In the Matter of Mason: Debt to a former spouse is non-dischargeable in bankruptcy

The Facts

Husband and Wife divorced, and the final decree directs Wife to pay 50% of Husband’s 2006 taxes. Wife later files for Chapter 7 bankruptcy, listing her obligation under the divorce decree in the bankruptcy petition. She lists Husband as a co-debtor on the tax debt, and as a creditor holding an unsecured non-priority claim. Wife received a discharge from the U.S. Bankruptcy Court. Each spouse petitioned the IRS for “innocent spouse” relief from their federal income tax liability for 2006. The Wife’s petition was granted, the Husband’s denied.

Husband filed a motion for contempt, asking the trial court to compel the wife to pay the obligation to him as ordered in the divorce decree. The trial court denied the motion, reasoning that:

[Wife] sought to have her debt to [Husband] discharged in bankruptcy. Toward [that] end, in her bankruptcy petition [Wife] noticed [Husband] as a creditor for “2010: divorce settlement” in the amount of the original debt to the IRS. [Husband] was duly noticed that he was listed as a creditor and had the opportunity to litigate the issue in the bankruptcy court. [Husband] was granted a bankruptcy and the debt was discharged.

The Appeal

Husband appealed, arguing that: 1) the trial court erred as a matter of law when it found that Wife’s obligation to pay 50% of his 2006 federal income taxes had been discharged in bankruptcy because he failed to litigate in the bankruptcy court that her obligation was non-dischargeable; and, 2) that the trial court erred as a matter of law and unsustainably exercised its discretion when it declined to award him attorney’s fees and costs.

The Supreme Court issued an opinion on November 28, 2012. 

The Holding

Wife’s debt to Husband to pay 50% of his 2006 taxes was automatically non-dischargeable under 11 U.S.C. § 523(a)(15) as a debt to a former spouse. Even if the Wife was ordered to make payments on the obligation to a third party instead of directly to Husband, it is still a debt to the spouse and therefore non-dischargeable.

The trial court did not err when it declined to award Husband attorney’s fees. The general rule in New Hampshire is that each party must bear their own costs in litigation. A prevailing party may only recover attorney’s fees when it is authorized by statute, there is an agreement between the parties allocating or awarding attorney fees, or there is an established judicial exception to the general rule. Exceptions to the general rule include:

(W)here an individual is forced to seek judicial assistance to secure a clearly defined and established right if bad faith can be established; where litigation is instituted  or unnecessarily prolonged through a party’s oppressive, vexatious, arbitrary, capricious or bad faith conduct; as compensation for those who are forced to litigate in order to enjoy what a court has already decreed; and for those who are forced to litigate against an opponent whose position is patently unreasonable.

The Supreme Court noted that although it held that Wife’s position was erroneous under the law, her position was not patently unreasonable. Therefore, Husband was not entitled to an award of attorney’s fees.

The Takeaway

Whether a financial obligation to a former spouse is incurred by an agreement approved by the court or by court order, that obligation cannot be discharged in bankruptcy. Plan on the obligation surviving the discharge, and ask your bankruptcy attorney whether the bankruptcy court can restructure the repayment of the debt. 

Tax season tips for divorcing couples

For the next three months, the 2009 tax season is upon us. For divorcing couples, whether to file separately or jointly, who will claim the children and how to address alimony can add even more stress to the divorce and to tax season. However, Attorney Nancy Van Tine of the Massachusets Divorce Law Montior offers these five simple tax tips:

  • Child support is not tax deductible. If you pay the child support, you pay the taxes.
  • Alimony is tax deductible to the payor, and taxable to the payee.
  • Property settlement, or property transfers, pursuant to a divorce decree are not taxable. However, as Attorney Van Tine points out, this is only true for opposite sex marriages. Same sex marraiges have different rules as Attorney Van Tine blogged about here.
  • Transfers of pensions can be transferred without any tax consquences through a Qualified Domestic Relations Order (again, only if your are in a opposite sex marriage).
  • The IRS has five tips for recently married or divorce taxpayers regading name changes.  

I would add to Attorney Van Tine's list these tips:

  •  If you do not have a court order regarding the child tax credit, then you must follow the IRS rules. Specifically, the parent who has residential responsiblity and parenting time more than 50% of the time is entitled to claim the child.
  • If your divorce decree has not been issued prior to December 31st, you may file jointly or separately. However, if your divorce is final by December 31st, you cannot file jointly. Take a look at IRS Publication 504 for more information.

 

Child support arrearages and the federal stimulus check

Attorney Robert L. Mues posted a great blog this morning about the economic stimulus check and child support arrearage. The IRS is treating the stimulus check like a tax refund. If you owe child support, the IRS is seizing or reducing the funds to apply to your arrearage.

Attorney Mues writes:

So what do you do if you and your spouse have filed a joint return and your spouse owes back child support if you want to avoid having the IRS seize your share? Well, you may fall in the category of what the IRS calls an “injured spouse”. To get your share of the stimulus payment, you can file Form 8379, Injured Spouse Allocation. You will then get your share of these payments, and your spouse’s share will be applied to his or her past-due federal or state income taxes or non-tax federal debt such as student loans and child support.