Bankruptcy Injustice In

Many are up in arms about a recent bankruptcy decision in Massachusetts which left a debtor’s spouse with no share of her husband’s income tax refund. The state’s Supreme Judicial Court ruled that the wife of a bankruptcy debtor had no right to an equal portion of the debtor’s tax refund because she did not work outside the home.

That means Janice Hundley, who was the family homemaker in Southborough, taking care of their two children, would get only a fraction of the $93,362 refund the couple received in an amendment of their 2002 tax return, even though they filed jointly, according to the ruling. That is because, when it comes to bankruptcy, the decision draws a line between the economics of running a family and a spouse’s own property rights.

Massachusetts is not a community property state like Texas. If the state was a community property state the tax return may have been treated differently.  In Texas, property which is acquired during marriage is presumed to be jointly owned by both spouses and is treated as such during bankruptcy. There are a few exceptions to the community property rule, such as a gift given only to one spouse, an inheritance or if it can be proven that the property belonged to one spouse.

But would the tax refund have been treated differently in a Texas bankruptcy court? Possibly.  Although the spouse did not work outside of the home, it could be presumed that she made a contribution to the household that enabled to debtor to earn his income or at least enabled him to take certain tax credits to get a sizable refund.  Under the community property law, the income could be treated as half hers and half the debtors.

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