Taxes are a part of life. This is especially true after a bankruptcy is filed. In order to properly file your income tax returns when there has been a bankruptcy, it is important to be aware of certain things.
When you file for bankruptcy, you are in essence, handing over the management of your financial affairs to be managed by a bankruptcy court-appointed trustee. The trustee will then use any of your assets which are not exempted from the bankruptcy, to pay your creditors. The IRS requires that you the debtor, file an individual tax return. Your trustee must also file a tax return on behalf of your bankruptcy estate which includes all of your assets which are subject to the bankruptcy.
Depending on which type of bankruptcy you file, you and the trustee may have different obligations. For instance, under a Chapter 7 bankruptcy, the debtor files the same tax return they would have filed prior to the bankruptcy. The trustee would then file a form on behalf of the bankruptcy estate. However, under a Chapter 11 bankruptcy, which is usually filed by a corporation rather than a person, the debtor will have more control over the estate and may file on its own behalf and as the trustee on behalf of the bankruptcy estate. Under a Chapter 13 bankruptcy, where creditors are typically being paid under a payment plan, the debtor must file a standard tax return, and the trustee must also file a specific tax form. Further, in the event there is a tax refund, these funds will be applied to Chapter 13 creditors. However, regardless of if it is a Chapter 7, 11 or 13 bankruptcy, all of the requisite tax return forms must be filed for the tax year. The bottom line is that you need to be sure that you properly file your tax returns during bankruptcy.
A key requirement under bankruptcy is that the person filing may not take on any new delinquent debt while their case is before the bankruptcy court. In the case of a Chapter 11 or Chapter 13 debtor, if they do not file their taxes or make required tax payments, their bankruptcy may become a Chapter 7 bankruptcy unless their bankruptcy is dismissed. This may be highly detrimental to those debtors who are seeking to repay debts according to a prearranged plan or reorganize their businesses. This is because Chapter 7 requires that all non-exempt bankruptcy estate assets be sold to pay creditors. Therefore, the Chapters 11 and 13 debtor who chooses to assume tax debt may be placing their assets and agreements at risk.
Another consideration is that when a creditor forgives a debt, they may report the amount forgiven to the IRS and send you an IRS form called a 1099(c) which states the amount. This would ordinarily be taxable income. However, debt forgiven as part of a bankruptcy case is ordinarily exempted from taxation. In the event that you receive a 1099(c) related to a debt which was part of your bankruptcy, there is a form you can file which will notify the IRS that the debt was discharged according to the bankruptcy and is therefore not taxable income.
Filing your proper tax returns and observing proper tax procedures during and after bankruptcy is essential. However, in order to ensure that you consider all aspects of your bankruptcy with respect to your tax returns, it is critical that you consult with an experienced bankruptcy attorney. With the advice of your attorney, you will be able to plan for tax filings in a manner which complies with the applicable laws and the terms or your bankruptcy.
We have the knowledge and experience you need to help you understand what you need to do and plan accordingly. Please contact us online or by phone if we may be of assistance. http://bestmichiganlawyer.com/contact-us