In the Chapter 13 bankruptcy case of (Halverson, Michael; In re), the bankruptcy court ruled that the Chapter 13 debtor's bankruptcy estate was entitled to half of the joint income tax refunds received by the debtor and his nonfiling wife.
The details of the bankruptcy case:
"The Massachusetts Department of Revenue (MDOR) filed a proof of claim in the amount of $64,172 including $14,936 for joint income tax liabilities of the Chapter 13 debtor and his nonfiling wife. Because the debtor's wife did not join in the Chapter 13 petition, statutory interest and penalties continued to accrue on her obligation to pay the joint tax liabilities."
It's important to note here that the nonfiling spouse does not benefit from the automatic stay of interest accrual enjoyed by the spouse who filed bankruptcy. Ultimately they will both suffer financially once "her half" of the income tax liability must be repaid. This is something to think about has you consider whether to file bankruptcy with or without your spouse.
"After the debtor filed for bankruptcy, he and his wife filed joint income tax returns that generated refunds of $948 and $986. Pursuant to state law, the MDOR offset both refunds to the prepetition joint tax liabilities. These offsets did not reduce the MDOR's claim because they were applied to statutory interest and penalties that accrued postpetition. The court agreed with the debtor that the MDOR could not offset the entire amount of the joint tax refunds to the statutory interest and penalties that accrued only on the wife's obligation. "The postpetition tax refund of a Chapter 13 debtor is unquestionably property of the bankruptcy estate," the court said."
The court ruled half of the tax refund belonged to the bankruptcy estate and should be used to benefit the creditors in the bankruptcy case. They also warned the MDOR that offsetting tax refunds that are property of the estate not in accordance with the limited exception set forth in the bankruptcy code violates the automatic stay.
Source: Consumer Bankruptcy News, Volume 19, Issue 18, page 9