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
(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
(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
(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,
Historical and Revision Notes
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
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
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
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.