Learning About Bankruptcy

Posted on: 25 April 2016

Filing for bankruptcy can have a great many effects on the rest of your financial yer, including effects on your taxes. How you should handle your taxes differently in light of a bankruptcy depends on the type of bankruptcy you are filing for and other decisions that you have made.

The Effects Of Filing Bankruptcy On An Audit

If you are under an audit, filing for bankruptcy will not stop the audit. The ten year statute of limitations is extended by the entire length of the bankruptcy. This could lead to you still owing taxes even farther into the future than you normally would.

Discharging Bankruptcy Debt

However, it is also possible to discharge taxes. They must be personal taxes that are at least three years old. To qualify for this, the tax return must have been filed by the taxpayer. Also, the tax that will be discharged must be at least 240 days old.

Fortunately, the discharged debt is not considered to be taxable income. One downside, however, is that you will not be allowed to use certain tax credits and deductions that would otherwise be available.

Individual Vs. Bankruptcy Estates

With Chapter 7 bankruptcy, your assets are divided into two categories: an individual estate and a bankruptcy estate. Filing a tax form for your individual estate is required by law and filing for the bankruptcy estate is a matter that is handled by your trustee. If you file for Chapter 13 bankruptcy, you will not create separate estates. However, when you file your taxes after filing for Chapter 7, you will not include the income, credits or deductions that fall under the bankruptcy estate.

While you must file your taxes as usual after filing for Chapter 13 bankruptcy, you will give your tax return to your trustee. Part of your debt repayment plan may include taxes you have failed to pay in the past.

Ending Your Tax Year

You have the right to end the tax year on the day before you file for bankruptcy. Then, any taxes that are due are considered a part of the claim against the bankruptcy estate. Given the effects that a bankruptcy can have on your taxes, it is important to consult with a tax professional before you seek to file for bankruptcy. This will ensure that you do not end up owing more than you should after filing for chapter 7 or chapter 13 bankruptcy.

For more information about the bankruptcy process, contact a bankruptcy attorney.