Bankruptcy isn’t something that anyone ever wants to have to do. It’s a means to an end to getting relief from all of your debt and getting back to a financially healthy place. Most people who are struggling with debt count on their tax refund to help get them in a good place for the year to come, as well—paying off a car or a large chunk of credit card debt, or padding the savings account for emergencies. So, if you are about to file a Chapter 7 bankruptcy and you are worried that it will affect this or next year’s tax refund, you’re in the right place to get the information you need.

Tax lawyers are an important piece to this bankruptcy and tax refund puzzle because there are so many conditions and situations that can make one person’s experience different than the next. Here, you’ll get the big picture, and then you can be prepared when you sit down with a professional.

What Happens When You File Chapter 7 Bankruptcy in Athens

Bankruptcy is a federal proceeding that is subject to laws and regulations. When the state and country allow a person to file for bankruptcy, they are allowing them a fresh start to financial stability. This begins with a petition, or an application, for a borrower to be allowed the opportunity to declare bankruptcy. This petition includes all debts that were incurred before the filing. Once the petition is filed, an automatic stay stops creditors from coming after the borrower to collect the incurred debts.

However, there are some exceptions to this, specifically with regard to state and federal tax debt. In Georgia, the Department of Revenue is not only able to audit you to determine if you qualify, but they can still require you to give back any allotted tax refund to offset your debt. This happens when you file your taxes and it shows that Georgia owes you money back, but they keep the refund to lower the amount you owe them.

This only applies in certain situations, but it is a possibility. For example, when there is a tax refund that is due to a citizen for a time period that was before the petition for Chapter 7 bankruptcy was filed, it will usually be offset toward the debt that was also incurred before the petition. In another situation, if there is a tax refund due for a time after the filing happened, it might be used to offset new debt incurred after bankruptcy took place.

Exemption Planning

Something that many people choose to do if they know they have a tax refund on the horizon is to file it before they petition for bankruptcy and then use the money before it gets taken. This could be used on tax debt that will not be discharged, or for something like student loans that will also not go away with a Chapter 7 petition (or a Chapter 13 for that matter).

This probably isn’t the best option, however, if you are facing such a serious amount of debt that the creditors are about to garnish your wages, repossess your cars, or foreclose upon your home. If you wait to file bankruptcy because you are expecting a tax refund, you could lose more than the value of the refund itself once your wages begin being garnished or if your car or home are pulled out from under you. These situations will also make your financial situation much worse than it was to begin with.

If you have already filed your taxes and a tax refund is on its way to you, and you are in the middle of petitioning for bankruptcy, the refund is considered an asset. This might mean that you will no longer be under the median income level which will allow you to file for a Chapter 7 case. Certain portions of a tax refund can be exempted, and therefore not taken by the trustees, but this is another complicated situation that should best be handled by a tax lawyer. You should know the amount that is allowed to be exempted before you file for bankruptcy, as well as the full amount that your refund will probably be.

Filing Taxes After Bankruptcy in Athens

Filing for bankruptcy in Georgia does not exempt you from filing a tax return. If you are hoping to get out of filing so that the state doesn’t take your refund, you’re simply digging yourself into a bigger hole. If you do not file taxes while you are in the process of filing bankruptcy, your case might be dismissed. Better to stay the course and get a true fresh start by keeping all your financial ducks in a row.

Tax Debt

Bankruptcy erases the majority of debts from a person’s record. However, some types of debt never go away until you pay them off in full, such as student loans and some types of tax debt. The ability for a tax debt to be discharged depends on when the tax was assigned, how it was incurred, and the tax types included in the debt.

As soon as you file for bankruptcy, though, you should stop making payments on any previously committed payment agreement to the Georgia Department of Revenue for your state tax debt. A Chapter 7 petition automatically cancels this agreement; if you have future payments that need to be made, they will be done concurrently with the newly filed bankruptcy process. You can also request an updated payment schedule for any tax debt that didn’t qualify for discharge.

In Georgia, if you receive a letter for a tax liability that happens after you make a Chapter 7 bankruptcy petition, this debt won’t be included in your bankruptcy file. To set up an arrangement to pay this amount, you can contact the Department at (404) 417-6543. In certain situations, you will be able to add this post-petition debt to your already begun bankruptcy file.

New tax debts that come in while you are in the bankruptcy period, though, are still your responsibility. While you are in this bankruptcy period, the Department cannot “come after you” to collect these amounts, but you still must pay them. If you don’t, when you are out of bankruptcy they will be there waiting for you—with interest, penalties, and fees added—which means that it might start the vicious cycle all over again. The Georgia Department of Revenue also has the right to request that the bankruptcy court dismiss your case and land you back where you started. They can even come to take your property or home if the situation warrants it.

Once your bankruptcy has been filed and notice is sent to the Department of Revenue, then the taxes that are allowed to be discharged will be removed from your record. If, however, you are still receiving notices that you must pay back taxes, then you should contact your tax attorney to find out if notice never made it to the Department and/or if there were taxes left on your record that shouldn’t be there.

An attorney that is well-versed and practiced in financial law can help you figure out why certain types of tax debt might still be left on your record. If they are still there, they will affect your tax refund because you still owe the IRS money.

When One Spouse Files for Bankruptcy but Files a Joint Tax Return in Athens

Filing for bankruptcy only affects the spouse or partner who made the petition. Georgia can still come after the other person to collect a shared tax debt unless they also file bankruptcy. So, if you and your spouse or domestic partner have a large portion of shared tax debt, it might be wise for both of you to file bankruptcy if you are looking to relieve yourselves of that particular burden.

This is important when thinking about your potential tax refund, too. Let’s say that a married couple files a joint tax return and has joint tax debt. Then the next year, they file separately because Spouse A is in bankruptcy and Spouse B knows that they are due a refund. The refund that is due to Spouse B can still be held by the Georgia Department of Revenue to offset the previous year’s shared tax debt.

Remember, though, that certain types of tax debt are not able to be discharged. This is another reason it is important to hire an experienced tax attorney—they will be able to answer all these questions and look at your situation as a whole so that they can guide you in the right direction.

Final Thoughts

Each situation is unique. There are so many small rules, laws, and loopholes that make it so confusing to file taxes in Georgia, petition for Chapter 7 bankruptcy and make sure that you are doing all the things right with regard to your federal and Georgia state taxes. It can make your head spin!

Instead, hire a professional and experienced tax lawyer such as the ones at Morgan & Morgan Law Firm. They will treat you, your finances, and your case with the utmost respect and understanding. No one wants to file for bankruptcy or have the state continue to come after them when they are trying to make that fresh start. Invest in yourself and your financial future, and let us help you get to where you want to be.

Lee Paulk Morgan

Lee Paulk Morgan

With more than 41 years of experience in the areas of Bankruptcy, Disability, and Workers’ Compensation, Lee Paulk Morgan is one of the most respected Bankruptcy and Disability attorneys in Athens, Georgia. His tireless dedication to serving clients has gained him the reputation of a premier attorney in his areas of practice, as well as the trust and respect of other legal experts, who often refer clients to him.