When weighing the pros and cons of bankruptcy, many often forget to ask about the relationship between bankruptcy and taxes. There are several things you should ask about how bankruptcy and taxes interact if you are considering filing for bankruptcy: are there any consequences, what are they, and is the timing a factor. Luckily, the experts at the leading San Diego bankruptcy lawyer group explained the basics of how bankruptcy and taxes relate.
Chapter 7 Bankruptcy
When filing for Chapter 7 bankruptcy, two estates are created: one individual and one related to your bankruptcy case. The bankruptcy estate is most commonly handled by an appointed trustee. Each of these estates is treated separately when it comes to taxing.
What this means is that you can file a tax return only for the individual estate. This includes income, deductions and credit for the individual estate and not for the bankruptcy estate. In turn, these are managed by the trustee, who files the tax return independently. The remaining assets are returned without any tax consequences after the case has been closed.
The IRS can file a proof of claim for income taxes as far due as three years from the date you file for bankruptcy, but any tax claims older than that are removed in the case of Chapter 7 bankruptcy. Afterwards the proof of claim is paid in assets that are left after the other creditors are paid.
Chapter 13 Bankruptcy
With Chapter 13 bankruptcy there are no separate taxable estates. The most likely scenario is that you will end up providing tax returns to a trustee as a result of the repayment plan. These refunds will in turn be used to pay creditors. You might also be charged with unpaid income taxes and will have to settle them according to the repayment plan in the next three to five years. In case you excluded discharged debt from the income, the tax attributes are charged from your personal tax return. The trustee can then decide whether to use the tax return to pay the creditors or allow you to keep it.
Taxes and Debt after the Bankruptcy Case
Even after filing for either chapter 7 or 13 bankruptcy you will still be obligated to settle taxes and any debts acquired after the bankruptcy proceedings. Neither the taxes nor debts in this case are protected by an automatic stay as they were not disclosed in the filing to begin with. The automatic stay covers the collection by creditors that were involved in the process from the beginning.
Any debts discharged during bankruptcy are not considered taxable income. However, you must file for bankruptcy before receiving Form 1099-C, or the debt will be considered taxable income unless there’s an exclusion or exception referring to that debt.
Seek expert San Diego bankruptcy lawyer advice
If you are still uncertain how bankruptcy and taxes intertwine, you should probably hire a respectable bankruptcy attorney and follow their expert advice on the subject. It’s important to be completely familiar with how taxation works after bankruptcy in order to avoid mistakes that may cost you in the future. Furthermore, make sure you keep your tax records and allow your attorney to go through them. If you have any questions about taxation relating to chapter 7 or chapter 13 bankruptcy, contact us for a free, no-obligation consultation.