How Bankruptcy Handles . . . Income Taxes that Your Ex-Spouse Isn’t Paying and You Can’t Write Off

If your divorce decree says your ex-spouse must pay jointly owed taxes but isn’t, how do you protect yourself from the tax creditor(s)?

 

In our last blog post we explained that:

  • A divorce court’s decree that orders your ex-spouse to pay income taxes which the two of you owe jointly does not change your own legal obligation to pay those taxes.
  • The IRS/state will try to collect from you the entire amount of taxes that your ex-spouse does not pay.  
  • If the taxes that are owed meet the conditions for discharge (permanent write-off), then a Chapter 7 “straight bankruptcy” will get rid of those taxes without you paying anything. Or a Chapter 13 “adjustment of debts” will do so after usually paying little or nothing on them.

But what if the income taxes your ex-spouse was supposed to pay and isn’t paying do NOT meet the conditions for discharge? To remind you, those conditions for discharge (somewhat oversimplified) are that the tax return must have been due more than 3 years ago and the tax return must have been actually submitted to the IRS/state more than 2 years ago. Is bankruptcy still somehow helpful?

The Handling of Non-Dischargeable Taxes under Chapter 7

Although Chapter 7 bankruptcy does not discharge tax debts that don’t meet the above conditions, it does give you the following possibilities:

  • Discharging all or most of your other debts may free up enough for you to be able to enter into a monthly instalment plan with the IRS or state taxing authority to pay off the taxes that your ex-spouse is not paying.
  •  If your finances are truly dire, you may be able to show the IRS/state that even after discharging all or most of your other debts you can afford to pay nothing towards the joint tax debt. After all, the bankruptcy documents that you sign under oath as to their accuracy provide a strong testament to your lack of assets and your low income. Then your tax debt may be put into uncollectible status, potentially long enough so that it eventually becomes legally uncollectible. Or through a settlement you may be able to convince the IRS/state to accept a modest payment and write off the rest.

The Handling of Non-Dischargeable Taxes under Chapter 13

A Chapter 13 plan gives you a lot more protection and certainty that the above Chapter 7 options. You would be usually be required to pay the non-dischargeable income taxes in full, but with some very important benefits:

  • The IRS/state would be prevented from taking any action against you throughout the 3-to-5 years that a Chapter 13 plan takes to complete, in contrast to being allowed to pursue you after about 3 months after a Chapter 7 case is filed.
  • You would usually not have to pay any interest or penalties starting from when your Chapter 13 case is filed, reducing what you have to pay overall to take care of the tax debt.
  • You pay the income taxes based on your budget (not on the IRS/state’s tight standards), usually being able to pay other debts that are important to you ahead of the taxes.
  • If your ex-spouse left you both with taxes that can’t be discharged but also some that can, Chapter 13 provides a good mechanism for paying the taxes that can’t be discharged and often paying little or even nothing on those that can be discharged.
  • Your ex-spouse is not protected from the IRS/state by your Chapter 13 filing—the “co-debtor stay” unique to Chapter 13 does not apply to income taxes, so your ex-spouse can be pursued regardless of your bankruptcy filing. Indeed the roadblocks your Chapter 13 filing puts in front of the IRS/state could induce them to chase your ex-spouse more diligently. And whatever they get your ex-spouse to pay reduces the amount you need to pay to the taxes in your Chapter 13 plan.

Conclusion

Even if some or all of the tax debts that your ex-spouse was supposed to pay don’t meet the conditions for discharge, filing a bankruptcy case may well still be your best option, especially a Chapter 13 case.

 

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