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Does Bankruptcy Affect Income Tax Returns

Income Tax & Consumer Proposals

How filing bankruptcy could affect your tax return and refund. Attorney Robert Geller.

When you file a consumer proposal in Canada, taxes get treated as unsecured debt that is, as long as you dont have a lien issued against your property by the CRA.

The way consumer proposals and tax debt works is that a proposal can help reduce your tax debt alongside any other debt owed to other creditors. Consider how filing your income tax while in a consumer proposal works in Canada:

Tax Debts In Each Chapter

Tax debts are typically priority debts in all chapter filings. They’re addressed and paid first when assets are liquidated in Chapter 7, and they must be included and paid in full in Chapter 12 and 13 payment plans.

Priority tax debts are not dischargeable in Chapters 11, 12, or 13.

You can receive tax refunds while under bankruptcy protection, but they will most likely be directed toward paying your tax debts.

Do You Have To File A Tax Return When Going Through Bankruptcy

While you can sometimes deal with past tax debt through a bankruptcy filing, you wont be protected from all past, current or future tax liability or obligations to the IRS.

  • Chapter 13 filers are required to file returns for tax periods ending within four years of the bankruptcy filing before you have a meeting with creditors to work out your debt repayment plan.
  • In Chapter 7 and Chapter 11, the bankruptcy estate that takes ownership of your assets is also required to file a separate tax return. The return must be filed by the trustee appointed to manage assets but sometimes in Chapter 11, the bankruptcy filer acts as the trustee and thus must take on this obligation.

And, no matter what chapter of bankruptcy you file under, all tax returns due after you file must be submitted on time unless you file for an extension. Failing to file or request an extension can result in dismissal of your bankruptcy proceedings or conversion of your bankruptcy to a different type.

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If You Dont Live In England Or Wales

You can declare yourself bankrupt in England or Wales if you live outside the UK, provided you lived in England or Wales or have had a business there at some point in the last three years. The Bankruptcy Order made in England and Wales may not be recognised in other countries outside the UK.

You cant declare yourself bankrupt in England or Wales if you live in Scotland or Northern Ireland.

New York State Tax Lien

Does Bankruptcy Affect My Tax Return?
  • Non-dischargeable tax debt is collectible for 20 years, with the 20 year period being renewed whenever a payment is made.
  • Tax lien is created by filing of NYS Tax Warrant, which attaches for 10 years to all personal property in any location, and to all real estate located in the County where it is filed.
  • New York State exemptions limit the State Tax Departments ability to collect, protecting many assets from seizure, including: the 10% limit on salary garnishments the $50,000.00 homestead exemption for residences the protections afforded qualified pension plans, profit sharing plans, IRAs and most retirement plans.

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Chapter 7 Tax Filing Requirements

Chapter 7 bankruptcy is available to individuals who cannot make regular payment of their debts, and to businesses that need protection from creditors and are going out of business. A bankruptcy trustee is appointed by the court to dispose of a debtors non-exempt assets to raise cash to pay creditors. Many unsecured debts may be discharged.

As the individual going through Chapter 7 bankruptcy, you would file a regular Form 1040 tax return.

Meanwhile, the bankruptcy trustee is responsible for filing a Form 1041 tax return for the bankruptcy estate, if applicable. The requirement to file a return for a bankruptcy estate applies if the estate generated gross income of at least $10,400 in tax year 2017.

You may receive a tax refund while in bankruptcy. In chapter 7, a trustee may request the tax refund if the refund is not exempt. The tax refund would be applied toward satisfaction of the claims filed in the debtors case.

If you have difficulty paying your taxes after filing for bankruptcy, you should seek the guidance of a qualified bankruptcy attorney.

Wipe Out Income Tax Debt With Bankruptcy

While the majority of taxes cannot be eliminated through bankruptcy, some can. The bankruptcy experts at Burr Law Office can examine your case to see if your tax debt can be eliminated. Though not simple, filing for Chapter 7 bankruptcy and finding out if your debts qualify for discharge may eliminate some tax debt..

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How Does Your Bankruptcy Affect The Filing Of Your Tax Returns

People who are over their heads in debt and considering bankruptcy have a number of decisions to make regarding bankruptcy and taxes. As bankruptcy attorneys, we often hear questions from clients about how bankruptcy will affect taxes and tax returns. An individual who files for bankruptcy under Chapter 7 or Chapter 13 of the federal Bankruptcy Code is still required to file an individual tax return or to request a filing extension.

If an individual going through chapter 13 bankruptcy fails to file a tax return properly or request a filing extension, it can result in a bankruptcy case being dismissed or converted to chapter 7. Bankruptcy is a complicated process and it can involve changes in the filing of tax returns. A misstep can be costly. It is important to understand the tax implications of a bankruptcy to make forward-looking decisions. You should seek the guidance of a knowledgeable bankruptcy attorney to review your specific situation.

