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VanDLaw
VanDLaw, Attorney
Category: Bankruptcy Law
Satisfied Customers: 833
Experience:  Chapter 7 & 13
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Bankruptcy Law Question - Arizona Is a non-filing spouses

Customer Question

Bankruptcy Law Question - Arizona: Is a non-filing spouse's separate property (e.g. an inheritance) subject to collection by the filing spouse's creditors?
Submitted: 5 years ago.
Category: Bankruptcy Law
Expert:  VanDLaw replied 5 years ago.

HelloCustomer

 

Separate property (i.e. inheritance) cannot become part of the bankruptcy estate or be levied by a judgment creditor if the the spouse who owns the property is not part of the judgment or bankruptcy. Inheritance is considered separate property, and would not have to be listed on the filing Spouse's bankruptcy schedules. To keep this very clear the non-filing/non-judgment spouse should keep the inheritance or other property completely separate from the couple's joint funds so as not to risk it being considered community property.

 

However, if you reside in a community property state all of your community property is included in the bankruptcy estate, even if only one spouse is filing and even if the non-filing spouse used separate funds to contribute to the community property. The separate property of the spouse who is filing is included in the bankruptcy estate also.

Customer: replied 5 years ago.
I think this answer is on the right track to what I need to know. I live in Arizona, a community property state. If the filing spouse's credit card debt is discharged, and the non-filing spouse did not sign for the credit cards or enjoy and benefits from their use, do these creditors have recourse after the bankruptcy on the non-filing spouse's separate property?
Expert:  VanDLaw replied 5 years ago.

The "community property" state you live in considers many assets and obligations of one partner in a marriage "community" assets or obligations. By extension, this can mean that one spouse can be held liable for the debts of the other spouse even if his or her name was not on the account which resulted in the debt.

 

However, for a debt to be considered community property, the debt must have been incurred to benefit the "community"/marriage; for example, if the debt were incurred to purchase items for the marital home, it would likely be considered community debt.

 

However, if the debt were incurred to purchase a boat which one spouse never used and which was kept separate from other community assets, the debt may not be considered community debt, and the non-debtor spouse may therefore not be liable.

 

It is possible that the filing spouse's creditors could name the non-filing spouse as a co-defendant in any lawsuits they bring to collect on these debts; if they obtain a judgment against you, they may be able to garnish your wages, levy your bank accounts, and/or place liens on your property. However, if you think that this debt does not qualify as community debt, you could challenge your liability in court and may be able to avoid a judgment being entered against the non-filing spouse.

 

Also, in most community property states, even though they can sue, due to the litigation that may ensue they usually choose not to file suit against the spouses of credit card holders as a matter of course; so the creditors may not even file suit against the non-filing spouse. Unfortunately, they do have the legal ability to sue you and your spouse, so you should be prepared in case a suit is filed against you. If

they are successful in getting a judgment against both of you all your property would be subject to attachment, after the statutory exemptions.
VanDLaw, Attorney
Category: Bankruptcy Law
Satisfied Customers: 833
Experience: Chapter 7 & 13
VanDLaw and 2 other Bankruptcy Law Specialists are ready to help you
Customer: replied 5 years ago.
Second question. Already accepted first answer.

In what circumstances can individual income taxes be discharged in a Chapter 7 versus Chapter 13 bankruptcy. I have assessments for past due taxes from both IRS and State of Arizona. The assessments are for tax year 2004 filed 4/15/2005 and 2005 filed 4/15/2006.
Expert:  VanDLaw replied 5 years ago.
Unfortunately you may not be able to discharge tax liens in bankruptcy.

You can discharge (wipe out) debts for federal income taxes in Chapter 7 bankruptcy only if all of the following conditions are true:

  • The taxes are income taxes. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy.
  • You did not commit fraud or willful evasion. If you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return, bankruptcy can't help.
  • The debt is at least three years old. To eliminate a tax debt, the tax return must have been originally due at least three years before you filed for bankruptcy.
  • You filed a tax return. You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy.
  • You pass the "240-day rule." The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet. (This time limit may be extended if the IRS suspended collection activity because of an offer in compromise or a previous bankruptcy filing.)

If your taxes qualify for discharge in a Chapter 7 bankruptcy case, your victory may be bittersweet. This is because bankruptcy will not wipe out prior recorded tax liens. A Chapter 7 bankruptcy will wipe out your personal obligation to pay the debt, and prevent the IRS from going after your bank account or wages, but if the IRS recorded a tax lien on your property before you file for bankruptcy, the lien will remain on the property. In effect, this means you'll have to pay off the tax lien in order to sell the property.

