Bankruptcy and Taxes

no money for taxes
no money utah bankruptcy guy

At times people who filed bankruptcy are confused why bankruptcy did not forgive all the money they owed to taxes. “Bankruptcy wipes away all my debt, right?” is a common statement I hear. Unfortunately not. To better understand bankruptcy and taxes a little background information is needed;  it then becomes more clear why bankruptcy and taxes are so enter twined. First you have to understand that bankruptcy is made possible because of federal laws, and the federal government is made possible because of tax dollars. Why would the government try to give you a perk when you really need the help? Essentially, because it is the government that extends the privilege of bankruptcy, the government wants to ensure that individuals will pay their taxes as is required of any American, legal resident, or individual working in the United States.

When it comes to Bankruptcy and Taxes you like many other people I talk to might wonder:

-Do I need to file my taxes to file bankruptcy?

-How many tax returns does the Bankruptcy court need from me?

-Can a bankruptcy help me get rid of Tax debt?

-Can I keep my tax refund after I file bankruptcy?

These are all important questions which I will address below:

Do I need to file my taxes to file bankruptcy?

If you have made income in the last year or two then yes. You need to file your taxes at least within two weeks of filing bankruptcy or your case may be dismissed. You will need to file your taxes, and turn in your Federal and State Tax Return to your trustee. Oftentimes, turning in your taxes is done through your attorney who then records it and passes it on to your assigned trustee on your behalf.

How many tax returns does the Bankruptcy court need from me?

Well…that depends on what chapter of bankruptcy you’re filing for. For a Chapter 7 Bankruptcy, attorneys will typically ask for your most recent 2 years of state and federal tax returns. In the case of a Chapter 13 bankruptcy, you may actually be asked for up to 4 years of your most recent tax returns.

 Can a bankruptcy help me get rid of tax debt?

Its possible but not common.  Since the government makes bankruptcy possible, and because of that, they have a list of requirements that they insist be met in order for this privilege to continue. Certain debts are prioritized in a bankruptcy, and some are left untouched. In the case of taxes owed and student loans the government feels that individuals should always be required to repay this debt.

Can I keep my tax refund after I file bankruptcy?

Again this depends on what Chapter of bankruptcy you filed for. Speak with your attorney to understand more about your specific case. As a general rule, don’t expect to keep a tax refund. Oftentimes my clients who filed a Chapter 7 bankruptcy find that they can keep a good chunk of their refund, but any left over money of a designated amount is given to the trustee to distribute to some of your creditors listed in your bankruptcy case.

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