How Bankruptcy Handles . . . Income Taxes that Your Ex-Spouse Was Required to Pay but Has Now Written Off in Bankruptcy

What can you do if your ex-spouse is hiding from both you and the tax authorities behind a Chapter 7 bankruptcy?

 

If your ex-spouse was ordered in your divorce decree to pay your joint income taxes, but has not paid and has now filed a Chapter 7 “straight bankruptcy” case, you may actually be in a stronger legal position than the IRS and the state taxing authority. Here’s why.

Your Ex-Spouse’s Regular Chapter 7 Bankruptcy Can “Discharge” Older Taxes

Check out our last blog post for a bit about what it takes for a taxpayer to legally write off (“discharge”) income taxes in a Chapter 7 case. And a month ago we spent a whole blog post explaining the conditions needed to do this.

The point is that if your joint income taxes meet those conditions your ex-spouse’s Chapter 7 case will leave him or her no longer obligated to pay those taxes. And that happens very quickly—usually within three or four months after a Chapter 7 case is filed, the debts, including eligible income taxes, are discharged.

Even faster—the minute that your ex-spouse files his or her Chapter 7 case—the IRS and the state are forbidden from trying to collect the tax against him or her or his or her assets.

All of which means that the IRS/state will come looking for you. If they haven’t already.

The Divorce Decree Did Not Get Rid of Your Legal Obligation to Pay the Taxes

We explained a couple of blogs ago that

the divorce court’s decree ordering your ex-spouse to pay the taxes has no effect on your own legal obligation to the IRS/state. As far as the tax authority is concerned, you owe the tax just as if you were still married. In fact, you are personally liable for the entire tax debt. So if your ex-spouse does not pay it, the IRS/state will try to make you pay it all.

That’s because, whether regarding income taxes or any other kind of debt, the divorce court could only change the legal obligations of those people who were legally parties in the case before it. And that was just you and your ex-spouse. So the divorce court could order your ex-spouse to pay all of a joint debt, but that did not change your legal relationship to the IRS/state, which includes your continued obligation to pay the debt.

If your ex-spouse was doing what he or she was ordered to do by your divorce court and paying the income taxes, the IRS/state would probably not be chasing you. But if he or she doesn’t pay, there is nothing stopping them from coming after you.

Your Ex-Spouse’s Chapter 7 Case CAN’T “Discharge” His or Her Obligation to You

The good news is that even though your ex-spouse may be able to get rid of his or her tax debts (or perhaps part of them), he or she cannot use Chapter 7 to get rid of the divorce court’s order that he or she pay those taxes on your behalf.

If that sentence is confusing, that OK.

Here’s the deal. Your divorce decree created a specific new obligation on the part of your ex-spouse, one which required him or her to pay all the taxes on your behalf and alleviated you from having to pay any of them (assuming that’s what the decree says). That divorce court-created obligation is distinct from the tax law-created obligation for each of you to pay those joint taxes.

Bankruptcy law simply treats those two kinds of obligations differently. The obligation to pay the tax based on the tax laws can be discharged as long as the conditions referred to above are met. But your ex-spouse’s obligation based on the divorce decree cannot be discharged through a Chapter 7 case under any conditions. 

Object to Your Ex-Spouse Refusal to Pay the Taxes

Your ex-spouse may not know that his or her obligation to you to keep paying the tax (or to pay you so that you can pay that tax) cannot be discharged in a Chapter 7 bankruptcy case. That’s especially true if your ex-spouse filed bankruptcy without an attorney. Or had an attorney but the law was not explained adequately, or he or she chose to not pay attention.  Or he or she may have just hoped that you would not find out the truth about all this.

While you are not legally required to object to your ex-spouse seeming attempt to discharge his or her obligation to you to pay the tax, you will likely want to inform him or her that the obligation is not affected by the Chapter 7 filing. And that you know it’s not. 

It may require you going back to the divorce court to enforce that court’s decree. And it may be worth hiring an attorney to help you with that.

If Necessary and Practical, File a Chapter 7 Case Yourself

The practical problem is that having a legal right and enforcing that right are two very different things. Your ex-spouse may simply not have the financial means to pay the taxes. Or if he or she does, it may just take too much of your time and money to make him or her pay it. Your own resources, financial and otherwise, may give you limited ability to pressure him or her to pay.

It may be necessary and worthwhile to consider filing bankruptcy yourself. If your ex-spouse’s tax debt can be discharged as to him or her, it almost certainly is as to you as well. The conditions for discharging an income tax debt turn mostly on how long ago the tax return for the tax was due, and on how long ago the tax return was actually sent in. Those apply to both taxpayers the same, assuming the tax arose out of a jointly filed tax return.

The best defense against your ex-spouse discharging his or her tax liability and foisting it on you may be to do the same as to your own liability for that same tax.

And since your ex-spouse’s obligation to you to pay the tax is not discharged in his or her Chapter 7 case, you may be able to enforce that obligation later.  (But be sure to talk with your bankruptcy attorney about a number of possible complications with this).

Watch Out for Your Ex-Spouse Converting the Chapter 7 into a Chapter 13 Case

A final caution: your ex-spouse CAN discharge his or her obligation to you to pay the taxes, the one created by the divorce court, IF he or she files a Chapter 13 “adjustment of debts” type of bankruptcy instead of a Chapter 7 case.  Your ex-spouse could even “convert” his or her Chapter 7 case into a Chapter 13 one if you raise an objection. This gets into some interesting timing and tactical considerations that you really should get legal advice about from an attorney.

Our next blog post will get into this, and particularly the possibility of fighting an ex-spouse’s Chapter 13 filing by you filing one yourself.