Articles Posted in Debt and Divorce in New Jersey

Unpaid Taxes, Un-filed Taxes, and Outstanding Tax Obligations

One of the ticking time bombs that can explode after a divorce is finalized is the issue of unpaid or unfiled joint or individual taxes. If you and your spouse file joint taxes during the marriage and you have any concern that your spouse may have underreported their income, or that they may have any outstanding tax liabilities you should protect yourself in the settlement agreement with language which indemnifies you from any action brought by a taxing authority against you. This situation arises often times when one spouse owns a small business and their record-keeping, reporting, and payment has been sub-par. It also occurs when one spouse is in the habit of paying taxes on an installment basis during the course of the marriage. A similar situation arises when spouses file jointly and there is a joint tax obligation outstanding. A post-divorce tax audit can also lead to an assessment of penalties and interest. In all of these situations allocation has to be made as to who will pay the taxes (including any penalties and interest) to the taxing authorities.

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While the general rule is that your spouse’s individual debt does not become your debt just because you’re married, in the case of medical bills there are situations where one spouse may be liable for the other spouse’s medical debt. The medical debt exception arises from the common law rule in New Jersey that a husband should be held liable to a third-party who furnishes “necessary” goods or services to his wife. Originally the duty was owed from a husband to a third-party provider. However as women began to attain relative economic parity with men the duty of support became reciprocal. With respect to outstanding medical bills the court does not simply make a wife liable for her husband’s medical debt and vice versa.  In order to successfully seek or obtain payment of one spouse’s medical debt by the other a medical creditor has to demonstrate a particular set of circumstances, which are set out below:

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The IRS treats canceled debt as income. This means that when a creditor cancels or forgives debt the amount of the canceled or forgiven debt is treated as income to the person forgiven.

For example, if you and spouse settled joint credit card debt for less than the amount owed you will receive a 1099 reflecting the amount forgiven. Similarly, if you sell your home as a short sale, sign a deed in lieu of foreclosure, or have your home foreclosed upon you may receive a 1099 for the amount of the debt that was forgiven.

The following example will help illustrate how canceled debt operates in the context of a short sale. If a husband and wife sell their house at a short sale for $385,000 but they owe $485,000 on the mortgage, the canceled debt is $100,000. While the bank is forgiving the $100,000 shortfall, the IRS is treating the $100,000 canceled debt as income to the husband and wife. The IRS learns about the canceled debt because the bank sends you and the IRS a Form 1099 which reports the amount of canceled debt. Having received the Form 1099 notice of canceled debt from the bank, the IRS is expecting you to report and pay taxes on that canceled debt. Continue reading →

When parties are separating or divorcing one of the key issues to be addressed is any credit card debt incurred during the marriage. As a general rule, marital debt is joint debt as long as the debt is incurred for “marital purposes” or “family expenses”.

Here are some examples where a balance racked up on a credit card or store charge card is considered marital debt:

One Name On Card – Sole Use By One Party

Wife has a credit or charge card in her sole name. She uses the card to purchase her clothing and for her other day-to-day expenses. Her husband never uses the card. He doesn’t see the statements, and he has no idea what the balance is on the card. Wife’s credit card balance is considered marital debt to be allocated between the parties in their divorce.

One Name On Card – Joint Use By the Couple

Husband and wife have a charge or credit card in their joint names. They use the card to purchase items for the household and each uses the card to purchase individual items for themselves. The debt incurred in this case is joint marital debt subject to allocation in the divorce.

Joint Names On Card – Sole Use By One Party

Husband and wife have a credit or charge card in their joint names. Husband uses the card for his dry cleaning, his motorcycle accessories, and his car’s gasoline. The debt would be considered joint marital debt. Continue reading →