What If Your Ex Gets a Tax Bill Once You File for Bankruptcy?

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What If Your Ex Gets a Tax Bill Once You File for Bankruptcy?

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Suppose, you and your partner own a house together, and you both are on the first and the second mortgage home equity loan. After you split-up, your partner (now your ex) transfers his or her share of the house to you through a settlement agreement. You can’t refinance the house in your name only, as it doesn’t have any equity, and so your lender doesn’t take off your ex’s name from the mortgage.

Now, you have lost the house in foreclosure after applying for bankruptcy. The second mortgage holder forgives your debt as you’re now protected by bankruptcy, but issues an IRS 1099 to your ex, which makes your ex crazy with anger. Are you liable to pay any tax money to your ex under such conditions?

Normally, you are not under any legal obligation to repay for any income taxes that your ex might owe. The domestic settlement agreement might state that you have to reimburse the extra taxes that your ex might owe, but any obligation to do so will probably get discharged in your bankruptcy. This might happen under the following conditions:

  • Listing Your Ex in Your Bankruptcy – Assuming that your debt is dischargeable, your liability to repay your partner for extra taxes might discharge in bankruptcy, if you list him or her as your creditor in bankruptcy papers (because the partner is a co-obligor on the mortgage debts).
  • Not Listing Your Ex in Bankruptcy – In this case, the unlisted debt to your ex might be discharged, if it’s a normally dischargeable debt and the bankruptcy is a ‘no asset bankruptcy case’ (Chapter 7 bankruptcy are mostly ‘no asset’ cases). You can know more about ‘no asset’ cases and dischargeable debts in Chapter 7 bankruptcy by visiting https://recoverylawgroup.com/ or calling 888-297-6203.

Domestic Settlement Agreement

This agreement, between two partners, divides all the joint assets and assigns responsibility to each partner to repay the joint debts. Now, since you have the house, only you’ll be liable to pay the mortgages and your ex is not supposed to be a part of any mortgage or other debts that you owe. As mentioned above, you will be liable to reimburse extra tax to your partner. Normally, such liabilities are not dischargeable in bankruptcy, in case the agreement is made with a child, spouse or a former spouse. But if you didn’t marry your ex, you are more likely to get a discharge, provided you list your ex in bankruptcy, and if not, then it is a ‘no asset’ bankruptcy case.

Is There Any Chance That Your Ex Might Not Owe Any Income Tax on the Pardoned Mortgage Debt?

Yes, it is possible if your ex is insolvent. The insolvency can be determined by adding up the value of your partner’s assets and comparing it to the number of their remaining debts (including the previous second mortgage). If the debts are greater than the value of assets, your ex is insolvent. So, if your ex is financially insolvent in the same year as the debt is pardoned, he or she won’t liable to pay any tax on that debt. Your ex just needs to provide reasonable evidence for it.

There was one more way to avoid the tax on pardoned mortgage debt. Congress had created an exception in the mortgage forgiveness tax, according to which you won’t be obliged to pay any tax on the pardoned debt if you and your ex used the second mortgage money to buy or to improve the house. However, this exception was ended in December 2013, although there was a possibility of its extension. You can confirm the extension of this law by consulting the Recovery Law Group at the contact details mentioned above.

Thus, the bottom line is that your ex can’t force you to pay the tax debt which is discharged in bankruptcy, as it will be against the bankruptcy court’s discharge orders. Just simply write a letter to his or her lawyer, to defend your position.