Will Filing for Bankruptcy affect my Tax Return?
Although nobody wishes for it to happen to them, bankruptcy is a real situation that many taxpayers will eventually have to face at some point in their lives. Each year, thousands of Americans file for bankruptcy protection in a bid to get out of their debt and retain some of their property.
One question that we should be really asking is if filing bankruptcy for bankruptcy will affect our tax return when it is tax season. If yes, then how? Will you still be required to file your tax returns when you have applied for bankruptcy? We shall be answering that and many more questions in this post.
Generally, there are two types of bankruptcy that an individual may apply for; they are Chapter 7 bankruptcy and chapter 13 bankruptcy. If an individual files for chapter 7 bankruptcy, then a bankruptcy trustee will sell or liquidate some of your assets and property in order to pay back some of the money that you owe to your creditors. When you file for chapter 7 bankruptcy, you reserve the right to protect some of your property.
Additionally, the majority of your unsecured debts (such as credit card debts, medical bills, and utility bills) can be discharged. As for the secured debts that you have (such as mortgages and auto loans), you are required to continue to make payments on them or have the creditor that you owe money to repossess your property. Some forms of secured debts can, however, be erased.
The situation is, however, quite different when you are filing for chapter 13 bankruptcy as you are allowed to keep your property. Chapter 13 bankruptcy grants you the ownership of your property on the condition that you continue to make monthly payments towards the partial or total resolution of your debts. You can make up for past due amounts over time and stave off any repossession or foreclosure action.
What happens to your Tax Returns when you file for bankruptcy?
If you apply for bankruptcy, you will still be required by law to file your income taxes or to request an extension. If you fail to do so, then the court may dismiss your bankruptcy case.
If your creditor agrees to a debt settlement or forgiveness as part of your bankruptcy proceedings, then the debt is not regarded as taxable income. Even though the debt is not considered as taxable income, the creditor may still send you a 1099 form. If your creditor whose debts have been discharged sends you a 1099 form, then we strongly advise that you give it to a tax professional who will handle it on your behalf. The tax professional will most likely file a 982 form to alert the IRS that the debt in question has been discharged under bankruptcy.
What happens if you owe taxes when you file for Bankruptcy?
If you owe money to the government in taxes at the time of your bankruptcy filing, then not all of the money can be erased. Debts such as child support, court fines, and student loans still have to be repaid in full. The situation gets worse if the IRS has called for an audit to be carried out on your account.
If the IRS has called for a tax audit to be carried out on your account, then filing for bankruptcy may not be sufficient to keep the tax collectors at bay. On the brighter side, filing for bankruptcy will stop the government from collecting on the taxes that you owe until the bankruptcy is discharged.
If you are due for a tax refund, then the money may be used to repay your creditors. You may, however, be able to keep your full refund if you receive one the year after the bankruptcy. Your income tax refund is also considered disposable income under chapter 13 bankruptcy. You must use it to resolve your monthly debt commitments to your creditors.
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