Bankruptcy offers a number of advantages, especially when your financial situation is bleak and there is no other solution in sight. However, it’s important to understand the disadvantages of bankruptcy and determine if the outcome is worth the negative aspects of filing.
One of the things people filing for bankruptcy often forget to consider is the impact it could have on their taxes. Before deciding to file, it’s important to understand how bankruptcy is going to affect your income tax situation. It varies based on whether you file for Chapter 7 or Chapter 13.
Chapter 7 Bankruptcy and Taxes
Chapter 7 bankruptcy creates two estates and each estate is treated as its own entity for tax purposes. This means you’ll file a tax form 1040 for your individual estate that includes income, deductions, and credit, but you will not include income, deductions, and credits in your bankruptcy estate.
Keep in mind the IRS can ask for information related to your bankruptcy, so you’ll want to keep detailed, organized records. If you receive notification from the IRS that they want to look more closely at something, don’t panic. As long as your bankruptcy was handled properly and you filed your taxes as required, chances are there won’t be a problem.
Chapter 13 Bankruptcy and Taxes
Unlike Chapter 7 bankruptcy, there is only one estate in Chapter 13 and the entire thing is taxable. Your trustee will have access to your tax information and your tax refund, if there is one, and it will likely be used to pay your creditors. If you owe income tax, that will be included in your repayment plan.
It’s also important to realize that new income taxes are not protected by an automatic stay when you file for bankruptcy. The timing of your bankruptcy can be important in regard to taxes, so make sure you speak with your attorney about when to file and how to handle any existing or expected tax debts. To read more about bankruptcy’s automatic stay and how it affects tax debts in general, check out this article from nolo.com.
Everyone’s income tax situation is different, so it’s important to work with an experienced bankruptcy attorney to avoid mistakes and get a handle on how filing for bankruptcy will affect your specific tax situation. It’s also important to keep track of tax records and allow your attorney to review the information when you begin the filing process.
If you have questions about how filing for bankruptcy will affect your taxes or you are ready to begin filing, we can help. Contact the Law Offices of Robert M. Geller at 813-254-5696 for more information or to schedule a bankruptcy lawyer consultation.