How Bankruptcy affects Income Tax

Filing bankruptcy will not require you to file any extra tax forms. You will file your taxes as usual, but bankruptcy can have an affect on how much money you get in your return. The affect will depend upon what type of bankruptcy you file, and some of your return may be seized. The bankruptcy law is different for each Chapter and may also vary from state to state. If you live in Miami, a bankruptcy lawyer in Miami will be best qualified to determine how your specific case will affect your tax returns. However, here are the basic rules that should apply to most situations.

Chapter 13

Chapter 13 bankruptcy allows you to pay back their debts though a structured payment plan over three to five years. While back owed taxes can be included in the filing, they are considered a priority and must be paid back in full. Debts such as credit card bills can be reduced and you will normally need to claim the savings on your tax return. The savings is considered income and may lower the amount of tax return.

Your repayment plan may require you to turn over a portion of you tax return during the repayment period. That will be determined along with other terms of the repayment agreement. To avoid losing large tax refund checks you may consider lowering the amount of taxes taken out of your pay checks or putting more into your 401k each pay period. Keep in mind if you lower the taxes taken from your pay checks you could risk having to pay taxes next time you file. Filing Chapter 13 will stop the IRS from siezing property or wages during the filing and the payment period.

Chapter 7

Chapter 7 bankruptcy is liquidation bankruptcy that will use to profits from the sale of eligible assets to repay your debt and the rest will be discharged. However, back owed taxes can never be discharged., they must always be paid back in full. You can set up a payment plan with the IRS to pay your back taxes but the IRS will take your tax return until the taxes are paid. The money you save from discharged debt is reported to the IRS and you may have to pay taxes on them. The year that you file Chapter 7 your tax return may be seized and used to pay your creditors. It will mostly depend on when you file.

Chapter 11

Chapter 11 bankruptcy is a restructuring bankruptcy used most often by businesses. It is by far the most complicated and expensive type of bankruptcy to file and is not often used by individuals. Since usually only businesses file for Chapter 11 bankruptcy income tax is not an issue. If a company owes taxes to the IRS, they will be required to pay them full. However, filing restructuring bankruptcy sets up a repayment plan that the IRS must abide by.