Does an ex-husband have rights to reimbursement for taxes incurred on a debt from which he was released prior to signinga settlement agreement?

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Does an ex-husband have rights to reimbursement for taxes incurred on a debt from which he was released prior to signinga settlement agreement?

In 2007, I lent my sister and her husband $29,000; both signed a promissory note agreeing to begin making payments in 09/11. In 04/10, they separated with the intent of divorcing. My sister began making monthly payments against the note. In 07/10, her husband demanded that I release him from the note, arguing that the debt belongs to my sister, not him. I declined to do so. After many threatening e-mails, he proposed a no-fault settlement that was contingent on his being released from the note. If I refused to release him, he intended to drive my sister into bankruptcy with a protracted divorce. In 08/10, I wrote half the note ($14,500) off as bad debt and sent her husband a notarized letter indicating that I was “forgiving his portion of the note and releasing him from further responsibility”. I did not consult my sister about this or inform her. Shortly after that, my sister and her husband arrived at a settlement agreement which included the following language: “As to the debt owed to X, in the form of a personal loan, titled in the name of Husband and Wife, Wife agrees to be solely and exclusively responsible for the balance of the loan and all payments therefore as per the terms of the loan agreement and promissory note, and Wife agrees to waive any and all claims against Husband for any contribution to this loan, and to save and hold Husband harmless from any and all liability or claims or damages or expenses (including attorney’s fees and legal expenses) that he may sustain or become liable or answerable for, in any way whatsoever, with reference to said loan. In 02/11, my tax accountant sent her husband a 1099-C indicating that $14,500 had been written off as bad debt and should be treated as income on his 2010 tax return. He is now insisting that my sister (who is now unemployed and living on food stamps) pay his taxes on the forgiven portion of the note. Is she obligated to pay?

Asked on March 17, 2011 under Family Law, Pennsylvania

Answers:

M.T.G., Member, New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

Listen, you had all the best intentions in all of this to help your sister out but he played a dirty trick on her by not disclosing the potential liability or in some way misrepresenting it at the time of the settlement.  She then agreed to "hold him harmless" from "any and all liability" and I think that this may fall under that category.  But she was not fully aware of the ramifications here. What your sister may have to consider is modification of the settlement agreement based upon fraud or misrepresentation.  You are now going to have to be involved and you are going to have help her wage this war.  And a war it will be.  Good luck to you all.


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