No spousal equity in bankruptcy for Massachusetts tax refunds

I’ve written several posts here on how tax returns are handled in a consumer bankruptcy case, but now there is a new twist, at least for married couples living in Massachusetts.

Got a tax refund coming? If you are married, think the bankruptcy court will divide it 50-50% if one spouse files for bankruptcy? Well, you need to think again.

Actually, in the Hundley case, the bankruptcy court didn’t really know what to think — the case got appealed all the way up to the First Circuit Court of Appeals (one step away from the Supreme Court), and even they punted, and asked the Massachusetts supreme court to answer this question: who owns a joint tax refund?

The Supreme Judicial Court didn’t give an absolute answer, bur instructed what not to do: assume a 50-50 split. Those laws, it said, apply only to divorce proceedings, and this couple has not filed for divorce.

The problem started when the married Hundleys were about to receive a $93,000 income tax refund. The reason the refund was so large was because of losses declared by the husband’s business — which unfortunately meant that he, although not his wife, had to file for personal bankruptcy as well.

Mr. Hundley did the logical thing and declared half of the refund as an asset in his bankruptcy, figuring the other half belonged to his non-filing wife. The trustee thought otherwise, however, and sought the whole refund. The round of litigation and appeals soon followed.

So where does this leave us? As is typical in legal matters, in a confusing and unchartered place. It looks like both the Hundleys and you and me too will have to evaluate each individual case according to its own facts in order to

 

By Doug Beaton

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