April 15 is almost here, which means the annual deadline is looming to file income taxes. It’s a time that many Californians dread with good reason, but as many debtors have found, bankruptcy isn’t all bad for income taxes. If tax debt meets certain requirements, such as being more than three years old, they can actually be discharged in Chapter 7 proceedings. But there are also certain procedural requirements in regards to tax filings that must be fulfilled after a debtor has filed for bankruptcy.
Chapter 7 Bankruptcy Tax Filings
Filing for Chapter 7 bankruptcy creates two different estates for legal purposes. The first is your individual estate. The second is the bankruptcy estate that is administered by the bankruptcy trustee. This means that you’ll have to file a personal tax return as normal, but the trustee will also have to file a separate tax return for the bankruptcy estate using a Form 1041. Income, deductions, and credits from the bankruptcy estate will not be listed on your personal tax return. However, the trustee may ask you for additional information to complete Form 1041. While this form may detail assets held by the trustee at the time, the good news is that if those assets are returned to you following the conclusion of the case, there are no additional tax consequences for this transaction.
Chapter 13 Bankruptcy Tax Filings
As Chapter 13 bankruptcy creates a repayment plan for debts, there is no separate estate created that a trustee is put in charge of. However, you still need to file a personal income tax return as usual and this information will likely be turned over to the Chapter 13 trustee. Unfortunately, since the purpose of Chapter 13 is to pay off as much debt as possible before receiving a discharge of unsecured debts, the trustee will likely put any refund that you might be receiving toward your repayment plan. That could be par for the course whether it’s a three year or five year plan, however, the trustee ultimately has discretion whether or not to return a refund to you, and may do so in certain circumstances.
Whether you file for Chapter 7 bankruptcy or Chapter 13 bankruptcy, any debts that are discharged in the process are not considered taxable income. However, it’s important to remember this only applies to debts incurred prior to filing for bankruptcy. Any new debts taken after the initial filing won’t be considered part of the current case, so you can end up paying taxes on these debts down the line.
Thinking About Filing for Bankruptcy?
If you’re thinking about filing for bankruptcy, an experienced bankruptcy attorney can walk you through the process. The Law Offices of Melanie Tavare of Hayward and Fremont can assist you in reducing or eliminating debt through Chapter 7 or Chapter 13 bankruptcy. Contact the Law Offices of Melanie Tavare at 510-255-4636 or online.
The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.
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