Bankruptcy Forms: Filing Bankruptcy Chapter 7 Bankruptcy Software Chapter 13

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TITLE 11–BANKRUPTCY

CHAPTER 7–LIQUIDATION

Sub Chapter II – Collection, Liquidation and Distribution of the Estate

Sec. 724. Treatment of certain liens

  (a) The trustee may avoid a lien that secures a claim of a kind 
specified in section 726(a)(4) of this title.
    (b) Property in which the estate has an interest and that is subject 
to a lien that is not avoidable under this title and that secures an 
allowed claim for a tax, or proceeds of such property, shall be 
distributed--
        (1) first, to any holder of an allowed claim secured by a lien 
    on such property that is not avoidable under this title and that is 
    senior to such tax lien;
        (2) second, to any holder of a claim of a kind specified in 
    section 507(a)(1), 507(a)(2), 507(a)(3), 507(a)(4), 507(a)(5), 
    507(a)(6), or 507(a)(7) of this title, to the extent of the amount 
    of such allowed tax claim that is secured by such tax lien;
        (3) third, to the holder of such tax lien, to any extent that 
    such holder's allowed tax claim that is secured by such tax lien 
    exceeds any amount distributed under paragraph (2) of this 
    subsection;
        (4) fourth, to any holder of an allowed claim secured by a lien 
    on such property that is not avoidable under this title and that is 
    junior to such tax lien;
        (5) fifth, to the holder of such tax lien, to the extent that 
    such holder's allowed claim secured by such tax lien is not paid 
    under paragraph (3) of this subsection; and
        (6) sixth, to the estate.

    (c) If more than one holder of a claim is entitled to distribution 
under a particular paragraph of subsection (b) of this section, 
distribution to such holders under such paragraph shall be in the same 
order as distribution to such holders would have been other than under 
this section.
    (d) A statutory lien the priority of which is determined in the same 
manner as the priority of a tax lien under section 6323 of the Internal 
Revenue Code of 1986 shall be treated under subsection (b) of this 
section the same as if such lien were a tax lien.

(Pub. L. 95-598, Nov. 6, 1978, 92 Stat. 2607; Pub. L. 98-353, title III, 
Sec. 477, July 10, 1984, 98 Stat. 381; Pub. L. 99-554, title II, 
Sec. 283(r), Oct. 27, 1986, 100 Stat. 3118; Pub. L. 103-394, title III, 
Sec. 304(h)(4), title V, Sec. 501(d)(23), Oct. 22, 1994, 108 Stat. 4134, 
4146.)


                      Historical and Revision Notes

                         legislative statements

    Section 724 of the House amendment adopts the provision taken in the 
House bill and rejects the provision taken in the Senate amendment. In 
effect, a tax claim secured by a lien is treated as a claim between the 
fifth and sixth priority in a case under chapter 7 rather than as a 
secured claim.
    Treatment of certain liens: The House amendment modifies present law 
by requiring the subordination of tax liens on both real and personal 
property to the payment of claims having a priority. This means that 
assets are to be distributed from the debtor's estate to pay higher 
priority claims before the tax claims are paid, even though the tax 
claims are properly secured. Under present law and the Senate amendment 
only tax liens on personal property, but not on real property, are 
subordinated to the payment of claims having a priority above the 
priority for tax claims.


                        senate report no. 95-989

    Subsection (a) of section 724 permits the trustee to avoid a lien 
that secures a fine, penalty, forfeiture, or multiple, punitive, or 
exemplary damages claim to the extent that the claim is not compensation 
for actual pecuniary loss. The subsection follows the policy found in 
section 57j of the Bankruptcy Act [section 93(j) of former title 11] of 
protecting unsecured creditors from the debtor's wrongdoing, but expands 
the protection afforded. The lien is made voidable rather than void in 
chapter 7, in order to permit the lien to be revived if the case is 
converted to chapter 11 under which penalty liens are not voidable. To 
make the lien void would be to permit the filing of a chapter 7, the 
voiding of the lien, and the conversion to a chapter 11, simply to avoid 
a penalty lien, which should be valid in a reorganization case.
    Subsection (b) governs tax liens. This provision retains the rule of 
present bankruptcy law (Sec. 67(C)(3) of the Bankruptcy Act [section 
107(c)(3) of former title 11]) that a tax lien on personal property, if 
not avoidable by the trustee, is subordinated in payment to unsecured 
claims having a higher priority than unsecured tax claims. Those other 
claims may be satisfied from the amount that would otherwise have been 
applied to the tax lien, and any excess of the amount of the lien is 
then applied to the tax. Any personal property (or sale proceeds) 
remaining is to be used to satisfy claims secured by liens which are 
junior to the tax lien. Any proceeds remaining are next applied to pay 
any unpaid balance of the tax lien.
    Subsection (d) specifies that any statutory lien whose priority is 
determined in the same manner as a tax lien is to be treated as a tax 
lien under this section, even if the lien does not secure a claim for 
taxes. An example is the ERISA [29 U.S.C. 1001 et seq.] lien.


