HOW DOES BANKRUPTCY AFFECT THE FILING OF INCOME TAXES
This is a very common question, with a very easy answer: it doesn’t. That’s not the end of the story as two other issues can pop up depending on when the bankruptcy is filed, whether you get a refund, and whether you get a 1099 for debt forgiveness.
If you file your income taxes prior to the filing of a bankruptcy and (1) you are due a refund but (2) you have not yet received the refund, it’s important to make your lawyer aware of your right to receive the refund. In many instances, you can protect the refund and keep it. In some instances you risk losing it and it may make sense to engage in some more planning prior to the filing of the bankruptcy.
If you receive a 1099 for debt forgiveness after you file for bankruptcy it’s important to speak with a competent CPA. You should not have to pay tax on the forgiven debt because it’s highly likely that you meet the IRS’ definition of insolvency. If that’s the case there’s a form that a CPA could help you fill out that will cancel any tax owed on the debt.
Generally speaking, your bankruptcy filing should not have a direct impact on how you go about filing your taxes other than the two instances mentioned above. If you have concerns you should mention to your tax preparer that you filed bankruptcy and you will almost certainly learn that there is no effect.
If you are looking for relief from debt or assistance with Chapter 7 bankruptcy we are here to help. We offer a free confidential no obligation consultation to discuss your personal situation. Please call (281) 847-4345 for immediate assistance or use the form below to send us a message.