How Bankruptcy Handles Income Taxes that Your Ex-Spouse is Required to Pay But Isn’t
March 2, 2015
If you owe taxes jointly with your ex-spouse who isn’t paying them, you may be able to write off those taxes.
Is this what you’re dealing with? Your divorce decree states that your ex-spouse is required to pay the income taxes that you both owe because you’d filed a joint tax return that year. But he or she is not paying them. And now you’re hearing from the IRS and/or state tax authority, telling you to pay the tax.
You’ve thought about trying to enforce the divorce decree by going back to the divorce court, but don’t have the money to hire an attorney to do this. Or maybe you’ve already tried to make him or her pay, but it’s not worked because he or she can’t or won’t pay. And maybe your ex-spouse has filed a bankruptcy to get out of paying the taxes. What are your options?
Your Obligation in Spite of the Divorce Decree
You may be rudely surprised to hear that the divorce court’s decree ordering your ex-spouse to pay the taxes does not change 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 usually personally liable for the entire tax debt (that is, whatever your ex-spouse doesn’t pay). So if your ex-spouse does not pay, the IRS/state will try to make you pay it all.
You legally owe the joint taxes not because of any special laws applicable to the IRS or the government that a divorce court can’t overturn. It’s the same with any debt. You continue to be legally liable on any debt that you owe jointly with your ex-spouse, even if the divorce decree says that he or she is solely obligated to pay it.
That’s because, whether with income taxes or any other kind of debt, your divorce court could only change the legal obligations of those people who were direct parties in the case before it. And that was just you and your ex-spouse. So the divorce court ordering your ex-spouse to pay all of a joint debt does not affect your continued obligation to pay the debt. And again that means paying it in full if he or she doesn’t pay.
Bankruptcy As an Option
Once you’ve exhausted your efforts at making your ex-spouse pay the taxes, you have to consider how to take care of them yourself. If the amount is small enough and/or you have the means to pay it, including through an extended monthly payment plan, that may be the best way to go, while holding on to the possibility that your ex-spouse could be made to reimburse you at some point.
But if you simply can’t afford to pay the tax debt, it may well be worth looking at the possible benefits of filing bankruptcy. That may especially be sensible if the tax debt is impossibly large and/or your ex-spouse has also not paid other debts he or she was supposed to or isn’t paying spousal or child support.
Income Taxes that Can Be Discharged in Bankruptcy
You may not be aware that some income taxes can be legally written off (“discharged”) through bankruptcy. We wrote a blog post about a month ago about the (usually older) taxes that can be discharged. To summarize briefly, usually the tax must simply meet two conditions to be discharged: its tax return must have been due more than 3 years ago (plus the length of any filing extensions) AND the tax return must have been actually submitted to the IRS/state more than 2 years ago.
The Discharge of Taxes under Chapter 7
If the joint tax that your ex-spouse is not paying meets these conditions (and a couple others that seldom apply), then your Chapter 7 “straight bankruptcy” case would discharge your obligation to pay that tax. The moment your case is filed, the IRS/state could no longer pursue you to pay the tax, nor could they do so while your case is pending. Then in most cases only about 3 or 4 months after your case is filed the tax debt is discharged, and the IRS/state would thereafter be permanently forbidden from ever collecting the tax.
The Discharge of Taxes under Chapter 13
If you filed a Chapter 13 “adjustment of debts” case instead, the joint income tax that meets the above conditions for discharge would be treated just like your other “general unsecured” debts. You would only have to pay that tax to the extent you could afford to do so within a fixed period of time (usually either 3 or 5 years). Often such “general unsecured” debts receive little or even nothing under Chapter 13 because people often have other debts that take priority in the eyes of the law. If you can only afford to pay these other more important debts within the required time, then usually you don’t have to pay the taxes, or you pay only a small portion of what you owe.
As in Chapter 7, from the minute your Chapter 13 case is filed and throughout its 3 to 5 years, the IRS/state is legally forbidden to try to collect on the tax debt. Then once the case is successfully completed, whatever hasn’t been paid on the tax debt is discharged, so that it is permanently gone.
If your ex-spouse is not paying an older joint income tax debt that he or she was ordered to pay, and that tax debt meets the conditions for discharge, either a Chapter 7 or Chapter 13 case filing would immediately stop any collection activity on that tax. Then at the end of either kind of case, the tax would be permanently discharged. You would be free of that obligation.