Bankruptcy and Income Taxes – Everything You Need to Know
Bankruptcy | April 12, 2015
It’s income tax season again, and you may be wondering what happens when it’s time to file income tax in the midst of a bankruptcy proceeding. Many of our clients also have questions about whether bankruptcy can help with discharging past debts to the IRS. Here’s a quick overview of what you need to know about how bankruptcy affects your income taxes.
Can Tax Debts be Discharged in Bankruptcy?
The short answer is “sometimes,” but there are strict limitations on this option. In Chapter 7 bankruptcies, if you have filed accurate tax returns by certain specified due dates, it is sometimes possible to discharge income tax obligations that were due more than three years before you file for bankruptcy. More recent income tax obligations, however, cannot be discharged and must be paid off immediately. In Chapter 13 bankruptcies, you are often allowed pay off income tax debts along with other credit obligations for the entire duration of your bankruptcy period, sometimes at zero percent interest. Your bankruptcy lawyers in Athens, Georgia, will be glad to help you file the correct petitions for whichever type of tax relief is appropriate for your situation.
What Do I Do About Income Taxes During Bankruptcy?
With some types of bankruptcies, you will file your normal income tax return and your bankruptcy trustee will file a second income tax return on behalf of your bankruptcy estate. This is often confusing to people who are unfamiliar with bankruptcy laws, and the expert legal team at Morgan & Morgan is experienced at providing clear information to our bankruptcy clients on tax issues. If you are filing Chapter 13 bankruptcy, it’s very important to pay all new income tax obligations on time, because if they are not paid on time they might be considered by the court to be new debt that you have taken on, and this is generally not permitted in a Chapter 13 bankruptcy.
Can I Keep My Income Tax Refund?
In Chapter 7 bankruptcy, your non-exempt assets all become the property of the bankruptcy estate. Depending on your state’s laws about exemptions, however, you might be able to keep your income tax refund separate from the other assets in your bankruptcy estate. If you are expecting a large refund, you and your Athens, Georgia, lawyer may even decide to delay your bankruptcy filing until after you have received that refund, depending on your particular situation.
Filing bankruptcy and income taxes can both be stressful, and we invite you to let us take some of those financial worries off your mind. When you come in and speak with your bankruptcy attorney at Morgan & Morgan, you will find that the biggest financial worries can be tamed down into a straightforward action plan.