Recent decisions from Michigan and Georgia have cast further confusion on the issue of exclusivity of “bankruptcy-specific” exemption statutes. Under 11 U.S.C. § 522(b), a debtor filing for bankruptcy is provided with two sources from which to claim property as exempt. The debtor may choose from those exemptions enumerated under 11 U.S.C. § 522(d) or select from exemptions available under “State or local law that is applicable on the date of the filing of the petition.” [1] The advent of bankruptcy-specific exemption statutes in several states has raised the question of whether these bankruptcy-specific statutes replace, or merely supplement, other general-exemption statutes. [2]

The issue has caused conflict in cases where a debtor attempts to elect both exemptions in the state’s bankruptcy-specific exemption statute, and those provided for in that state’s general exemption statutes. Debtors often argue that the bankruptcy-specific statute is a means by which the legislature sought to allocate more protection to bankrupt debtors and is not the only source of exemptions in bankruptcy. Conversely, trustees and creditors argue that the debtor is restricted to the exemptions listed in the bankruptcy-specific statute and that the debtor is “double-dipping” by seeking to claim exemptions under the bankruptcy-specific statute and other general-exemption statutes. The answer has significant consequences for debtors, trustees and creditors alike.

What Are State Bankruptcy-Specific Exemption Statutes?
Several states have instituted exemption statutes that are available only to debtors in bankruptcy. [3] Generally, these statutes provide additional cash exemptions, allow for exemptions in property not otherwise exempt under general state law, which in some cases, replicate exemptions provided for elsewhere, and arguably replace the general exemption statutes altogether for bankrupt debtors. In 2005, the Michigan Legislature enacted MCL § 600.5451, which provides, inter alia, that:

(1) A debtor in bankruptcy under the [B]ankruptcy [C]ode, 11 U.S.C. 101 to 1330, may exempt from property of the estate property that is exempt under federal law or, under 11 U.S.C. 522(b)(2), the following property (emphasis added).

Similarly, West Virginia has enacted W.Va. Code § 38-10-4, which provides:

Any person who files a petition under the federal bankruptcy law may exempt from property of the estate in a bankruptcy proceeding the following property (emphasis added).

Georgia’s bankruptcy-specific statute states:

[A]ny debtor who is a natural person may exempt, pursuant to this article, for purposes of bankruptcy (emphasis added).

The confusion concerning bankruptcy-specific exemption statutes partially stems from the fact that many of the same exemptions are often found in other provisions of the state code. For example, MCL § 600.5451(1)(o) allows a bankrupt debtor to exempt “[p]roperty described in Section 1 of 1927 PA 212, MCL § 577.151 or real property, held jointly by a husband and wife as tenancy by the entirety.” MCL § 600.6023a, a general exemption statute, provides for the identical exemption:

Property described in Section 1 of 1927 PA 212, MCL 557.151, or real property, held jointly by a husband and wife as tenancy by the entirety is exempt from execution under a judgment entered against only one spouse.

Section 600.5451 allows a debtor in bankruptcy to exempt retirement accounts and annuities as follows:

All individual retirement accounts, including Roth IRAs, or individual retirement annuities as defined in section 408 or 408a [of] the IRC, 26 U.S.C. 408 and 408a and the payments or distributions from those accounts or annuities. This exemption applies to the operation of the federal bankruptcy code as permitted by section 522(b)(2) of the bankruptcy code, 11 U.S.C. 522.

The language of MCL § 600.6023 is substantially the same:

(k) An individual retirement account or individual retirement annuity as defined in section 408 or 408a of the IRC of 1986 and the payments or distributions from such an account or annuity. This exemption applies to the operation of the federal bankruptcy code as permitted by section 522(b)(2) of title 11 of the United States Code, 11 U.S.C. 522.

However, noticeably absent from MCL § 600.5451 are several exemptions that, prior to 2005, were historically claimed by bankrupt debtors. One such exemption not included under § 600.5451 is found under MCL § 500.2207, which allows a debtor to exempt the full cash surrender value of a life insurance policy.

Similar to Michigan’s bankruptcy-specific statute, OCGA § 44-13-100 provides a list of property that may be exempted by those debtors filing for bankruptcy. Section 44-13-100 permits bankrupt debtors to exempt annuity payments only “to the extent necessary for the support of the debtor.” However, § 33-28-7 of the Georgia Code allows a debtor to exempt the entire amount of any annuity. Thus, the question arises: Can a bankrupt debtor go outside of a state bankruptcy-specific exemption statute to claim exemptions under the state’s general exemption statutes?

