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Avoidance of Certain Liens in Chapter 7

Posted by attorney Michael Koplen

Section 724 of the Code sets forth the treatment options for certain types of liens, including tax liens, in a Chapter 7 case. The trustee is granted the power to avoid certain liens altogether. These liens include claims for fines, penalties, and punitive damage claims, among others. The full list is found in 11 U.S.C. 726(a) (4). These types of liens are treated as low priority claims under Chapter 7. The trustee has the ability to subordinate tax claims to other types of claims, including secured claims. The trustee can subordinate tax claims on property of the estate to pay prior secured creditors and most priority claims, including the trustee's commission. The purpose of this subordination is to protect the debtor's fresh start.

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