A bankruptcy does not alter your duty to file a tax return every year. You must file your individual tax return by the April deadline or request an extension. If you fail to properly file your taxes and your bankruptcy is ongoing, then this could have negative consequences for the proceedings. In this situation, the worst-case scenario is that your bankruptcy case is dismissed or converted from a Chapter 13 to a Chapter 7 bankruptcy. If you fail to file your taxes for the year your bankruptcy was finished, then you could get into trouble with the Internal Revenue Service (IRS). You may even end up owing money and accruing a new debt after finally getting out from under a load of money you already owed.
Filing Taxes for Yourself and the Estate
If you were going through a bankruptcy during the tax year, then you need to consider both your individual tax return and the estate tax return. During a Chapter 7 or 13 bankruptcy, you file your taxes like normal. The bankruptcy trustee will file the estate’s tax paperwork.
If you are going through a Chapter 11 bankruptcy, you may be both the debtor and the bankruptcy trustee. In this situation, you must file both the individual and estate tax forms with the federal government. Chapter 11 bankruptcies are usually filed by corporations.
Discharged Debt Is Not Income During Bankruptcy
During bankruptcy proceedings, you may have a great deal of debt forgiven, which is also known as having the debt discharged. You no longer have to pay this debt. Outside of bankruptcy, this may be treated like income. However, discharged debt related to a bankruptcy is not considered income. When you file your taxes, you will not include your discharged debt as part of your income for the year.
However, that does not mean you ignore any 1099-C forms creditors sent to you. You may have received this form if a creditor discharged at least $600 in debt, though not all places send them. If you received any, speak with your bankruptcy attorney or accountant about what to do. You need to include an additional form with your taxes that tells the IRS you are not adding canceled debt to your income because it is related to a bankruptcy.
What if You Have a Tax Liability?
If you file your taxes during a bankruptcy and you owe money, speak with an attorney about your options. You must pay your tax bill, and this liability will not be discharged in the bankruptcy because it occurred after you filed for bankruptcy. Your best chance of ensuring a tax liability does not negatively impact your bankruptcy is to work with your lawyer and the IRS to create a payment plan.
Will You Get a Tax Refund?
When your taxes result in a refund, you need to speak with an attorney about what happens with that money. You cannot assume that you get to keep it. During a Chapter 13 bankruptcy, any tax return is generally considered income and may be taken by the trustee to pay your creditors. However, you should speak with your lawyer about any way to keep your tax return. You are more likely to be able to keep your refund during a Chapter 7 bankruptcy. However, do not spend it without speaking to your attorney first.
Filing Taxes After Bankruptcy? We Can Help
The legal team at Kademenos, Wisehart, Hines, Dolyk & Wright Co. LPA has years of experience helping individuals and couples through bankruptcy proceedings. We will help you get your taxes squared away during bankruptcy proceedings and afterward so that you do not find yourself in trouble with the IRS during an already stressful time.
If you are considering bankruptcy, or you are currently going through the process without an attorney, call us today at (419) 625-7770, or use the online form to schedule a free, initial case consultation.