Michigan’s Struggle to Find Clarity
To understand the decisions dealing with the exclusivity of bankruptcy-specific statutes, a brief overview of the context in which MCL § 600.545 was enacted by the Michigan Legislature is necessary. Prior to 2005, all Michigan debtors—bankrupt and nonbankrupt alike—enjoyed exemptions provided for in numerous provisions under the Michigan Code. 

The lack of clarity in the statute itself and the scant legislative history available have hindered Michigan bankruptcy courts in deciding the question of exclusivity as to MCL § 600.5451, which began as H.B. 5763 and would amend MCL § 600.6023. Eventually, H.B. 5763 was passed in a package of bills as a distinct statute and not as an amendment to MCL § 600.6023. There is little other language that clarifies the intent of the legislature in enacting MCL § 600.5451.

Michigan Decisions
In Michigan, the issue of exclusivity has been addressed squarely on two occasions in In re Eisenberg and In re Sassak. The question of exclusivity of Michigan’s bankruptcy-specific statute was decided oppositely in each case.

In In re Eisenberg, the debtor sought to exempt his entire interest in the cash-surrender value of a life insurance policy pursuant to MCL § 500.2207. [4] The trustee objected on the basis that MCL § 600.5451 was the exclusive source of exemptions for bankrupt debtors and it did not contain an exemption for life insurance policies, which was sustained by the court.

First, the court was persuaded that although the word “only” did not appear in the preamble to MCL § 600.5451, the language in the opening paragraph did “clearly imply that the following list of property is the list and the exclusive list of property that the debtors may claim is exempt if they elect Michigan exemption law under Bankruptcy Code section 522(b).” [5] In this vein, the court opined that the life insurance exemption provided for under MCL § 500.2207 was enacted many years prior to enactment of MCL § 600.5451, and that the legislature was aware of the life insurance exemption and elected not to provide it to bankrupt debtors. [6]

Second, the judge believed that if the Michigan Legislature had intended merely to amend and not supplant the former exemption scheme for bankrupt debtors, then it would have left H.B. 5763 as an amendment to MCL § 600.6023. “[T]he legislature could have and would have likely simply just amended Section 600.6023 to put in any updates or amendments to the substantive exemptions, listed exemptions in that statute rather than enacting an entirely different statute, 600.5451.” [7]

Lastly, the court took notice of the fact that on the same day that MCL § 600.5451 was enacted, six other bills were also passed, which included MCL § 600.6023a. Both statutes contained an identical exemption relating to property held in tenancy by the entireties, and the judge reasoned that “had the Legislature intended that a bankruptcy debtor could claim an exemption under MCL 600.6023(a) for tenancy by the entirety or for husband and wife jointly held property under MCL 557.151, it would have been unnecessary for the legislature to put a provision very similar to that in as subsection (0) to MCL 600.5451(1).” [8] The court concluded that pursuant to 11 U.S.C. § 522(b)(3), MCL § 600.5451 was the applicable state law on the date of the debtor’s filing. [9]

The opposite conclusion was reached in In re Sassak. [10] The Sassak court viewed the issue under the backdrop of 11 U.S.C. § 522(b)(3), noting that under § 522(b)(3), a debtor was permitted to claim property as exempt under applicable state or local law. Under the court’s rationale restricting a debtor to those exemptions under § 600.5451 would run counter to the language of § 522(b)(3):

Schedule C instructs the debtor to check one of two boxes when claiming exemptions: one box for 11 U.S.C. § 522(b)(2) (the federal scheme) or the other box for 11 U.S.C. § 522(b)(3) (the state scheme). If MCL 600.5451 is intended to be the exclusive list available to a debtor claiming under the state exemption scheme, one would expect the second box to read “MCL 600.5451” instead of referring the debtor to broader scope of 11 U.S.C. § 522(b)(3). [11]

The court also decided against reading MCL § 600.5451 as the exclusive source of exemptions on the basis that if this was the legislature’s intent it would have included limiting language such as the word “only.” [12] The court was also persuaded that such an interpretation of § 600.5451 conflicted with the language of a bill analysis that stated that the intent of H.B. 5763 was to “modernize and liberalize” laws applicable to bankrupt debtors. [13] The court concluded that MCL § 600.5451 was not intended to be the exclusive source of exemptions for bankrupt debtors in Michigan.

