How might bankruptcy affect my taxes?
If you are considering filing for bankruptcy, it is important to weigh all of the potential advantages and consequences of filing, including the tax implications. Bankruptcy will impact every aspect of your finances, and could affect your tax returns and filings. Our Xenia, Ohio Miami Valley Bankruptcy attorneys discuss what you should expect when it comes to your taxes during and after a divorce.
Your Taxes and Chapter 7
When you file for Chapter 7 bankruptcy, two separate estates will be created. The first is your individual estate, and the second is the bankruptcy estate. The bankruptcy estate will be handled by your trustee. Each estate is treated separately for tax purposes
Accordingly, Chapter 7 filers will file a tax return only for their individual estate. You will include your income, deductions, and credit for your estate alone, not taking into account the deductions and credits from the bankruptcy estate. The bankruptcy trustee will file an independent tax return for the bankruptcy estate.
Your Taxes and Chapter 13
Under a Chapter 13 bankruptcy, your estate remains as one for tax purposes. You will likely provide tax returns to your trustee during repayment and any tax refunds will usually go towards repaying creditors. You may be held responsible for repayment of unpaid income taxes.
Your Taxes Post-Bankruptcy
It is important for bankruptcy filers to know that if they file for Chapter 7 or Chapter 13 bankruptcy, they may still be required to pay for taxes and new debt acquired post-filing. New debts are not covered under the automatic stay because they were not included in the initial bankruptcy filing.
Your debts that are discharged through bankruptcy will not be deemed taxable income. Bankruptcy filers will want to file before receiving a Form 1099-C. Bankruptcy actions filed after receipt of this form could result in your debt being considered taxable income.
It is imperative that bankruptcy filers consult with a bankruptcy attorney for assistance with filing their tax returns. Follow your lawyer’s informed advice as to when and how you should file your tax returns during and after the bankruptcy process.