When you file for bankruptcy, you may think it’s a one-time action, but it’s not. Bankruptcy will follow you for years, and the consequences of filing can impact your ability to join the military, work in certain sectors, and get loans. That doesn’t mean bankruptcy isn’t the best course of action at times—it can certainly be the best way to go. However, it’s important that you understand its consequences, including how it will affect your tax return.
Make Certain to File
First, note that you must file a tax return. IRS Publication 908 discusses bankruptcy and taxes, and it states that anyone going through a bankruptcy needs to either file a return by April 15 or ask for an extension. If you don’t do this, your bankruptcy case could actually be dismissed.
The biggest question most people with bankruptcy is whether certain things are taxable or not. If some or all of your debt is forgiven and you do not have to pay it, that forgiven debt is not seen as taxable income. You may actually receive a 1099 form from the creditor, but there are specific forms that can be filed that show this “income” is actually discharged debt from a bankruptcy.
Debts that Cannot Be Forgiven
Bankruptcy may assist you in discharging some debts, but there are certain types of debt that cannot be discharged. If you owe back taxes or find out that you will owe taxes on this year’s tax return, you’re still responsible for paying them. There are a number of other government-related debts that bankruptcy cannot affect, including student loans, child support, and court fines. One good thing, however, is that the IRS will not actively try to collect your taxes until your bankruptcy case is complete. This means you will have a little breathing room.
What About Refunds?
If you’re going to get a refund from your taxes, be aware that this money will be considered one of your assets. This means that if you filed Chapter 7 bankruptcy, it will likely be used to pay some of your debt unless it has been one year since you filed. If it has, you get to keep the refund. If you filed Chapter 13 bankruptcy, your refund will be seen as part of your disposable income. That means you can use it to pay towards your monthly debt payments.
Need help determining if bankruptcy is right for you? Contact Michael F. Kanzer & Associates today for assistance.