Indecision in Other Jurisdictions
There is little guidance or clarity from other states where bankruptcy-specific exemption statutes exist. In Georgia, at least two cases address the question of whether that state’s bankruptcy-specific statute, OCGA § 44-13-100, limits bankrupt debtors to the exemptions provided for therein.
In In re Allen, the debtor sought to exempt the entire amount of her annuity under a provision of the Georgia Insurance Code. [14] The trustee objected on the basis that the debtor was restricted to the exemptions under OCGA § 44-13-100. Under OCGA § 44-13-100, only certain types and limited amounts of annuities may be exempted by bankrupt debtors. The provision that the debtor sought to employ had been enacted contemporaneous to the state’s bankruptcy-specific statute and allowed a debtor to exempt the entire amount of any form of annuity. The court adopted an analysis similar to that in In re Eisenberg. The court believed that the Georgia Legislature did not intend to allow for conflicting exemptions as to bankrupt debtors:

[T]here is no indication that the Georgia Legislature intended to amend or supplement the bankruptcy-specific exemptions found in Section 44-13-100 by way of the more general Georgia Insurance Code provisions. Rather, it appears that the Legislature intended the Georgia Insurance Code to apply to nonbankruptcy situations, with the bankruptcy specific exemptions in Section 44-13-100 applying in bankruptcy cases. [15]

A different result was reached in In re Fullwood. [16] In In re Fullwood, the debtor sought to exempt his worker’s compensation settlement under OCGA § 34-9-84. A creditor objected, arguing that the debtor was not permitted to exempt a worker’s compensation benefit as OCGA § 44-13-100 did not provide for such an exemption. The court rejected the creditor’s argument, reasoning that under § 522(b)(3), the Bankruptcy Code allowed for a debtor to select exemptions from any and all state laws. [17] As in Sassak, the court believed that restricting a debtor to the exemptions listed in Georgia’s bankruptcy-specific statute would run afoul of § 522. The court further reasoned that Georgia’s worker’s compensation statute was enacted long prior to the enactment of its bankruptcy-specific exemption statute and therefore it would have been redundant to include the same exemption in OCGA 44-13-100. [18] The court also gave substantial consideration to the fact that worker’s compensation benefits has historically enjoyed protection throughout the country. [19] The court concluded that “not all of Georgia’s exemptions are within the four corners of OCGA § 44-13-100.” [20]

Conclusion
This issue currently finds courts taking one of two very different positions. Those ruling that bankruptcy-specific statutes are not exclusive seem to do so because they are unwilling to preclude debtors from claiming exemptions that have been claimed by debtors, but that are left out of bankruptcy-specific statutes. On the opposite side, courts consistently point to the fact that a specific statute was enacted for bankrupt debtors and the legislature was aware of the exemptions historically relied on by bankrupt debtors, making a conscious decision to omit them with respect to bankrupt debtors. Absent more direct statutory language from lawmakers or a ruling from the circuit courts, the tug-of-war over assets between trustees and debtors appears destined to continue.

Recent decisions from Michigan and Georgia have cast further confusion on the issue of exclusivity of “bankruptcy-specific” exemption statutes. Under 11 U.S.C. § 522(b), a debtor filing for bankruptcy is provided with two sources from which to claim property as exempt. The debtor may choose from those exemptions enumerated under 11 U.S.C. § 522(d) or select from exemptions available under “State or local law that is applicable on the date of the filing of the petition.” [1] The advent of bankruptcy-specific exemption statutes in several states has raised the question of whether these bankruptcy-specific statutes replace, or merely supplement, other general-exemption statutes. [2]

The issue has caused conflict in cases where a debtor attempts to elect both exemptions in the state’s bankruptcy-specific exemption statute, and those provided for in that state’s general exemption statutes. Debtors often argue that the bankruptcy-specific statute is a means by which the legislature sought to allocate more protection to bankrupt debtors and is not the only source of exemptions in bankruptcy. Conversely, trustees and creditors argue that the debtor is restricted to the exemptions listed in the bankruptcy-specific statute and that the debtor is “double-dipping” by seeking to claim exemptions under the bankruptcy-specific statute and other general-exemption statutes. The answer has significant consequences for debtors, trustees and creditors alike.

