Bankruptcy | Are There Tax Consequences After Filing Bankruptcy?
It’s important to weigh bankruptcy advantages and consequences, yet many forget to look at bankruptcy and tax consequences. If you do not file before receiving the form, that debt is considered for taxable income unless there is an exclusion or exception applied to the debt.
Chapter 7 Bankruptcy and Tax Consequences
Filing for Chapter 7 creates two different estates: one is your individual estate, and the other the bankruptcy estate. The bankruptcy estate is handled by a trustee, and each estate is treated separately for tax purposes.
This means that you still file a tax return (Form 1040), but only for your individual estate. You therefore only include income, deductions, and credit for your individual estate, and do not include income, deductions, or credit from your bankruptcy estate. Instead, the trustee manages the bankruptcy estate and will file the income tax return independently (Form 1041). Any remaining assets in that estate will be returned to you without any tax consequences after the close of your case.
With a Chapter 7 bankruptcy, the IRS can file a proof of claim for income taxes that are due within the three years to the date you filed, but tax claims older than three years are usually removed in Chapter 7. The proof of claim is then paid out in assets of the bankruptcy that are left over after other creditors are paid.
Chapter 13 Bankruptcy and Tax Consequences
Unlike Chapter 7, there are no two separate taxable estates. As a result of the repayment plan under Chapter 13, you will usually end up providing tax returns to a trustee, and your refunds will be used to pay creditors. In addition, you also might be responsible for unpaid income taxes, and will pay for them according to your debt repayment plan over three to five years. If you excluded discharged debt from your income, the reduction of tax attributes is made on your personal tax return. As a result, the trustee over your repayment plan has the discretion to keep your tax refund to pay creditors, but may allow you to keep it for special circumstances.
Post-Filing Taxes and Debt
When you do file either Chapter 7 or Chapter 13, you can still end up paying for taxes and new debt that is acquired after beginning bankruptcy proceedings. These new taxes or debts are not protected by an automatic stay because they were not disclosed in the initial filing. The automatic stay only covers collection by creditors involved in the initial filing and suspends involved legal proceedings.
Filing Steps
Overall, you should always file your tax return according to your attorney’s advice no matter which chapter, or request an extension. To know the extent of your tax consequences, it’s important to ask and work with your attorney so you don’t make any mistakes and know what exactly will happen. In addition, you should always keep any tax records and share them with your attorney, especially since a trustee will ask how you spent your return. – blog.startfresthtoday.com
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