29 Nov Tax Refunds And Bankruptcy
Today, I am going to add a new chapter to the continuing saga of how your Tax Returns, and more importantly, Tax Refunds, impact your Bankruptcy. I am a firm believer in planning the bankruptcy and the future. Do you remember when you were married. The traditional marriage vows contain the language, in sickness and health, for richer or poorer, etc., but those vows do not go so far to include future tax refunds for the non-filing spouse.
Recently, I read a case where the Bankruptcy Trustee attempted to go after the joint tax refund when only one of the parties to the marriage filed for bankruptcy protection. This may sound far-fetched but it is true. The Trustee’s logic was simply that the Confirmation Order required the Debtor to contribute all future tax refunds toward the dividend paid to unsecured creditors, and therefore, the Trustee was justified in his position.
Obviously, the Debtor and the non-filing spouse saw it differently. The Court agreed with the Debtor and the non-filing spouse. First, the Confirmation Order did not bind the non-filing spouse. Second, the Trustee cannot seek to over-reach on the Court Order and attempt to impose an obligation on a party that simply does not exist. Third, even if that over-reach was possible, it would create a significant hardship on a non-filing spouse.Again, I am all about planning, and this decision takes it one step further. In general, when it comes to the preparation and filing of your tax return, a husband and wife should be looking at filing both ways: married filing individually or married filing jointly. Obviously, the non-filing spouse could have filed an individual tax return and this issue would have never come to light. However that did not happen here.
When one of the parties is in bankruptcy and is under a Court Order to submit all of his/her tax refunds to the bankruptcy court, red flags should be raised. What if the non-filing spouse would get a much larger refund if they filed jointly? However, they are now prohibited from doing so because they are subject to the Confirmation Order and that larger refund would have to go to the filing spouses creditors.
A policy that would allow a non-filing spouse’s refund to be subject to the bankruptcy courtwould produce some absurd results, and would be an overall bad policy. Therefore, in my opinion, the Judge nailed this one on the head.
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