What Are State Bankruptcy-Specific Exemption Statutes?
Several states have instituted exemption statutes that are available only to debtors in bankruptcy. [3] Generally, these statutes provide additional cash exemptions, allow for exemptions in property not otherwise exempt under general state law, which in some cases, replicate exemptions provided for elsewhere, and arguably replace the general exemption statutes altogether for bankrupt debtors. In 2005, the Michigan Legislature enacted MCL § 600.5451, which provides, inter alia, that:

(1) A debtor in bankruptcy under the [B]ankruptcy [C]ode, 11 U.S.C. 101 to 1330, may exempt from property of the estate property that is exempt under federal law or, under 11 U.S.C. 522(b)(2), the following property (emphasis added).

Similarly, West Virginia has enacted W.Va. Code § 38-10-4, which provides:

Any person who files a petition under the federal bankruptcy law may exempt from property of the estate in a bankruptcy proceeding the following property (emphasis added).

Georgia’s bankruptcy-specific statute states:

[A]ny debtor who is a natural person may exempt, pursuant to this article, for purposes of bankruptcy (emphasis added).

The confusion concerning bankruptcy-specific exemption statutes partially stems from the fact that many of the same exemptions are often found in other provisions of the state code. For example, MCL § 600.5451(1)(o) allows a bankrupt debtor to exempt “[p]roperty described in Section 1 of 1927 PA 212, MCL § 577.151 or real property, held jointly by a husband and wife as tenancy by the entirety.” MCL § 600.6023a, a general exemption statute, provides for the identical exemption:

Property described in Section 1 of 1927 PA 212, MCL 557.151, or real property, held jointly by a husband and wife as tenancy by the entirety is exempt from execution under a judgment entered against only one spouse.

Section 600.5451 allows a debtor in bankruptcy to exempt retirement accounts and annuities as follows:

All individual retirement accounts, including Roth IRAs, or individual retirement annuities as defined in section 408 or 408a [of] the IRC, 26 U.S.C. 408 and 408a and the payments or distributions from those accounts or annuities. This exemption applies to the operation of the federal bankruptcy code as permitted by section 522(b)(2) of the bankruptcy code, 11 U.S.C. 522.

The language of MCL § 600.6023 is substantially the same:

(k) An individual retirement account or individual retirement annuity as defined in section 408 or 408a of the IRC of 1986 and the payments or distributions from such an account or annuity. This exemption applies to the operation of the federal bankruptcy code as permitted by section 522(b)(2) of title 11 of the United States Code, 11 U.S.C. 522.

However, noticeably absent from MCL § 600.5451 are several exemptions that, prior to 2005, were historically claimed by bankrupt debtors. One such exemption not included under § 600.5451 is found under MCL § 500.2207, which allows a debtor to exempt the full cash surrender value of a life insurance policy.

Similar to Michigan’s bankruptcy-specific statute, OCGA § 44-13-100 provides a list of property that may be exempted by those debtors filing for bankruptcy. Section 44-13-100 permits bankrupt debtors to exempt annuity payments only “to the extent necessary for the support of the debtor.” However, § 33-28-7 of the Georgia Code allows a debtor to exempt the entire amount of any annuity. Thus, the question arises: Can a bankrupt debtor go outside of a state bankruptcy-specific exemption statute to claim exemptions under the state’s general exemption statutes?

Michigan’s Struggle to Find Clarity
To understand the decisions dealing with the exclusivity of bankruptcy-specific statutes, a brief overview of the context in which MCL § 600.545 was enacted by the Michigan Legislature is necessary. Prior to 2005, all Michigan debtors—bankrupt and nonbankrupt alike—enjoyed exemptions provided for in numerous provisions under the Michigan Code. 

The lack of clarity in the statute itself and the scant legislative history available have hindered Michigan bankruptcy courts in deciding the question of exclusivity as to MCL § 600.5451, which began as H.B. 5763 and would amend MCL § 600.6023. Eventually, H.B. 5763 was passed in a package of bills as a distinct statute and not as an amendment to MCL § 600.6023. There is little other language that clarifies the intent of the legislature in enacting MCL § 600.5451.

