There are a couple of different ways that filing bankruptcy can affect your taxes, but they really have more to do with when and how you file than with the bankruptcy itself. The courts allow for two different means of filing taxes, and they have specific laws concerning how you address bankruptcy on your taxes. Many factors are part of determining the best ways and most ideal times to file bankruptcy and taxes. Our lawyers can help you determine the best route for you and your family, but it’s a good idea to gather a bit of general information so you have an idea of what you may face when it comes to taxes and bankruptcy.
Filing Taxes Before Bankruptcy
You may choose to divide your taxes for the year into two “short year” taxes. The first part of the short year liability is an allowable claim against the bankruptcy estate. Keep in mind if there is a liability for taxes, you cannot meet that liability by taking from the estate. However, if there are no assets in the estate, then this is not an option. The other option is to file taxes as you normally would. In many cases, it’s best to file taxes right before filing bankruptcy in order to use the tax return as payment for the bankruptcy fees.
Bankruptcy and Canceled Debts
Canceled debts and bankruptcy are handled in two different ways when it comes to income taxes. If you have canceled debts and you have not filed bankruptcy, they must be addressed as canceled debts on your tax return and will apply as part of your adjusted gross income. However, bankruptcy does not count as canceled debts when it comes to your taxes unless there are creditors you forgot to list on your bankruptcy documents. Any creditors not listed in the process will still be considered open accounts. As such, if they choose to cancel your debts, the canceled debt from them must be addressed on your tax return. In such cases, you will normally receive a 1099-C in the mail.
If you plan to file bankruptcy this year, it’s best to consult an experienced lawyer before you file taxes. Then, your bankruptcy attorney can let you know the best time to file, and whether or not you need to divide your tax year before you file. In any event, your individual circumstances will play an important role in your bankruptcy and how you file taxes.
The Importance of a Qualified Bankruptcy Lawyer
In order to ensure you have filed everything completely and in the best way for your situation, make sure you have a qualified bankruptcy lawyer in your corner. Taxes and bankruptcy can become complicated, and it’s easy to make costly mistakes if you attempt to navigate either process without the assistance of a qualified lawyer.
Have you had problems filing taxes after bankruptcy? Let us know in the comments. Don’t forget to share this post with others who may have bankruptcy and tax questions as well.