Taxes are an ever-present reminder of the need for citizens to do their part and provide funds for the government to run. Since a bankruptcy filing is a federal government affair, it should be no surprise to find out that tax issues figure prominently in both chapter 7 and chapter 13 filings, the two most common forms of consumer bankruptcy. To get a better idea of how taxes affect bankruptcy filings, read on.
Taxes and Your Filing Status
Firstly, the bankruptcy courts will want to ensure that a recent tax return has been filed before your case can proceed. The question of your return status appears not only in your bankruptcy paperwork but also comes up at the creditor's meeting for chapter 7 filers. You will be asked to supply a copy of your most recent tax year's tax return with your chapter 7 bankruptcy bundle when you file. If you have not filed, the bankruptcy court will want to know why, and you should be prepared for your case to be delayed while you take care of that issue. Why the interest? If you are owed a refund, that money might go to the bankruptcy trustee and not you.
Things are slightly different with chapter 13 filers. The trustee will want to see the last several years of tax filings and you also must have filed for the most recent tax period. If you haven't filed, the judge may order you to file a return based on estimates of income and deductions. That return could later be amended. Otherwise, your chapter 13 filing may be suspended until you have complied with the order to file and present past returns.
Taxes and Debt Relief
The main benefit of filing for bankruptcy is debt relief. With a bankruptcy action, many debts disappear or become easier to pay (as with a chapter 13 filing). Taxes, however, occupy a protected debt state. In most cases, your tax debts will remain after a bankruptcy filing. When it comes to the most tax relief, a chapter 13 filing provides the most in the way it allows filers to stretch out payments. Also, no penalties or fees can be charged on tax debts while you are in active chapter 13 status. Finally, tax liens are removed due to past non-payment of taxes.
For chapter 7 filers, taxes older than three years may be forgiven in whole or part and, in that case, liens on those older debts are removed. However, liens may remain in place for older debts not forgiven and on newer tax debts.
No doubt about it, taxes are complicated. Don't try to make guesses or make decisions based on what you read or hear. Speak to your bankruptcy lawyer about your tax situation and find out how best to proceed.