Michigan Decisions
In Michigan, the issue of exclusivity has been addressed squarely on two occasions in In re Eisenberg and In re Sassak. The question of exclusivity of Michigan’s bankruptcy-specific statute was decided oppositely in each case.

In In re Eisenberg, the debtor sought to exempt his entire interest in the cash-surrender value of a life insurance policy pursuant to MCL § 500.2207. [4] The trustee objected on the basis that MCL § 600.5451 was the exclusive source of exemptions for bankrupt debtors and it did not contain an exemption for life insurance policies, which was sustained by the court.

First, the court was persuaded that although the word “only” did not appear in the preamble to MCL § 600.5451, the language in the opening paragraph did “clearly imply that the following list of property is the list and the exclusive list of property that the debtors may claim is exempt if they elect Michigan exemption law under Bankruptcy Code section 522(b).” [5] In this vein, the court opined that the life insurance exemption provided for under MCL § 500.2207 was enacted many years prior to enactment of MCL § 600.5451, and that the legislature was aware of the life insurance exemption and elected not to provide it to bankrupt debtors. [6]

Second, the judge believed that if the Michigan Legislature had intended merely to amend and not supplant the former exemption scheme for bankrupt debtors, then it would have left H.B. 5763 as an amendment to MCL § 600.6023. “[T]he legislature could have and would have likely simply just amended Section 600.6023 to put in any updates or amendments to the substantive exemptions, listed exemptions in that statute rather than enacting an entirely different statute, 600.5451.” [7]

Lastly, the court took notice of the fact that on the same day that MCL § 600.5451 was enacted, six other bills were also passed, which included MCL § 600.6023a. Both statutes contained an identical exemption relating to property held in tenancy by the entireties, and the judge reasoned that “had the Legislature intended that a bankruptcy debtor could claim an exemption under MCL 600.6023(a) for tenancy by the entirety or for husband and wife jointly held property under MCL 557.151, it would have been unnecessary for the legislature to put a provision very similar to that in as subsection (0) to MCL 600.5451(1).” [8] The court concluded that pursuant to 11 U.S.C. § 522(b)(3), MCL § 600.5451 was the applicable state law on the date of the debtor’s filing. [9]

The opposite conclusion was reached in In re Sassak. [10] The Sassak court viewed the issue under the backdrop of 11 U.S.C. § 522(b)(3), noting that under § 522(b)(3), a debtor was permitted to claim property as exempt under applicable state or local law. Under the court’s rationale restricting a debtor to those exemptions under § 600.5451 would run counter to the language of § 522(b)(3):

Schedule C instructs the debtor to check one of two boxes when claiming exemptions: one box for 11 U.S.C. § 522(b)(2) (the federal scheme) or the other box for 11 U.S.C. § 522(b)(3) (the state scheme). If MCL 600.5451 is intended to be the exclusive list available to a debtor claiming under the state exemption scheme, one would expect the second box to read “MCL 600.5451” instead of referring the debtor to broader scope of 11 U.S.C. § 522(b)(3). [11]

The court also decided against reading MCL § 600.5451 as the exclusive source of exemptions on the basis that if this was the legislature’s intent it would have included limiting language such as the word “only.” [12] The court was also persuaded that such an interpretation of § 600.5451 conflicted with the language of a bill analysis that stated that the intent of H.B. 5763 was to “modernize and liberalize” laws applicable to bankrupt debtors. [13] The court concluded that MCL § 600.5451 was not intended to be the exclusive source of exemptions for bankrupt debtors in Michigan.

Indecision in Other Jurisdictions
There is little guidance or clarity from other states where bankruptcy-specific exemption statutes exist. In Georgia, at least two cases address the question of whether that state’s bankruptcy-specific statute, OCGA § 44-13-100, limits bankrupt debtors to the exemptions provided for therein.
In In re Allen, the debtor sought to exempt the entire amount of her annuity under a provision of the Georgia Insurance Code. [14] The trustee objected on the basis that the debtor was restricted to the exemptions under OCGA § 44-13-100. Under OCGA § 44-13-100, only certain types and limited amounts of annuities may be exempted by bankrupt debtors. The provision that the debtor sought to employ had been enacted contemporaneous to the state’s bankruptcy-specific statute and allowed a debtor to exempt the entire amount of any form of annuity. The court adopted an analysis similar to that in In re Eisenberg. The court believed that the Georgia Legislature did not intend to allow for conflicting exemptions as to bankrupt debtors:

