Law Office of Robert L. Firth
Married Couples’ Protection Against Income Tax Debt Collection
Filing bankruptcy with or without your spouse affects the protection you each receive from the IRS and state tax agencies.
The last few blog posts have been about what happens if you file bankruptcy with or without your spouse, and if you file under Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts.”
Today’s blog post addresses the protections you and your spouse get or don’t get from collection activity by the IRS (and any applicable state income tax agencies) under those options.
The “Automatic Stay” Does Apply to Income Tax Debts
Some people may think that the IRS and other income tax authorities are not covered by the “automatic stay.” That’s the protection you receive from virtually all creditor collection actions as soon as your bankruptcy case is filed.
But that’s not true. If the IRS or state continued to pursue you or your assets on a tax debt after being given notice of a bankruptcy filing, it would be breaking federal law just like any other creditor. The bankruptcy court could order the IRS/state to pay you damages if it does break the law in this way. Since the IRS and state tax agencies have been punished for such inappropriate behavior in the past, they almost always follow the law and stop collections as soon as you file bankruptcy.
There ARE some limited exceptions to the automatic stay that apply to taxing authorities—actions that they can still take in spite of a bankruptcy filing. But these exceptions are sensible. Tax authorities can “assess” a tax (determine the amount of tax) and send out a notice about it. They can make a demand for tax returns, send a notice of tax deficiency (but not act to collect on that deficiency), and conduct an audit (but again not act to collect any debt arising from the audit). These permitted actions have to do with determining the amount of a tax and do not involve any direct collection activity.
The “Automatic Stay” Applies Only to the Filing Spouse(s)
The automatic stay protects only the debtor—the person or persons filing the bankruptcy case. So only the income and assets of the person or persons filing are protected.
On a jointly owed tax if only one spouse files the bankruptcy, the IRS or state agency can continue pursuing the non-filing spouse. The other spouse’s bankruptcy filing has no effect on tax collection against the non-filing spouse. Because the tax debt is jointly owed, the non-filing spouse can be required to pay the debt in full.
Chapter 13 “Co-Debtor Stay” Does Not Apply to Income Taxes
With most joint debts the non-filing spouse can be protected in a Chapter 13 case through the “co-debtor stay.” But the co-debtor stay does not apply to joint income taxes. That’s based on the rationale that the “co-debtor stay” applies only to “consumer debts,” and courts have determined that income taxes are not “consumer debt.”
Applying the Stay Rules to Income Taxes
Because under both Chapter 7 and 13 the tax agencies can pursue a non-filing spouse who jointly owes an income tax, both spouses need to file bankruptcy whenever they owe a significant joint tax debt.
Almost always this means a joint filing—two spouses filing together on one bankruptcy case. But sometimes they may find it worthwhile for each to file a separate case, usually for one to file a Chapter 7 case and the other a Chapter 13 one. This may make sense when their financial circumstances are different enough, or perhaps when the marriage is not stable enough to last through a joint 3-to-5-year Chapter 13 payment plan.
The IRS and some state tax agencies might not pursue a non-filing spouse if the taxes are being paid in full through the other spouse’s Chapter 13 plan. But this would be done purely at the discretion of the IRS/state and so depends on the circumstances. Discuss this carefully with your attorney.
The automatic stay that you get with any bankruptcy filing stops the IRS and state agencies from any further collection actions just like any other creditor. But to get this protection, whoever owes the tax has to file bankruptcy. The co-debtor stay of Chapter 13 does not apply to income taxes, so that does not give any help to a non-filing spouse. As a result, if the tax debt is relatively large it’s usually best for both spouses to join in the bankruptcy filing.