unit, with respect to a taxable period that ended before the date of the order for relief against an income tax liability for a taxable period that also ended before the date of the order for relief, except that in any case in which the setoff of an income tax refund is not permitted under applicable nonbankruptcy law because of a pending action to determine the amount or legality of a tax liability, the governmental unit may hold the refund pending the resolution of the action, unless the court, on the motion of the trustee and after notice and a hearing, grants the taxing authority adequate protection (within the meaning of section 361) for the secured claim of such authority in the setoff under section 506(a).3
This new exception to the automatic stay applies only to setoff of an income tax refund for a prepetition tax period against an income tax liability for a prepetition tax period. If the amount or “legality” of tax liability is disputed in a pending action, the taxing authority may hold the refund unless the bankruptcy court orders otherwise and then subject to adequate protection for the taxing authority’s secured claim.
There has been controversy in Chapter 13 cases about the use of a prepetition tax refund that has been intercepted by a taxing authority claiming a setoff for unpaid taxes.4 Withholding or intercepting the refund has been likened to the freezing of a bank account.5 New § 362(b)(26) makes clear that the automatic stay does not interfere with the next step—the actual setoff of an income tax refund against tax liability, when both have origin in a prepetition tax period. This new exception to the automatic stay does no violence to “applicable nonbankruptcy law,” thus preserving any arguments the debtor may have about conditions for the exercise of setoff by the governmental unit holding the tax refund. For example, that there is a new exception to the automatic stay would not help a taxing authority exercise setoff if mutuality is lacking or if the refund is larger than the right of setoff.
Chapter 13 plans are sometimes funded in part by income tax refunds. The new stay exception in § 362(b)(26) will complicate the use of prepetition tax refunds in Chapter 13 plans. Providing for the prepetition tax liability through the plan will not change the fact that the taxing authority is a secured creditor to the extent of the setoff that new § 362(b)(26) allows it to exercise.
Finally, BAPCPA imposed a new deadline for final resolution of a motion for relief from the stay. As amended, new § 362(e)(2) provides that in a Chapter 13 case the stay terminates “60 days after a request is made by a party in interest under [§ 362(d)]” unless the bankruptcy court renders a final decision. The 60-day period can be extended by agreement of the parties or by a court order that specifically fixes the length of the extension and finds good cause. This new provision means that the stay will automatically terminate 60 days after a request for relief unless the bankruptcy court either decides the motion or orders an extension.
2 11 U.S.C. § 362(a)(8).
3 11 U.S.C. § 362(b)(26).
4 See § 236.1 [ Tax Refunds ] § 122.1 Tax Refunds.