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Does Filing Bankruptcy Affect Your Income Tax Return

The Different Chapters Of Bankruptcy

Is IRS debt dischargeable in 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.

File Irs Form 982 After Bankruptcy Discharge

The correct way to ensure that you do not have to pay taxes on any debt forgiven in bankruptcy, and properly allocate any tax attributes, is to file IRS Form 982 for the tax year in which you received your bankruptcy discharge.; See IRS Publication 4681 for detailed information explaining all the above.;; Many people and even accountants are unaware of this form and the importance of filing it.;; Be proactive and mention it to your accountant before filing your returns .

Tax Debt Discharge In Chapter : A Timeline

All these rules apply to the bankruptcy process as well. If you have past-due tax debt, things will be a little different.

  • Filing: On your paperwork, you will list the tax debt as priority unsecured debt in Part 1 of Schedule E/F.

  • Trustee meeting: At this meeting, the trustee will review your paperwork, confirm your identity, and ask questions about any red flags in the paperwork.

  • Discharge: The court has the power to discharge both secured and unsecured debts. If your debts meet all requirements, you should receive a notification of a discharge within about 60 days.

In special circumstances, you’ll have to meet additional qualifications to discharge some types of debt. This may be true in cases involving tax liens. It’s also true in student loan cases. If you want to discharge student loan debt, you must convince the court that there is an undue hardship preventing you from repaying the loan.

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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

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.

When Did You Earn The Tax Refund

How Does Filing Bankruptcy Affect Your Tax Return ...

When figuring out whether you can keep your tax return, the first step is determining whether your tax refund came from income earned before or after filing bankruptcy.

Any return that results from income earned after filing for bankruptcy is yours to keep. A tax refund that’s based on the income you earned before filing will be part of the bankruptcy estate no matter if you receive it before or after the filing date.

Tax Year

Get step-by-step instructions on filing Chapter 7 bankruptcy in Nolo’s How to File for Chapter 7 Bankruptcy.

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The Tax Assessment Was At Least 240 Days Old

Again, this often covers the same ground as the first two rules. The IRS must assess the tax at least 240 days before the taxpayer files for bankruptcy. The IRS assessment can arise from a self-reported balance due , an IRS final determination in an audit, or an IRS proposed assessment that has become final.

In other words, you reported what you owed, or the IRS has officially stated, “This is what you owe.”

Planning For Chapter 7

Here are some ways to increase your chances of keeping your tax refund in Chapter 7 bankruptcy.

If you file during tax season. Individuals who file bankruptcy during tax season often have to figure out what to do with the tax refund they have just received. You can use any available tax refund or wildcard exemption to protect it. But if your state doesn’t offer these exemptions, or you want to save your wildcard for other assets, consider these strategies:

  • If possible, file for bankruptcy after receiving and spending your tax refund. If you choose to do this, be sure to use your refund on necessities and not to purchase new assets.
  • Use your tax refund to pay your bankruptcy attorney for the fees and costs of your case.

These strategies have been found to pass muster in most bankruptcy cases because you’re allowed to use your assets to pay expected living expenses. Neither option involves an attempt to avoid paying a creditor, which is considered fraudulent in bankruptcy.

Adjust withholdings. If you expect a significant return because of amounts deducted from your paycheck, the fix is to adjust your tax withholding early in the year. Keep in mind that this tip won’t be as helpful if you change your withholding later in the year such as from October through December.

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When A Collection Agency Can Garnish Your Tax Refund

Some state revenue services may allow state tax refund garnishment for debt collection. Most of the time, however, debt collectors must file a lawsuit against the debtor. If a debt collector does so and wins a judgment, it can then garnish wages. It can also levy a bank account or impose property liens.

Are Debt Collectors Obligated To Inform You Before Snatching Your Refund

Should You File Bankruptcy if You are Owed a Tax Refund

Yes. They must inform you before they take the money. Just like the case of wage garnishment, collections agencies are required to inform you that they are going to seize your tax refund if you dont pay your debt.

If a collections agency informs you that they are likely to snatch your tax refund, you can call the Treasury Offset Programs call center and get all the information you need to put up a fight. The best option is usually to pay your debts and avoid interception.

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Adjust Your Tax Withholding

If you think that you’re going to file for bankruptcy in the next year, you can avoid the refund issue by adjusting your tax withholding so that you only pay the tax you owe. You’ll get more money in each paycheck that you can use to pay for necessary expenses. It’s important to make sure, however, that you continue to withhold a sufficient amount to cover the taxes you do owe.

Change Your Tax Withholding

If you plan to file for Chapter 7 in the next year, you can also avoid receiving a refund at all by adjusting your tax withholding so that you only pay the tax you owe. By doing this, youâll receive more money each month and you can avoid getting a tax refund. But you need to make sure you have savings to pay any tax bill when it comes due.

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Income Tax & Consumer Proposals

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:

Why Is My Spouse Getting Calls From My Creditors

How does your bankruptcy affect the filing of your tax ...

Your spouse may have signed an agreement or contract either co-signing or jointly signing for liability. For example, you may have a supplemental credit card for your spouse or your spouse may be a guarantor on one of your loans. If so, your spouse is responsible for paying the balance of this debt.

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Will My Trustee Still Receive My Gst And Income Tax Refunds This Year

  • The tax refund relating to the year of your bankruptcy will be sent to the Trustee for the benefit of your creditors. Subsequent tax refunds should be sent to you.
  • The Trustee has a right to apply your GST credits towards the costs of administering your bankruptcy . Once the Trustees costs are covered, the GST credits will again revert to you.