Customer: replied 5 years ago.
This is a good answer and consistent with my prior knowledge. The reason I asked the question is that an Arizona attorney recently told me that you can only discharge tax debt (according to these rules) in a Chapter 13. That no discharge was possible in a 7 even if it met the above criteria. Other attorneys did not support this position and I could find no statutes (e.g. 523) that clarified it. But the advising attorney was convincingly unequivocal. So the bottomline questions I have that merit a value payment are:

1. Is there something in Arizona law that prevents a Chapter 7 discharge even after meeting the above criteria?

2. Does everything said about IRS tax debt above also apply without exception to Arizona State income tax debt?

Regards XXXXX XXXXX for good answers so far...
Expert:  VanDLaw replied 5 years ago.

1. Dischargeable taxes are eliminated in Chapter 7 and are treated as general, unsecured creditors in Chapter 13. The above criteria is used for Chapter 7 tax discharge eligibility and if all the criteria is met, you can eliminate your tax liability.

 

Taxes which are non-dischargeable in Chapter 13 are considered priority debts and must be paid in full during the Chapter 13 plan without interest.

 

Secured tax liens cannot be discharged in Chapter 7. The secured portion of tax liability must be paid during a Chapter 13, in full and with interest, but without further penalty.

 

The Bankruptcy Code does not specify taxes that are dischargeable. It specifies taxes that are excepted from discharge. Income taxes excepted from discharge are primarily addressed in Bankruptcy Code sections 507(a)(7)(A), 523(a)(1)(B) and 523 (a)(1)(C). In simple language, unless secured, income taxes are not excepted from discharge, and consequently are dischargeable if aain, they meet the five points listed previously.

 

This applies to Federal Income tax. There is nothing in Arizona law that supersedes this criteria as it pertains to Federal Income Tax, and it is a Federal bankruptcy code.

 

2. Generally, the rules are the same for state income taxes as they are for federal ones. The bankruptcy code only talks about "taxes" meeting the 3-year rule, 2-year rule, etc.

 

However, there are some differences:

a. Some states send out preliminary notices of state tax deficiencies. In California, for example, the final date of assessment is 60 days or more after the proposed additional assessment. This extends the waiting time to discharge California state income taxes to 300 days So, 60 days are added to the 240 day federal rule for qualifying state taxes for bankruptcy.

 

b. Some states require filing an Amended Return after an IRS audit assessment. The 3-Year Rule qualification for bankruptcy is measured from when this Amended Return was due, and the 2-Year Rule from when it was filed.

 

c. Most state sales taxes are not dischargeable in Chapter 7. In Chapter 13, they are treated as priority taxes to be paid in full.

 

I could not find any information in any of the Arizona statutes that make any changes to the bankruptcy provisions, and the bankruptcy federal code is followed. If your attorney that is telling you Chapter 7 will not eliminate tax liabilities no matter what (completely wrong by the way) then ask him to provide some statutory authority to back it up.

 

 

Further information you might find helpful:

Arizona Revised Statutes, Sec. 42-2066. Statute of limitations on tax debts

A. A taxpayer's obligations for any tax, interest or penalty required to be collected by the department for any tax period are extinguished, if not previously satisfied, six years after the amount of tax determined to be due becomes final unless one of the following circumstances applies:

1. The department has commenced a suit to collect the debt pursuant to section 42-1114.

2. The taxpayer has agreed in writing to extend this time period before the time period expires.

3. Enforced collection has been stayed by the operation of federal or state law during the period. The period of limitations prescribed by this section is extended by the period of time that the department was stayed from engaging in enforced collections.

B. If a tax obligation is extinguished pursuant to this section, any related liens for those obligations are also extinguished.

VanDLaw, Attorney
Category: Bankruptcy Law
Satisfied Customers: 833
Experience: Chapter 7 & 13
VanDLaw and 2 other Bankruptcy Law Specialists are ready to help you
Customer: replied 5 years ago.
You're good. Thank you for better answers than three lawyers could provide face to face.
Customer: replied 5 years ago.
Please review our prior dialogue. Simple follow up question. If one spouse files can that petition later be modified to make it a joint filing?

Thanks,Customer
Customer: replied 5 years ago.
Why no response to my last question?

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