[T]here is no indication that the Georgia Legislature intended to amend or supplement the bankruptcy-specific exemptions found in Section 44-13-100 by way of the more general Georgia Insurance Code provisions. Rather, it appears that the Legislature intended the Georgia Insurance Code to apply to nonbankruptcy situations, with the bankruptcy specific exemptions in Section 44-13-100 applying in bankruptcy cases. [15]

A different result was reached in In re Fullwood. [16] In In re Fullwood, the debtor sought to exempt his worker’s compensation settlement under OCGA § 34-9-84. A creditor objected, arguing that the debtor was not permitted to exempt a worker’s compensation benefit as OCGA § 44-13-100 did not provide for such an exemption. The court rejected the creditor’s argument, reasoning that under § 522(b)(3), the Bankruptcy Code allowed for a debtor to select exemptions from any and all state laws. [17] As in Sassak, the court believed that restricting a debtor to the exemptions listed in Georgia’s bankruptcy-specific statute would run afoul of § 522. The court further reasoned that Georgia’s worker’s compensation statute was enacted long prior to the enactment of its bankruptcy-specific exemption statute and therefore it would have been redundant to include the same exemption in OCGA 44-13-100. [18] The court also gave substantial consideration to the fact that worker’s compensation benefits has historically enjoyed protection throughout the country. [19] The court concluded that “not all of Georgia’s exemptions are within the four corners of OCGA § 44-13-100.” [20]

Conclusion
This issue currently finds courts taking one of two very different positions. Those ruling that bankruptcy-specific statutes are not exclusive seem to do so because they are unwilling to preclude debtors from claiming exemptions that have been claimed by debtors, but that are left out of bankruptcy-specific statutes. On the opposite side, courts consistently point to the fact that a specific statute was enacted for bankrupt debtors and the legislature was aware of the exemptions historically relied on by bankrupt debtors, making a conscious decision to omit them with respect to bankrupt debtors. Absent more direct statutory language from lawmakers or a ruling from the circuit courts, the tug-of-war over assets between trustees and debtors appears destined to continue.

Each year, thousands of debtors file for relief under chapter 13 between Jan. 1 and April 15. A certain number will then timely file tax returns for the prior year, and find that they have a tax liability. These “straddle” liabilities—liabilities for tax years preceding the year in which the chapter 13 is commenced but before the deadline for filing the tax return—pose serious problems for debtors who need and deserve the fresh start promised in chapter 13. How can a debtor deal with these tax liabilities in the chapter 13, if at all? Four recent decisions from Michigan illustrate the difficulties in analyzing and treating these straddle liabilities.

In In re Turner, [1] the debtor filed for chapter 13 relief on Jan. 13, 2009, and timely filed his State of Michigan tax return that indicated a liability of $2,396 for the tax year ending Dec. 31, 2008. The debtor filed a proof of claim on behalf of the state, which objected to the claim. The court focused on § 1305, which provides that only the taxing authority can file a claim for “taxes that become payable...while a case is pending.” The court stated that while the debtor could pay the taxes at any time after Jan. 1, the taxes are not payable until the final day on which a tax return can legally be filed. The taxes are not due to or legally enforceable by the taxing authority until that date, and until the return is filed, the taxing authority cannot know whether there is a liability. The court also noted that if the tax liability is found to be a pre-petition obligation, then the taxing authority may be denied the time required by Bankruptcy Rule 3002 for filing a proof of claim, and the taxing authority has 180 days from the petition date to file the claim. The debtor filed for relief on Jan. 13, and the bar date for a governmental proof of claim would run on July 28. If the tax liability is not fixed until April 15, then the governmental unit would have only 88 days between April 15 and July 28 to actually file the proof of claim. The fact that the taxes are not payable and the apparent adverse impact on the state’s ability to file a proof of claim compelled the conclusion that the straddle tax liability was a post-petition liability that could not be treated in the chapter 13 plan unless the state chose to file a proof of claim and receive payment through the Plan.