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The Automatic Stay Stops Irs Collection Of Tax Debts During Your Bankruptcy But The Irs May Be Able To Collect From You Later

By Hari Ender, Attorney

The automatic stay will stop the IRS from collecting taxes debt that you owe once you file a Chapter 7 or Chapter 13 bankruptcy. But depending upon the nature of the tax debt you owe, the IRS may be permitted to collect from you later. Continue reading for more information about the automatic stay in bankruptcy and what it can do to help you with your tax debt.

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Most Tax Debts Are Not Discharged In Bankruptcy Which Means You Continue To Owe Them After Your Bankruptcy Case Is Concluded

What are some other solutions for tax debt? Filing for bankruptcy can clear tax debt depending on the nature and circumstances of your situation. Please be aware that even if you file for bankruptcy, you must still file all current tax returns and pay current taxes. Unlike other forms, including chapter 13 bankruptcy, filing under chapter 7 does not involve coming up with a repayment plan for repaying the debt you owe to creditors. You filed bankruptcy last year, and now it’s time to file your taxes. How state tax liens are imposed. File for federal bankruptcy protection. The taxes owed are income taxes; Here are some of the criteria that the irs will consider when deciding whether or not you or your business is. When filing for bankruptcy, it’s important to pay attention to your tax refund so you don’t lose it. Learn how bankruptcy affects your tax refund. How bankruptcy affects your income taxes. Filing an income tax return after filing for bankruptcy does not have to be a problem, as long as you know what to watch out for, including when and how to file.

Spend Your Tax Refund Before You File For Bankruptcy

Filing for Personal Bankruptcy? TurboTax Tax Tips Video MUST SEE!

One of the best ways to keep your bankruptcy from affecting your tax refund is to file your tax return, receive the refund, and spend it before filing your petition. As long as you use the money for permissible expenses, you wont be required to repay that amount to the bankruptcy trustee. If you are preparing to file for bankruptcy, you should use your tax refund on things like:

  • Housing expenses
  • Food
  • Medical care or equipment
  • Car payments, maintenance, and repair
  • Education tuition, books, or expenses

You should avoid spending your tax return on unapproved expenses like:

  • Repaying any one credit card
  • Payments to family members

If your tax refund goes to these unapproved expenses, it could be up to you to repay those amounts back to the trustee after the bankruptcy begins. The best way to avoid this is to discuss how you plan to spend your tax refund with your bankruptcy attorney beforehand and give him or her copies of your receipts once the money is spent.

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Is Tax Debt Discharged In Bankruptcy

Although the automatic stay will stop the IRS or state taxing authority from collecting tax debts during your bankruptcy , whether your tax debt will be wiped out at the close of your bankruptcy is another matter. To learn more, see our area on Tax Debts in Bankruptcy.

Take our bankruptcy quiz to identify potential issues and learn how to best proceed with your bankruptcy case.

Amending Your Petition To List A Tax Refund

Tax refunds are valuable assets in your bankruptcy that must be listed on your bankruptcy forms. If you forgot to list your tax refund on your bankruptcy forms and your 341 meeting has not yet taken place, you must file an amendment to your bankruptcy forms listing the refund, whether or not it is exempt.

If your 341 meeting has already occurred and the trustee has determined your case is a no-asset case chances are an amendment adding your tax refund is not necessary because it would have otherwise been protected by an exemption. You can check your state exemptions to confirm. In some cases a trustee may indicate that they will check back after your tax return has been filed to to see if you receive a tax refund.

If you receive a notice asking your creditors to file a proof of claim or your trustee states your tax refund will be seized, you can file an amendment to protect what you can using available exemptions.

The amount that can be protected by an exemption may depend on whether other assets are being protected with the wildcard exemption and/or whether your state has specific exemptions for one or more tax credits.

If youâre an Upsolve user and need instructions on how to use our free web app to prepare your amendment, please visit and use the “Submit a Request” feature in the top right corner to send us a message.

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You Can Wipe Out Or Discharge Tax Debt By Filing Chapter 7 Bankruptcy Only If All Of The Following Conditions Are Met:

  • The debt is federal or state income tax debt. Other taxes, such as fraud penalties or payroll taxes, cannot be eliminated through bankruptcy. In other words, the debt needs to be a regular tax payment that you owed either the State of Wisconsin or the federal government.
  • You did not willfully evade paying your taxes or file a fraudulent return. Bankruptcy will not help in these circumstances. Your actions need to have been lawful.
  • Your tax debt is at least three years old. The original tax return must have been due at least three years prior in order to effectively file for bankruptcy. So if you were to file for bankruptcy in April 2020, for instance, this would apply to your 2017 taxes that were due April 15, 2018.
  • You filed a tax return at least two years before filing for bankruptcy. To eliminate a tax debt, a return for that debt must have been filed. Generally, if your extensions expired and you filed late, you have not filed a true return and will not be able to eliminate the tax debt.
  • The tax debt must have been assessed by the IRS 240 or more days before you file for bankruptcy, or must not have been assessed yet. This is called the 240 day rule. If the IRS suspended collection efforts due to a compromise or previous filing, this deadline may be extended.

Accruing New Debt Under Bankruptcy

Does Bankruptcy Affect My Tax Return?

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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