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How does bankruptcy affect your income taxes?

On Behalf of | Oct 26, 2023 | Bankruptcy

Filing for bankruptcy can often provide relief from overwhelming debt. However, depending on your circumstances, it may impact your tax liability and refund check.

Knowing what to expect come tax time can help you be better prepared.

Not filing is not an option

You will still need to file an income tax return. Not doing so can lead to serious legal consequences, including penalties and fines. However, filing for bankruptcy may discharge previous tax liability.

Chapter 7 bankruptcy is considered a liquidation bankruptcy. With a Chapter 7 bankruptcy, any tax debt at least three years old may be discharged, but this only refers to income tax. Furthermore, the tax refund you receive after your filing may go towards satisfying your debt. But this is only the first refund. Any refund after that is yours to keep.

Chapter 13 is considered a reorganization plan. It requires a regular income and allows you to develop a plan to repay all or part of your debt. Back taxes may be a part of that repayment plan. Furthermore, you must still file tax returns and pay your current taxes. Failing to do so may result in your case being dismissed without a discharge.

When filing for bankruptcy, there are several things to consider besides your tax liability. Working with someone who understands the regulations can help guide you toward the best choice for your situation. The closer it gets to “tax season,” the more difficult it can be to navigate tax issues in a bankruptcy, so seeking legal guidance before you file can help you be prepared.

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The Law Office of Kim Covington, is a woman owned debt relief agency, and I have helped families, individuals and small businesses, file for bankruptcy relief under the U.S. Bankruptcy Code, for over 24 years.