Aug 17, · The IRS filed a motion to dismiss the request for an innocent spouse determination arguing ‘that a bankruptcy court’s jurisdiction is limited by the fact that it is a judicial offer of the district court, that the structure of 26 U.S.C. (f) vests the determination of innocent spouse relief strictly in the IRS and tax courts, and that the United States has not consented to being sued on the innocent . The Codebtor Stay in Chapter 13 Bankruptcy If you have joint obligations with your spouse, filing for Chapter 13 bankruptcy can protect your spouse from those creditors with the codebtor stay. The Chapter 13 codebtor stay prohibits creditors from coming after your codebtors (such as your spouse) during your bankruptcy. Filing bankruptcy discharges the debt of the filer only—not a non-filing party. If a couple has joint debt, but only one spouse files for bankruptcy, the non-filing spouse will remain responsible for the obligation. Protections for non-filing spouses exist, however, but again, don't always karacto.xyz: Cara O'neill, Attorney.
The time frame for deciding a tax case in the other forums does not necessarily match the time frame for the bankruptcy case. By giving the bankruptcy court the ability to decide the tax matter, Congress allowed it to control the timing. The reasoning behind the grant of jurisdiction to the bankruptcy court to hear the tax matter extends to the determination of innocent spouse status; however, the decision of whether someone is an innocent spouse does not turn on whether the tax is due, i.
The facts of the case are not unusual for an innocent spouse argument. Pendergraft, who was 66 at the time of the decision, married Mr. Pendergraft in During the period of their marriage, they split household responsibilities with Mr. P operated a private psychotherapy practice part time and took primary responsibility for child care and household maintenance.
For the years , the Pendergrafts failed to file tax returns or to pay the taxes. P alleged that she did not know of the failures and signed returns for each year expecting her husband to file them. She learned of the problem when the IRS levied on her separate bank account in Although Mr.
P initially denied knowledge of the problem he eventually confessed to her he had forgotten to pay the taxes for one year. She alleged that he may have misappropriated money she gave to him between and to deal with the IRS and that he caused the IRS to mail all correspondence to his office address preventing her from learning of ongoing problems. In late June , she attended a meeting with their attorney in which she alleges that she learned for the first time that their income and property taxes had not been paid for 15 years and that they faced criminal prosecution.
According to her, this attorney advised her that she must join her husband in filing for bankruptcy in order to prevent the IRS from seizing their house and from prosecuting them. I note that if the attorney gave such advice, it incorrectly described the effect of bankruptcy on possible criminal tax prosecution. Bankruptcy code section b 1 , one of the exceptions to the automatic stay, provides that bankruptcy has no impact on criminal prosecution.
By October of , she had obtained permission of the bankruptcy court to proceed with divorce and in November she asked the bankruptcy court to determine that she qualified as an innocent spouse.
The bankruptcy court looked at section e 1 A which allows a court to grant innocent spouse relief if the IRS fails to make a determination within 6 months. The court acknowledged the case law cited by the IRS finding bankruptcy court an inappropriate forum for innocent spouse determinations. The bankruptcy court rejected the authorities provided by the IRS for three reasons: 1 the case law did not address 5 th Circuit precedent interpreting a ; 2 the plain language of the statute; and 3 a decision by the bankruptcy on this matter would not lead to inconsistent judgments or conflict with basic principles of judicial economy.
Having decided that it can decide the innocent spouse issue, the bankruptcy court then determines that it must wait for the IRS to make a decision. It required Mrs. P to submit to the IRS Form and indicated that it will make a decision if the IRS fails to do so in six months not adopting the four-month rule for claims for refund as the shortened time period in cases or after the IRS makes an adverse decision.
It is possible, of course, that the IRS will decide in her favor in the administrative process. If it does not, watch this case as I expect the IRS will not give up this issue at the bankruptcy court level.
My first thought was that bankruptcy courts have no business doing innocent spouse cases. Innocent spouse cases are fact-intensive, time-consuming domestic disputes, often with relatively small amounts of probably uncollectible tax involved. The fact of bankruptcy makes it less likely the IRS will ultimately collect. None of the factual determinations required by section involve tax expertise. With the IRS budgets being slashed, why not let the bankruptcy court wade through the personal as well as financial dregs of what is likely to be a no-win situation for the IRS?
