Don’t Let A Spouse’s Bankruptcy Rob Your Refund

This article originally appeared on Forbes.  The original article can be found at:  click here

Picture this: Your spouse’s small business goes bankrupt, and your spouse along with it. (Or worse: You go bankrupt, and you have to tell your spouse about it.) You hang on to the house and some other assets that are in your name, but even so, your financial picture isn’t pretty. The sizeable tax refund you receive is more than happily received — it’s a lifeline.

Then an overzealous bankruptcy trustee tries to take it away.

That’s exactly the situation a client of mine was in recently. When they called me, they thought they had already lost. What happened next shows how important it is for business owners to know and advocate for their rights, and how helpful an experienced bankruptcy lawyer can be.

Federal Bankruptcy Law Protects A Spouse’s Assets

Crucial to this case was understanding the difference between the debtor spouse’s obligations during bankruptcy and the voluntary contributions a non-debtor spouse may have made to the bankruptcy plan. In other words, the spouse who goes bankrupt may be required to fork over their entire tax refund (if they haven’t properly separated their personal assets from the finances of their bankrupt business), but the spouse who isn’t bankrupt gets to keep theirs.

For married couples filing a joint federal tax return, this means the non-bankrupt spouse gets to keep 50% of the total refund.

This is true no matter what proportion of income each spouse earned. Even if the non-debtor spouse earned no income at all during a given year, they’re entitled to half the refund from a joint return.

In my client’s case, Mr. B went bankrupt, along with his business, but Mrs. B didn’t. Mrs. B did, however, agree to contribute her income to Mr. B’s bankruptcy plan — a decision that was 100% voluntary. Bankruptcy is one of the most stressful events a marriage can undergo. Mrs. B wanted to help her husband move past his bankruptcy, which is a natural inclination the law ought to reward, not punish.