How To Beat The Irs: Dischargeability Of Taxes In Bankruptcy

Will Bankruptcy Affect a Tax Refund?

How to Beat the IRS: Dischargeability of Taxes in Bankruptcy

With a few exceptions, the Bankruptcy Code adheres to the age-old rule that in life, only death and taxes are certain. It isnt so easy to beat the IRS because the Bankruptcy Code significantly limits a debtors ability to discharge taxes in bankruptcy. A bankruptcy professional has to have an intimate understanding of the Bankruptcy Code in order to know when you can beat the IRS and when you cant. Your starting point should be an understanding as to when a discharge of a tax is permitted.

Beating the IRS in bankruptcy court can sometimes feel like asking the San Diego Padres to beat the New York Yankees. The IRS has very low hurdles to clear in order to make a tax debt stick around. First, the IRS must show that the tax is of the kind that cant be discharged. The type of tax, the date the tax was assessed, the date it was due, whether it is a tax or penalty and other factors are all relevant. Second, the IRS must prove this only by a preponderance of the evidence, which is lawyer talk for maybe Im right, and maybe Im wrong. The IRS must also demonstrate that the claim is for either a tax or tax penalty. The Bankruptcy Code does not define what is a tax and just because Congress or a local legislature called it a tax does not necessarily mean it is a tax.

I. Priority and Gap Period Taxes: The Wait Three Years After Filing the Return or 240 Days After Being Assessed Rule.

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What About My Tax Refund

This question comes up quite a bit. If you anticipate a large refund, talk about this issue with your attorney. It may be a good idea to delay filing until after you receive your tax year refund for the past year. Technically, when consumers file for bankruptcy, all their non-exempt property goes to the trustee. That includes tax refunds. Since the policies vary depending on where you live, you may be able to use the wildcard exemption to exempt the tax return.

Let’s Summarize…

Owing past-due income taxes can be stressful. These bills are often so high that, even if you fall behind a little, you could end up owing a lot of money. Fortunately, if your debts meet certain requirements, filing Chapter 7 bankruptcy can erase past-due income tax debt in one fell swoop.

Protecting Your Refund With Exemptions

The good news is you can protect a tax refund thatâs part of your bankruptcy estate if the refund is protected by an exemption. If youâre entitled to claim the federal bankruptcy exemptions you have the ability to use a wildcard exemption to protect any property. Somestates have wildcard exemptions as well. Especially with respect to the federal exemptions, that wildcard will often be enough to protect your tax refund.

Of course, you may also need some or all of the wildcard to protect other types of personal property like personal electronics or a vehicle. But, in most cases, filers use the wildcard to protect their tax refund first. Thatâs because non-cash assets are far less attractive for trustees to take than tax refunds.

If you canât use the federal bankruptcy exemptions, most states have a lower value wildcard exemption that offers less protection for your tax refund. On the other hand, certain states do have special exemptions to protect tax refunds attributed to the Earned Income Tax Credit or Child Care Tax Credit. So, you need to carefully check your exemption scheme to know how much of your tax refund you can protect.

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What If The Ato Is A Creditor

Any refund you are entitled to during the period of bankruptcy may be retained by the ATO to offset any pre bankruptcy income debt and/or offset any Family Assistance or Child Support debts incurred. Any debt still outstanding to the ATO after your bankruptcy is discharged which formed part of the bankruptcy cannot be recovered by the ATO.

Special Rules For Student Loans

Does filing for bankruptcy affect your tax refund?

Special rules apply to other types of government debt as well. For example, student loan debt isnât usually dischargeable during Chapter 7. Debtors must usually show undue hardship to discharge their education debt. Undue hardship means different things in different parts of the country because the Supreme Court has not ruled on this issue.

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Tax Debt In Chapter 13 Bankruptcy

If you file for Chapter 13 bankruptcy where the court trustee arranges a partial repayment plan, then your tax debt will be included in the plan. If it meets the five criteria listed above, then it will be deemed a nonpriority debt.

This means it will get treated like credit cards and other debts that are generally easy to discharge. Instead of paying off the full amount, the court will determine how much you can reasonably afford to repay. You will repay some of the debt you or the IRS or your state tax office in your payment plan. Then the remaining balances will be discharged.

If your tax debt does not meet those five, then it may be deemed a priority debt. You will still be able to pay it off under your repayment plan. However, it must be repaid in full.

The Different Chapters Of Bankruptcy

There are six numbered chapters of bankruptcy filings. Chapters 7, 11, 12, and 13 are applicable to individuals in different circumstances.

Bankruptcy chapters 9 and 15 aren’t applicable to tax debts.

Chapter 7 is sometimes called a “straight” bankruptcy, because it provides for the full discharge of allowable debts. The bankruptcy court effectively takes control of your assets and liquidates them as necessary to pay off as much of your debt as possible. You’re no longer responsible for those unpaid balances after your bankruptcy discharged if you don’t have sufficient assets to cover all your debts.

