Bankruptcy, Tax Filings & You
Filing for bankruptcy, Chapter 7 or Chapter 13, does not necessarily absolve one’s tax debt. The IRS is notoriously persistent in pursuing their claims and laws relating to the discharge of taxes in bankruptcy.
In addition, if you file a Chapter 7 bankruptcy in which some of your assets are liquidated by the trustee, this creates a new taxable entity called the “bankruptcy estate.” The tax returns one files for the year of their Chapter 7 bankruptcy are two-fold: one set for the individual (or jointly filed married couple as the case may be) and another set of returns for the bankruptcy estate that must be filed by the bankruptcy trustee.
An individual can choose to demarcate two short taxable “years”, the first that includes the year up to the commencement of bankruptcy date and a second from the bankruptcy commencement on: the demarcated double tax filing can use the first chunk to be charged against the bankruptcy estate. If you file a “no asset” chapter 7 (over 90% of all chapter 7’s are no asset cases), then there will not be a need for a tax return filed by the bankruptcy estate.
By contrast, Chapter 13 filers do not have to file separate tax returns. The so-called “wage-earner’s bankruptcy”, Chapter 13 bankruptcy, is practically tailored to complement a tax debtor’s needs. Tax debt can be included and repaid through a chapter 13 plan. Tax debtors who have not filed for bankruptcy can organize repayment plans directly through the IRS, of course, but any payment plan with the IRS would not be including all your debts and would only apply toward the tax debt. In a chapter 13, one plan can cure all debt problems, including tax debts.
Like many of the requirements of personal bankruptcy, filing taxes during Chapter 13 reorganization is not optional. Many individuals have faltered by failing to complete their taxes and, as a result, end up with a defunct bankruptcy.
Tax Deductions on Your Bankruptcy—Not an Urban Myth!
Chapter 13 bankruptcy is all about repaying both dischargeable and non-dischargeable expenses, including tax debt, child support, fines, and more. Some payments toward non-dischargeable debt may create a tax deduction. One can even file a tax deduction on the legal fees involving their bankruptcy—professional legal help that our Legal Helpers attorneys will be more than happy to talk to you about. Call one of our qualified attorneys to get to the good stuff by calling Legal Helpers at 1-800-260-1402 for a free consultation.
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