If My Spouse Files Bankruptcy Could I Lose My Tax Return?

If your spouse files bankruptcy without you its possible for you to keep your tax return. One partner in a marriage can file bankruptcy individually without involving the other directly in the process. Although this is common there are still some issues that may overlap in bankruptcy filings for many married couples. The bankruptcy filing can be in the name of one spouse only. This leaves debts and assets of the other partner uninvolved in the bankruptcy process so long as they are kept separate from those of the spouse who is filing.

Tax refunds of the person filing for bankruptcy are usually a form of income. It will also become part of the bankruptcy estate to be used to pay back creditors. If the spouses file taxes individually, the tax refund each spouse receives is their separate property. Usually, the bankruptcy court won’t have any right to get the non-filing spouse’s tax refund. Although, it can go after the tax refund of the person filing bankruptcy.

Two Main Types Of Bankruptcy

The two types of individual bankruptcy are called Chapter 7 and Chapter 13. Tax refunds are income that can be taken to pay debts. This happens in both kinds of bankruptcy, but there are some differences. 

In a Chapter 7 filing, the bankruptcy trustee looks at the entire financial picture of the person filing for bankruptcy and totals up debts and assets. These are assets beyond exempt items, like a residence and some personal items. They will be sold to satisfy as many debts as possible. Some exempt assets include necessities of life. This is your home, a car worth up to $7,500 for an individual, tools of a trade worth up to $10,000, and other personal items. Non-exempt income or assets, such as the tax refund that the filer receives, are gathered. Then, the money is used to pay off as many debts as possible. 

A Chapter 13 case, however, balances debt and income to create a payment plan. This plan will extend over three to five years to allow you to pay most or all your debts and keep most or all of your property. Tax refunds may be taken toward debt repayment in each year of the payment plan. In this case, the bankruptcy filer may lose tax refunds every year of the three to five years of the debt repayment plan.

Will I Lose My Tax Return

In both types of bankruptcy, though, a non-filing spouse who keeps separate income and banking records would likely keep their individual income tax refund. However, if we suppose the couple typically combines the income of the two spouses and keeps it in a joint bank account, and the non-filing spouse’s tax refund deposits into that account, it will be property of the household community and can be taken to pay the filing spouse’s debts. The key here is that the non -fling spouse files their taxes married but separate. By filing this way the non-filing spouse in a bankruptcy case keeps their money separate from the court

Are Some Taxes Exempt in Bankruptcy

Even in a situation where the court can make a claim on your taxes some of those taxes are exempt. The portion that’s exempt means its exempt from the court. An example of an exempt portion of your taxes is the earned income tax credit portion. This is the potion of a return that is given to you if your income is very low and you have dependent children.

Get Free Bankruptcy Consultation in Tulsa

If your spouse files bankruptcy without you its possible to keep your tax return out of the fray. Bankruptcy is a complex legal proceeding with many important choices to make depending on your unique situation. Experienced bankruptcy attorneys at Kania Law Office will explain the details of the laws, the exemptions that may apply in your case, and the options you have for how to file in detail with a free consultation. Call us at 918-743-2233 or contact us online to schedule an initial consultation.