October Tax Season: How Can Bankruptcy Help Me If My Ex-Spouse and I Owe Joint Income Taxes?
Your ex-spouse’s bankruptcy filing seldom helps you, even if it writes off a joint tax. But your own Chapter 7 or 13 can help you directly.
In our last blog post a couple days ago we said that you’re usually fully liable on an income tax debt if you signed its tax return, even if later you got a divorce decree ordering your ex-spouse to pay it. Then we presented three types of relief from this tax liability that the IRS provides.
However, these three types of relief—“innocent spouse,” “separate liability,” and “equitable” relief—are quite limited. To qualify you have to meet some strict standards, which may well not apply to you. And even if you do qualify, you may still owe other taxes or other unmanageable debts.
So how can bankruptcy help?
Setting the Scene
For the sake of simplicity, let’s assume that your ex-spouse is simply not paying the jointly owed tax debt. Or at least he or she is not doing so fast enough to prevent the IRS or state taxing authority from chasing you.
Keep in mind that even if he or she IS making payments or is trying to deal otherwise responsibly with the IRS/state, because you are also fully liable on the tax debt the IRS/state usually has every right to chase you at the same time.
If Your Ex-Spouse Files Bankruptcy
First, any protection that your ex-spouse gets from his or her bankruptcy will almost never do you any good. The “automatic stay” that immediately protects your ex-spouse from collection actions by the IRS/state does not protect you at all. That’s true whether your ex-spouse files a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.” Even the “co-debtor stay” of Chapter 13 that might give you some degree of protection from other jointly owed creditors does not apply to income taxes.
Second, any legal write-off (“discharge”) of tax debts that your ex-spouse may get from his or her bankruptcy case will not apply to you. You will continue to be liable as if your ex-spouse had not filed bankruptcy.
Third, your ex-spouse’s bankruptcy filing may actually make the IRS/state all the more aggressive towards you. It only makes sense—if they are slowed down from collecting against your ex-spouse, they’ll more likely turn to you for payment. And if your ex-spouse’s liability gets wiped out altogether, you are the only one left to pay it.
Does an Ex-Spouse’s Bankruptcy Ever Help?
There are situations—rare ones—in which your ex-spouse’s bankruptcy filing could help you. For example, if he or she files a Chapter 7 case which gets rid of other debts so he or she can concentrate on paying off the continuing tax debt, and as a result the tax is paid off relatively quickly, the IRS/state might sometimes be persuaded to not try to force payment out of you at the same time. Another example, even rarer: the IRS/state might be persuaded to allow your ex-spouse to pay a portion of a tax debt in his or her Chapter 13 payment plan, while you pay the rest.
But much more likely, your ex-spouse’s bankruptcy is not good news for you.
If You File a Chapter 7 Case
We cover this in detail elsewhere in this series of blog posts on income taxes, but the IRS and state would be forbidden from pursuing you on any tax debts from the moment that your Chapter 7 case is filed. That protection lasts during the time of your case, which is usually about three or four months.
More importantly, a Chapter 7 bankruptcy case can permanently discharge older tax debts. If your tax debt is discharged, that means that the IRS/state would never be able to take any action whatsoever to collect those taxes. They could not even keep your future tax refunds.
By “older” taxes we mean those whose tax returns were due more than three years earlier AND whose tax returns were in fact sent in to the IRS/state more than two years earlier. There are some other possible conditions but usually these two are the only ones that are relevant.
A bankruptcy discharge of one of your tax debts affects only YOUR own liability on that debt, not the liability of your ex-spouse. The “joint and several liability” from a jointly signed tax return means that he or she would have to pay the debt in full or else also file bankruptcy.
If You File a Chapter 13 Case
There are a lot of details about how a Chapter 13 filing would deal with your tax debts, beyond what we can cover here. So please see other blog posts from this tax series on this website.
Focusing on generally newer income tax debts that can’t discharged under Chapter 7, Chapter 13 gives you the opportunity to pay such taxes under very flexible and favorable terms. How much you pay to all of your creditors each month, including the IRS/state, is mostly based on your personal budget. When you begin paying the taxes and in what order compared to your other creditors depends on your budget and on who else you owe. Usually you don’t need to pay ongoing interest and penalties, thereby reducing the amount you need to pay.
The IRS and state don’t have much say about any of this as long as you do what you propose to do and pay off the required taxes within a five-year period.
Just as with Chapter 7, if you file a Chapter 13 case the IRS/state would be able to pursue your ex-spouse on any joint tax on which he or she is also liable. That’s true even if you are in the midst of paying that tax in full through your Chapter 13 case.
If after your Chapter 13 case is filed the IRS or the state does succeed in getting your ex-spouse to pay a portion of the joint tax debt, you don’t have to pay that portion of the tax a second time. The taxing entity would have to reduce the amount you would pay accordingly.
Finally, as alluded to above, if both you and your ex-spouse owe a tax that can’t be discharged, you might both be able to make arrangements to pay that tax together in your respective Chapter 13 cases. For example, each could pay half. The IRS and state are not legally prevented from objecting and then pursuing whichever ex-spouse is not proposing to pay such a tax in full. But the IRS/state might exercise their discretion to allow you two to pay off the debt through your mutual efforts.