In In re Senczyszyn, [2]the court determined that § 1305 does not define “pre-petition” vs. “post-petition” claims, but applies only after a court makes the threshold determination that the claim is a post-petition claim. The court stated that whether an obligation is a claim is based on § 101(5)(A), which defines any right to payment—whether liquidated, unliquidated, contingent or otherwise—and is to be construed in the broadest terms possible. Under Sixth Circuit precedent, the obligation will be a claim if the obligation has its basis in a pre-petition relationship between the debtor and creditor. That relationship, standing alone, gives the creditor the required notice of an obligation to file a proof of claim. Applied to tax obligations, the liability by definition arises out of a pre-petition relationship between the debtor and taxing authority. Every fact that is necessary for the existence and extent of the claim occurred as of Dec. 31 of the prior year. The straddle tax liability is a claim as of Dec. 31 that, as a pre-petition priority claim, must be treated in debtor’s chapter 13 plan pursuant to § 1322, free from the restrictions of § 1305.

Two other cases [3] used a third approach to straddle tax claims and were the first to disagree with the Senczyszyn court regarding the status of the claim as a pre-petition claim. These courts agreed with the Turner court’s holding that the state’s “right to payment” did not arise until April 15 and, therefore, the claim did not arise until April 15, well after the commencement of the cases.

The courts then focused on §§ 1322 and 507(a)(8)(A)(i). Section 507(a)(8) gives priority status to any claim that is measured by income for a taxable year ending on or before the date of the filing of the petition for which a return, if required, is last due after three years before the date of the filling of the petition. Straddle tax liabilities are “measured by income” for a tax year ending prior to the commencement of the case—the debtor's income in 2009 certainly predates the filing of the case in 2010. The last date on which the debtor could timely file a return would have been April 15, 2010, a date is that is after a date that was three years prior to the commencement of the case. Thus, the debtor’s tax obligation for the year 2009 constituted a “priority” tax claim under § 507.

Section 502 provides that any claim that arises after commencement of the case for tax that is otherwise entitled to priority is determined and allowed as if the claim had arisen before the date of the Petition. Section 1322 requires that the debtor's plan provide for full payment of all allowed priority claims over the life of the plan. "[Sections] 502(i), 507(a)(8) and 1322(a)(2)…establish a Congressional intent to treat taxes on income for the taxable year preceding the bankruptcy cases as prepetition claims and to bring those claims into the bankruptcy plan." [4]

Regardless of the analysis used—whether the “straddle” tax claim is a pre-petition claim or is a post-petition claim that nonetheless can be treated in the Plan—allowing a debtor to treat these claims is more consistent with the “fresh start” policy of the Bankruptcy Code. Presumably, debtors are all committing all of their disposable income to the funding of the plan, raising the question of how the debtor would be able to pay this additional claim. Payment of the claim assures that the claim will be paid, as full payment of the priority claim is a condition to the debtor receiving a discharge. Payment through the chapter 13 plan also simplifies the collection by the taxing authority, which must do nothing more than file a proof of claim. The taxing authority may be denied the ability to charge interest and penalties. However, a taxing authority’s goal should be to collect taxes owed, not to seek unnecessarily punitive additional charges or fees. Payment of straddle tax claims through the chapter 13 plan furthers the goals of both the Code in providing the debtor with a fresh start and those of the taxing authority for collection of outstanding tax obligations.

Many consumers find that despite the fact that they receive a discharge creditors still attempt to collect debts and report false derogatory information on their credit reports. The Fair Debt Collection Practices Act (FDCPA) [1] and the Fair Credit Reporting Act (FCRA) [2] regulate debt collection and credit reporting. Bankruptcy judges have struggled with the limits of their jurisdiction in dealing with these types of post-petition claims. The Seventh Circuit Court of Appeals has split regarding the availability of FDCPA claims that are predicated upon the fact that a discharge has been entered. [3] Assuming the availability of an action, when do bankruptcy courts have jurisdiction to hear cases under the FDCPA and FCRA?

