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Filing bankruptcy brings questions about filing your taxes

Let us say that you have decided to file for bankruptcy protection under either Chapter 7 or Chapter 13.

Now you wonder about filing your income tax return. Does bankruptcy affect the normal process in some way?

IRS guidelines

In its Bankruptcy Tax Guide, the IRS requires you, as the debtor, to either file an individual tax return or request an extension. Otherwise, you risk having your case dismissed or converted. What many people entering bankruptcy find confusing is that two different forms must now be filed: one for the individual and one for the bankruptcy estate.

The Chapter 7 process

Remember that your tax matter is not a debt, it is an obligation that you owe to the government. Therefore, if you file Chapter 7 bankruptcy, you should file your 1040 tax form as you normally would. Meanwhile, the trustee will file a form 1041 on behalf of the bankruptcy estate.

The Chapter 13 process

If you have chosen Chapter 13, you will establish a monthly plan for the purpose of paying your creditors. You will continue to pay your taxes in a timely manner and provide your returns to your trustee. Any refunds will go toward satisfying your debt to creditors. Once again, the trustee will file a 1041 form on behalf of the bankruptcy estate. If you should fail to file your taxes or properly manage any new tax obligations, the trustee could convert your Chapter 13 to a Chapter 7. This may be a very difficult change for you because a Chapter 7 bankruptcy features the liquidation of all non-exempt assets to pay creditors.

Looking ahead

Seek legal guidance for any bankruptcy questions you have, including those concerned with tax payments. If you have already filed your income tax returns, be sure to provide complete records to your attorney and prepare to answer questions about such payments. As your attorney can tell you, the trustee will probably ask for those answers.

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