Does a Non-Filing Spouse's Share of a Tax Refund Become Part of the Bankruptcy Estate?

Married clients filing bankruptcy present reason for a greater level of attention to bankruptcy attorneys, especially when only one spouse is filing. Bankruptcy attorneys and pro se filers must carefully survey marital assets and liabilities to ensure that everything is appropriately accounted for. All earned income is included in the bankruptcy estate. Depending on the time of year you file, this may include your tax return.

One particularly vexing issue is whether a non-filing spouse's share of a tax refund should be included in the bankruptcy estate. The 10th Circuit Panel of Bankruptcy Appeals recently addressed the issue of whether a non-debtor spouse's share of a tax refund is appropriately included in a debtor's bankruptcy estate. The Court clarifies the issue in In re Genevieve Muran Crowson, BAP No. WY-09-067.

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The bankruptcy court, relying on an earlier decision of the Appeals Panel, In re Kleinfeldt, ruled that the non-filing spouse's share of the tax refund was appropriately included in the bankruptcy estate. However, the Appeals Panel in Crowson overruled the lower bankruptcy court, drawing a clear distinction between the facts in In re Kleinfeldt and the present case.

In In re Kleinfeldt, the Appeals Panel held that the non-filing spouse's share of the tax refund was correctly included in the bankruptcy estate, because only the filing spouse earned any income, the joint refund was comprised of only one spouse's withheld wages, and no tax credits or other types of overpayments had to be allocated between the spouses.

When the trustee in Crowson saw that the debtor was due a tax refund, he filed a motion for turnover, seeking to get the debtor to surrender her entire tax refund, despite the fact that she filed a joint tax return with her non-filing spouse. Although the filing spouse was the only person who had earned any income that was included in the joint tax return, both spouses were entitled to an equal share of certain tax credits. The Appeals Panel held that that portion of the tax refund attributable to the non-filing's spouse share of the tax credits were not part of the bankruptcy estate.

As evidenced by Crowson, the bankruptcy process can be a complex one to navigate. If you live in Colorado and are considering bankruptcy, you should contact a Denver, Colorado Bankruptcy Attorney.

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