Both the FDCPA and the FCRA grant federal court jurisdiction to hear claims under these statutes. [4] Despite this fact, bankruptcy courts have routinely dismissed claims under both the FDCPA and the FCRA for lack of subject matter jurisdiction. [5] While evaluating subject-matter jurisdiction, those courts have focused their review on whether the consumer law claims fall into bankruptcy “related-to” jurisdiction found in 28 U.S.C. § 1334. In so doing, the courts have applied the test articulated in Pacor Inc. v. Higgins, [6] which essentially held that for a bankruptcy court to have related-to jurisdiction, the claims must impact the debtor and the estate. Pacor and the cases that follow its holding tend to be cases that involve state law claims against non-debtors brought in bankruptcy court. Pacor deals with an individual who sued Pacor for asbestos-related injuries. Pacor was not the debtor, but removed the case to bankruptcy court because Pacor reasoned that it would file third-party claims against the debtor and therefore, the litigation was related to the debtor’s bankruptcy. [7] However, the courts have held that unless the claims impact the debtor and the estate, bankruptcy courts do not have jurisdiction. [8] Federal consumer law claims will generally not affect the estate; therefore courts tend to dismiss the claims for lack of jurisdiction with the debtor left to refile her claims in federal district court.

However, the fact scenario in Pacor is far different than the cases that involve federal consumer protection statutes. First, when the debtor sues a debt collector for post-petition collection, he or she is a party to the action. Further, no one in Pacor seemed to argue that federal jurisdiction existed other than related to jurisdiction. Therefore, without bankruptcy jurisdiction, the claims must be sent to state court.

The FDCPA and FCRA both grant federal courts the jurisdiction to hear claims under these statutes. When bankruptcy courts rule that they do not have subject-matter jurisdiction to hear FDCPA or FCRA claims, but the federal district court did have jurisdiction, a question arises: Just who are bankruptcy judges if they are not judges in the district court?

Congress originally intended that bankruptcy judges be functionally independent of the district courts. However, the Supreme Court in Northern Pipeline Co. v. Marathon Pipe Line Co. [9] struck down the separation because it “impermissibly removed most, if not all, of the essential attributes of the judicial power from the [Article] III district court, and has vested those power in a non-[Article] III adjunct.” [10]

It is clear that bankruptcy judges are not independent of the district court. Following the 1984 amendments to the Bankruptcy Code, many courts ruled that bankruptcy courts are now just the name given to the district court judges assigned to hear bankruptcy cases.

The Volpert v. Ellis court stated that “[t]here is no ‘bankruptcy court’ per se as a separate legal entity. Instead, the phrase ‘bankruptcy court’ is merely a collective term of reference for all bankruptcy judges who serve within any district as judicial officers of the district court.” [11] The court also state the “[w]e use the words ‘bankruptcy court’ somewhat loosely...the bankruptcy court is no longer a distinct entity, but is a ‘unit’ of the district court.” [12]“Thus, ‘bankruptcy courts’ no longer exist as distinct jurisdictional entities, but rather have been subsumed within each district court.” [13]

“[T]here really is no bankruptcy court except in name. The term ‘bankruptcy court’ is solely a phrase that is applied to the bankruptcy judges for a district insofar as those judges together are a unit of the district court. 28 U.S.C. § 151. Thus while functionally there may appear to be a separate bankruptcy court, for jurisdiction purposes there is only one court, i.e., the district court.” [14] In light of the fact that bankruptcy judges are judges within the district court the question must be asked: How can the bankruptcy court rule that it does not have jurisdiction over a matter at the same time it rules that the district court has jurisdiction?

The Ninth Circuit has recently ruled that “the bankruptcy court’s subject-matter jurisdiction under the 1984 Act is coterminous with that of the district court.” [15 Indeed, bankruptcy jurisdiction is vested in the district court, not a separate court. [16] If the bankruptcy court is a separate court from the district court, then how does the bankruptcy court have jurisdiction over any bankruptcy matters?

Bankruptcy judges receive cases that are referred to them by the district court pursuant to 28 U.S.C. § 157(a). Therefore, if the bankruptcy court does not believe it may hear the matter, the proper procedure would be to withdraw the reference found in § 157 rather than to dismiss for lack of jurisdiction and have the debtor refile the case before the district court. To rule that the bankruptcy court does not have jurisdiction but the district court does have jurisdiction necessarily rules that the bankruptcy court and the district court are separate and distinct courts. This contradicts the statutory scheme and case law interpreting the role of bankruptcy judges.

Those who represent debtors in these types of actions would do well to assert jurisdiction other than simply claiming related to jurisdiction. Debtors should assert that the courts have federal question jurisdiction. Bankruptcy courts who do not believe they should hear these matters should consider whether the property remedy is to withdraw the reference to the bankruptcy court and have the matter referred back to the district court rather than make the ruling that the bankruptcy court does not have jurisdiction.