One of the most popular blog postings I have written is about what happens to income tax refunds when a Chapter 7 or Chapter 13 bankruptcy is filed in the Southern District of Indiana. That blog is the most read of any blog posting ever written for Indiana Bankruptcy Blog. As a result, I have been thinking about what else I could explain about income tax refunds and bankruptcy. One of the issues I have not discussed which comes up fairly often is how is an income tax refund treated when only one spouse files.
In a recent ruling of the case In re Anthony Peter Page Judge Coachys discussed this issue. In the Page case, the debtor filed a Chapter 7 bankruptcy on July 19, 2010. At the time of the filing the debtor was married, but his wife did not file bankruptcy. Mr. Page was the primary breadwinner and his non-filing wife was a homemaker who took care of the couple's two children. The couple's 2010 tax return resulted in a $22,626.00 federal and $4,194.00 state refund. Yeah....almost $27,000.00 total. The trustee in the Page case argued that since the debtor was the primary breadwinner that the refund was attributable mostly to the debtor's income and that the debtor should be required to turn over the majority of the return to the trustee for distribution to creditors. Specifically, the trustee argued that the non-filing spouse should be allowed to keep 200/365th of the income tax refund (pro-rated to the date of filing).
The debtor, on the other hand, argued that the "50/50 rule" should be applied. This rule states that just as a non-filing spouse would be liable for income tax liability on joint tax filings, he or she should also be able to share in the good fortune of a large income tax refund and that it should be presumed that an income tax refund should be split 50/50 between the spouses. Keep in mind that this ruling does not apply in every state, only the Southern District of Indiana, where folks living in Indianapolis, Carmel, Noblesville, Kokomo, Anderson, Zionsville, and the other surrounding areas of Indianapolis file their bankruptcy petitions.
The judge ruled that there is a 50/50 split presumption on joint income tax refunds and the debtor was ordered to turn over half of the federal and state income tax refund pro-rated to include January 1, 2010, through the date of filing. Therefore, the debtor and his wife were able to keep a much more significant portion of the income tax refund than if the judge had agreed with the trustee.
Confused yet? The bottom line is that this ruling can be harmful or beneficial to your non-filing spouse if you file bankruptcy. If you are the majority breadwinner, it is a great rule. However, if the filing spouse makes a minimal amount of money it will result in more than the debtors "fair share" being turned over to creditors. The tax refund issue is a bit complex and usually much easier to explain in person, but an experienced bankruptcy attorney can tell you when the best time to file your petition would be to maximize your ability to keep your refund.
To schedule a free initial bankruptcy consultation at Halcomb Singler call our office at 317-575-8222 or click here to fill out our information sheet and we will call you to schedule an appointment. We will spend about an hour reviewing your finances, income, assets, debts and expenses and answer your questions about bankruptcy. Until then, Happy Tax Season :)
Halcomb Singler, LLP, is a debt relief agency. It helps people file for bankruptcy under the bankruptcy code. No attorney-client relationship with the firm of Halcomb Singler, LLP, is created through this blog. Also, please note that Erika Singler is an attorney licensed in Indiana and does not seek to practice law in any jurisdiction in which they are not properly authorized to do so. The information contained in this blog is general in nature and should not be relied upon for the circumstances of any individual(s) or businesses.
Thanks for the info!
ReplyDeleteVery informative
Tax Specialist