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Bankruptcy: The BK Blawg
How do Georgia Residents Protect Joint Tax Returns in a Joint Bankruptcy Filing?
As a debtor’s attorney, one of my goals is to help my client protect as many of their assets as possible when filing for bankruptcy. The Bankruptcy Code allows us to shelter certain assets by declaring them as exempt.
Interestingly Georgia law, not federal bankruptcy law, determines which assets you may exempt in a case filed in Georgia (there are some limited exceptions to this for filers who have recently moved to or from Georgia). The Georgia exemption statute may be found at O.C.G.A. 44-13-100.
An asset that frequently needs to be protected is one’s federal and/or state income tax refund. Because your refund comes in the form of cash, it is not surprising that bankruptcy trustees will try to find a way to grab your refund. For this reason, I advise my clients to adjust their tax withholdings so that their future tax returns will not show either an overpayment (and thus a refund) or a liability (which will create future budget problems when the tax debt comes due).
If you have a refund due you for the past year, you can use the Georgia “wildcard” exemption to declare that refund as exempt – to a point. Under the Georgia exemption statute, you can use half of your unused real estate exemption for any property + you get an additional $600 wildcard exemption. Thus, an individual can declare up to $5,600 of his income tax refunds as exempt.
What happens if a married couple files jointly? Can they declare up to $11,200 as exempt? This question came up in a recent case decided by Judge James Sacca of the Northern District of Georgia. In the Hraga case, the debtors scheduled a tax refund in the amount of $10,388 arising from their 2010 tax returns. Each debtor claimed 1/2 of the refund ($5,067.99) as exempt property. The trustee challenged this claim of exemption on the grounds that only Mr. Hraga worked in 2010 and that the entire $10,388 refund was the sole property of Mr. Hraga.
Judge Sacca analyzed the law and noted that Georgia law contains no presumption of equal ownership of property by married couples. Accordingly, “in Georgia, funds earned by one spouse during a marriage remain the separate property of that spouse unless the spouse transfers an interest in those funds or a court distributes those funds equitably” (i.e., in a divorce or separate maintenance proceeding).
The judge did note that other elements of the tax law (i.e. a first time home owner credit) could contribute to the refund, and thus could alter the percentages – although these other tax considerations did not apply in the Hraga case.
The Hraga’s 2010 tax refund, concluded the judge, must be divided based on the percentage of tax withholdings paid. In the Hraga’s case, all of the withholdings were paid by Mr. Hraga, so the entire refund is deemed his property.
Because Judge Sacca’s ruling in the Hraga case discusses tax refunds only, it does not address how a bankruptcy judge might address the question of ownership of household goods or even motor vehicles. I have generally taken the position that non-titled assets and assets that cannot be tied definitively to one spouse should be treated as half owned by each. But one line in Judge Sacca’s decision does give me pause – he notes that “while the objective of the law in a marital dissolution may be the equitable division of assets between spouses, the objective of bankruptcy law is the equitable distribution of each of a debtor’s assets to each of that debtor’s creditors.”
Is it fair to treat assets as separate property for bankruptcy purposes because one spouse earned the money to purchase that asset (or generated the income to produce a tax refund) but to equitably divide that property in case of divorce? Does not this approach devalue the contributions of a non-working spouse who stays at home to raise young children?
For now, I will advise my clients that tax refunds are to be allocated to joint filers based on the percentage contribution of the spouse but I will be interested to see if any additional case law arises that addresses how other jointly held marital property is treated for exemption purposes.
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