Why should your tax returns be affected if your spouse files a bankruptcy?

by Peter Orville, Binghamton Bankruptcy Lawyer

March 18, 2008

Why should your tax returns be affected if your spouse files a bankruptcy? If you file a separate tax return from your spouse, there should be no effect at all. If you file a joint tax return, however, you should be aware of the following:

1. Your last (if joint) tax return must be sent to your spouse’s trustee and any of your spouse’s creditors that request it. Usually, your tax return is private, between you and the IRS. When a bankruptcy is filed, however, the person filing the bankruptcy loses his/her right to privacy. If it is a joint tax return, you lose that right also.

2. If it is a Chapter 13 bankruptcy, EACH of your joint tax returns due during the pendency of the bankruptcy (3-5 years) must be sent to the Chapter 13 trustee for his/her review.

3. If it is a Chapter 7 bankruptcy, and there is a refund that hadn’t been received prior to the filing of the case, the Chapter 7 trustee can take at least half (your spouse’s share) of the refund. Unless, of course, your spouse can protect it with an exemption.

4. If it is a Chapter 13 bankruptcy, the Chapter 13 trustee may want part of the refund EACH YEAR. Many Chapter 13 trustees take the position that any tax refund received while a person is in the Chapter 13 is “disposable income” and must come to the trustee. In the Northern District of New York, the Chapter 13 trustee allows debtors to keep $1,500 each year from their tax refunds. So if you file a joint tax return, and get a refund of $4,000, for example, you can keep your one-half ($2,000) and your spouse can keep $1,500, but must pay the remaining $500 to the trustee.

Next: How your spouse’s bankruptcy will affect your income and expenses.

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Peter Orville is a bankruptcy lawyer in Binghamton, located in the Southern Tier of New York. He is a member and New York co-chair of the National Association of Consumer Bankruptcy Attorneys.

Last modified: January 17, 2013