Income Taxes and Self-Interest in a Marriage

Posted by Kevin on February 3, 2014 under Bankruptcy Blog | Comments are off for this article

Each spouse in a marriage with significant tax debts has his or her self-interest, which may need a different solution than the other spouse.

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Married couples can and often file bankruptcy together. Doing so when they both owe substantial income taxes may especially makes sense. But each spouse needs to understand his and her own rights and options before deciding whether to file bankruptcy or not, and if so whether to join in the other’s bankruptcy or file his or her own case.

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If a couple owes a lot of income taxes, often it is because of the actions of one of spouses—such as one spouse running a business into which that spouse puts his or her heart and soul but still eventually failed. The spouse who is “at fault” may well be feeling deep frustration and guilt, while the other spouse is experiencing feelings of anger, disappointment, and even betrayal. This extra source of conflict can not only make their situation more emotionally challenging but legally as well.

This blog suggests some principles to consider if you’re in a similar situation.

The Two Spouses Each Have Their Own Self Interest

To state what is probably obvious, just because two people are married does not mean that their financial situations are the same, or that their legal problems and the potential solutions are the same. While some spouses do have close to identical situations—if they are jointly liable on all the same debts and share ownership in all their assets—often that’s not the case. Each person can have his or her own separate debts and to some degree his or her own assets, making their financial situations very different. And beyond those tangible differences, each person can have different goals and different attitudes about how to deal with his or her individual problems and their ones in common.

Because income taxes are such an unusual debt, they can greatly complicate the self-interest of each spouse. Taxes are unusual in how they are incurred. For example, a tax debt can arise primarily out of the actions of one of the spouses, with the other spouse becoming completely liable by simply signing a joint tax return. That spouse might eventually be able to get out of that liability through the “innocent spouse” exception, another complication not available with any other kind of debt. Taxes are also quite unusual in how they are treated in bankruptcy.  There are relatively complicated rules about what taxes will and will not be discharged, and how each portion of each tax account can be handled under Chapter 13.

Each nuance of these rules can create different self-interests for each spouse.

The Two Spouses May Each Need Their Own Bankruptcy

The two spouses’ different self-interests may well lead to different solutions. Sometimes that may mean one person filing bankruptcy and the other not, or one person filing a Chapter 7 case and the other a Chapter 13 one.

The Two Spouses Could Need Separate Attorneys

Without getting deeply into delicate attorneys’ ethical rules about conflict of interest, attorneys need to be careful about simultaneously representing any two people who have different interests. This is true regardless if these two people are married and have some common interests. In the end the two may end up filing a joint bankruptcy because it is in their individual and mutual best interest to do so. But before getting there each person must be made fully aware of his or her individual rights and legal options, whether this happens through two separate attorneys or through a single one. One or both spouses may decide to sacrifice some of their individual interests for their common good, but can only do so when their rights and options have been clearly laid out for each of them.