The idea that Congress did not want bankruptcy courts to decide innocent spouse issues — as the DOJ argues — is, to me, ahistorical nonsense. It is unfortunate that the opinion in Pendergraft does not also note that, under the predecessor to , e , bankruptcy courts regularly decided innocent spouse question.
See, e. United States, F. Legislative history from re does not specifically mention bankruptcy courts, but it does express concern that the avenues for innocent spouse relief need to be expanded, not contracted.
When the government began arguing that section e narrowly applied only to allow the Tax Court to rule on relief or the district courts to rule on relief if a refund suit was brought , Congress reacted in by amending e 1 to add introductory language making clear that a Tax Court e proceeding was in addition to any other remedies provided by law. The Pendergraft opinion notes this language, but fails to quote from the Committee report that adopted this language, which reads as follows:.
Non-exclusivity of judicial remedy. The bill clarifies Congressional intent that the procedures of section e were intended to be additional, non-exclusive avenues by which innocent spouse relief could be considered. Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts and also because of the time it takes to write what we think are high quality posts.
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Notify me of new posts by email. Love PT, and want to show your gratitude for the fact this amazing content is free? If only one partner in a marriage owes debt, then only that partner should file for bankruptcy.
Debts where spouses are joint and severally liable for payment will remain with the spouse who has not filed for bankruptcy. However, in states, that follow community property law, then a single spouse bankruptcy for joint debts may be advantageous, in some situations. If the debts are held jointly, then the non-filing wife will still owe even after one spouse has filed bankruptcy. A non-filing spouse should not have their credit damaged because of a spouse filing for bankruptcy.
In a common law property state, your separate property that is under your name and not jointly with your spouse would become part of your bankruptcy. In a community property state, all community property is part of your bankruptcy even if you file without your spouse unless you have some exemptions. However, a major advantage of Chapter 13 bankruptcy , where the debtor plans to repay her debts, is that the creditor will leave the co-debtor alone, as long as bankruptcy plan payments are timely deposited.
While the bankruptcy of one spouse does not generally affect the other, there are some notable exceptions. Also, if applying for a joint loan in the future, the bankruptcy of one spouse will affect the creditworthiness of the applying couple. Another exception has to do with jointly held property. If that property is jointly held, it can also be taken away. This is of vital importance in community property states, states where both spouses in a marriage own and are responsible for all the debt and property acquired during the marriage.
Any joint debts discharged by the bankruptcy of a single spouse also apply to the non-filing spouse. Sometimes collection agencies will pursue both spouses even though only one spouse owes debt. If you feel that the calls and letters asking for payment are only meant for your spouse but are still addressed to you, there are a couple of steps you can take to minimize the annoyance.
First, you should request proof of responsibility for those debts from the debt collectors bombarding you with collection demands. If your spouse has already filed for bankruptcy, he or she can ask the bankruptcy court for an automatic stay to halt all collection activity.
A bankruptcy lawyer can also assist you or your spouse in contacting the creditor to have them stop the calls or communication. Yes, it would be possible for one spouse to file for bankruptcy without the other partner ever finding out. However, Chapter 7 bankruptcy uses income as a test for eligibility and utilizes income garnishment as a means of settling debt.
The non-filing spouse will certainly notice if the bankruptcy court for debt repayment is garnishing their paychecks. Hiding bankruptcy is a temporary solution at best and is not healthy for any marriage. Filing for bankruptcy is a very complicated process.
Bankruptcy law varies depending on where the action is filed and which chapter of bankruptcy is being pursued. A local bankruptcy lawyer will know the particulars of filing for bankruptcy, can recommend what chapter of bankruptcy is right for you, and can ensure that your paperwork is filed correctly.
If creditors are still trying to collect after a bankruptcy action has been filed, a lawyer may be able to halt such collection efforts and may be able to get you some money damages. He later went on to get a J. While working as a legal writer with LegalMatch, Ki covered a wide range of topics like breach of contract, criminal, family disputes, and immigration law.