Chapter 13 bankruptcy involves a multiyear, court-approved payment plan to repay your debts to the greatest extent possible. The goal is to pay them off in full, but some balances that can’t be paid can be discharged.

Chapter 11 allows for debt reorganization and a repayment plan similar to a Chapter 13 filing, but it is generally used by incorporated businesses or individuals whose debt is in excess of the limits for a Chapter 13 filing. That limit is $394,725 as of 2020.

Chapter 12 is intended for family farmers and fishermen who are financially distressed by expenses related to their businesses. It’s intended to be a quicker method of filing and designing a repayment plan. There are also limits to how long creditors can collect on debts under this chapter.

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Tax Liens & Bankruptcy

Tax debt and tax liens are different things. Tax debt is simply money that you owe either the State of Wisconsin or the IRS. A tax lien is a legal judgment secured against your property to satisfy a tax obligation that you owe the state or federal government. Should you qualify for Chapter 7 bankruptcy, and meet all of the above criteria, unfortunately bankruptcy will not eliminate prior tax liens.

Your obligation to pay off the debt will be discharged, but not eliminated. However, the IRS will no longer be able to go after your income or bank account.

However if a tax lien was filed before you filed for bankruptcy, the lien will remain on the property. If you ever want to sell your property, you will have to pay off the lien before you can do so.

Do you have other tax related, or bankruptcy questions? Let us know. Were happy to help.

The experienced attorneys of Burr Law Office are here to answer your bankruptcy questions. Give us a call at today.

Bankruptcy Is Supposed To Help You Get A Fresh Start When You Have Too Much Debt But It Will Affect Far More Than Just Your Credit Scores

Can I Keep my Tax Refund if I File Chapter 13 Bankruptcy?

There are different types of bankruptcy called chapters and the type of debt you have can influence the chapter you need to file, and how your bankruptcy case will progress. In some cases, the bankruptcy court may require you to sell your assets in order to pay part of your debt. Or, the court may make a payment arrangement for you to pay off creditors over several years before the remaining balance of your debt can be discharged.

If your debts include tax debt, you may be able to get it discharged, depending on the type of tax debt.

Because laws related to bankruptcy and taxes are both complicated, its important that you understand before you file for bankruptcy how it will affect past tax debt as well as future obligations to the IRS. Its best to consult with a lawyer before making any decisions about bankruptcy . But this guide can help you learn a little more about how bankruptcy can affect your taxes during and after filing.

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Hayward Parker & Oleary Serves Clients In Middletown Newburgh And The Surrounding Area

Bankruptcy, in several instances, can be an effective way of dealing with past-due federal and state income tax debt.

In a Chapter 7 or Chapter 13 bankruptcy, income tax obligations are dischargeable if the tax return for the year in question was filed and:

The 3 Year Rule: The tax return was due more than 3 years prior to the bankruptcy filing. If the debtor obtained an extension, the due date would be the extension deadline.

The 2 Year Rule: For a late filed return , if the delinquent return was actually filed more than 2 years prior to the bankruptcy filing.

The 240 Day Rule: If there has been an assessment by a taxing authority, it was made more than 240 days prior to the bankruptcy filing.

The debtor did not file a fraudulent return or willfully attempt to evade paying taxes.

Example #1 Debtor timely filed their 2003 tax return . There have been no recent assessments by the government and the return was not fraudulent. The taxes still owed from the 2003 return are dischargeable if the bankruptcy is filed after April 15, 2007 .

Example #2 Debtor files their 2001 tax return late, on October 31, 2005. There have been no recent assessments, and the return was not fraudulent. The taxes still owed from the late filed return are dischargeable if the bankruptcy is filed after October 31, 2007 .

Accruing New Debt Under Bankruptcy

One of the provisions of a bankruptcy is that the debtor may not acquire any other delinquent balances while under the courts supervision. Barger said taxes may be defined as new debt if a person is unable to pay them. That can either force the court to dismiss or convert the current bankruptcy.

New debt that a person acquires while already in a bankruptcy is not protected from collection by the bankruptcy court, because it was not disclosed in the initial filing, Barger said.

In a Chapter 11 or Chapter 13 filing, both of which stretch over a period of time, the failure to file taxes or to keep current on new tax payments can result in a conversion of the bankruptcy to a Chapter 7 unless the case is dismissed entirely, Archer said.

Chapter 7 bankruptcies are much more brutal than 11s or 13s because they will liquidate all non-exempt assets to pay creditors,” he said. ” 11s and 13s are more like court-brokered negotiations.

In a Chapter 7 case, Archer explained, the failure to pay post-petition taxes will affect neither the bankruptcy nor the tax debt.

The debt isn’t discharged in the bankruptcy case, and the bankruptcy code prohibits filing for a Chapter 7 bankruptcy more than once every eight years, he said. So that debt wouldn’t be going anywhere.

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