Governmental entities may place a tax lien against property for delinquent taxes owed on such property or as a result of the property owner’s failure to pay income or other taxes. Once the tax lien is perfected, the governmental entities can either enforce the lien or sell the liens, in order to recover the delinquent taxes. Private entities may purchase the liens, which often impose high interest rates on the debtors. A purchaser of the tax liens will be able to collect payment directly from the debtor when the property is sold or, if necessary, foreclose, while the government entity can use the proceeds from the sale to reduce its own debt. Issues often arise when the debtor subsequently files for bankruptcy and attempts to reduce the interest rate on the tax lien.
Generally, under section 511(a), if the holder of a “tax claim” is entitled to be paid interest, or enable a creditor to receive the present value of the allowed amount of a tax claim, the interest rate of interest to be paid on such tax claim shall be “determined under applicable nonbankruptcy law.” As a result, the debtor cannot modify, or “cram down,” the interest rate in accordance with Till v. SCS Credit Corp. Recent cases have addressed the issue of whether a purchaser of a tax lien is entitled to the anti-modification protections provided under section 511(a) of the Bankruptcy Code.
In those cases, the debtors proposed to reduce the interest rates on tax liens that have been sold to third parties. In particular, each debtor have argued that he was permitted to “cram down” the applicable interest rate under Till because the creditors who purchased the tax liens did not hold a “tax claim” within the meaning of section 511(a). While a minority of courts has found that debtors can modify the interest rates on the tax liens because the private purchasers do not hold a “tax claim,” the majority of courts have found that the purchasers are able to assert the non-bankruptcy rates pursuant to section 511(a).
This Article is divided into four parts: Part I examines the relevant statutory provisions; Part II addresses the first step of a courts analysis when determining that a purchaser is a creditor; Part III explains the factors courts consider when determining if a “tax claim” is held; Part IV discusses the impact of the analysis used by the courts.