                         house report no. 95-595

    Subsection (b) governs tax liens. It is derived from section 67c(3) 
of the Bankruptcy Act [section 107(c)(3) of former title 11], without 
substantial modification in result. It subordinates tax liens to 
administrative expense and wage claims, and solves certain circuity of 
liens problems that arise in connection with the subordination. The 
order of distribution of property subject to a tax lien is as follows: 
First, to holders of liens senior to the tax lien; second, to 
administrative expenses, wage claims, and consumer creditors that are 
granted priority, but only to the extent of the amount of the allowed 
tax claim secured by the lien. In other words, the priority claimants 
step into the shoes of the tax collector. Third, to the tax claimant, to 
the extent that priority claimants did not use up his entire claim. 
Fourth, to junior lien holders. Fifth, to the tax collector to the 
extent that he was not paid under paragraph (3). Finally, any remaining 
property goes to the estate. The result of these provisions are to leave 
senior and junior lienors and holders of unsecured claims undisturbed. 
If there are any liens that are equal in status to the tax lien, they 
share pari passu with the tax lien under the distribution provisions of 
this subsection.

                       References in Text

    Section 6323 of the Internal Revenue Code of 1986, referred to in 
subsec. (d), is classified to section 6323 of Title 26, Internal Revenue 
Code.


                               Amendments

    1994--Subsec. (b)(2). Pub. L. 103-394, Sec. 304(h)(4), substituted 
``507(a)(6), or 507(a)(7)'' for ``or 507(a)(6)''.
    Subsec. (d). Pub. L. 103-394, Sec. 501(d)(23), substituted 
``Internal Revenue Code of 1986'' for ``Internal Revenue Code of 1954 
(26 U.S.C. 6323)''.
    1986--Subsec. (b)(2). Pub. L. 99-554 inserted reference to section 
507(a)(6) of this title.
    1984--Subsec. (b). Pub. L. 98-353, Sec. 477(a)(1), substituted ``a 
tax'' for ``taxes'' in provisions preceding par. (1).
    Subsec. (b)(2). Pub. L. 98-353, Sec. 477(a)(2), substituted ``any 
holder of a claim of a kind specified'' for ``claims specified'', 
``section 507(a)(1)'' for ``sections 507(a)(1)'', and ``or 507(a)(5) of 
this title'' for ``and 507(a)(5) of this title''.
    Subsec. (b)(3). Pub. L. 98-353, Sec. 477(a)(3), substituted 
``allowed tax claim'' for ``allowed claim''.
    Subsec. (c). Pub. L. 98-353, Sec. 477(b), substituted ``holder of a 
claim is entitled'' for ``creditor is entitled'' and ``holders'' for 
``creditors'' in two places.
    Subsec. (d). Pub. L. 98-353, Sec. 477(c), substituted ``the priority 
of which'' for ``whose priority'' and ``the same as if such lien were a 
tax lien'' for ``the same as a tax lien''.


                    Effective Date of 1994 Amendment

    Amendment by Pub. L. 103-394 effective Oct. 22, 1994, and not 
applicable with respect to cases commenced under this title before Oct. 
22, 1994, see section 702 of Pub. L. 103-394, set out as a note under 
section 101 of this title.


                    Effective Date of 1986 Amendment

    Amendment by Pub. L. 99-554 effective 30 days after Oct. 27, 1986, 
see section 302(a) of Pub. L. 99-554, set out as a note under section 
581 of Title 28, Judiciary and Judicial Procedure.


                    Effective Date of 1984 Amendment

    Amendment by Pub. L. 98-353 effective with respect to cases filed 90 
days after July 10, 1984, see section 552(a) of Pub. L. 98-353, set out 
as a note under section 101 of this title.

                  Section Referred to in Other Sections

    This section is referred to in sections 106, 303, 349, 502, 522, 
550, 551, 764 of this title; title 26 sections 6327, 7437.



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