Taxes And Your Bankruptcy

Debt is a problem that plagues many modern consumers. When debt loads become unbearable, bankruptcy can be an option for finding relief. A Chapter 7 bankruptcy will eliminate debts, and a Chapter 13 bankruptcy will help you reorganize your debts to make them easier to pay off. Regardless of which chapter makes the most sense in your situation, filing for bankruptcy can be a complex process.

One question that you may have regarding bankruptcy is how the proceedings will affect your income taxes. Your bankruptcy lawyer will be able to advise you throughout the process, but there are some key concepts you should understand about taxes and your bankruptcy.

Always File a Return

You may be tempted to forego filing a tax return when going through a bankruptcy because you know you will not be able to pay any money that you owe, and any return that you get will be seized by the bankruptcy trustee and used to help repay debtors. Don't give in to this temptation.

You need to file a tax return each and every year. Not only does filing a return ensure that you are in good standing with the government, it starts a clock that limits the amount of time the government has to collect on your tax debt.

If you fail to file your own return, the IRS will eventually file one on your behalf. This almost always results in you owing significantly more in taxes and fees than you would if you filed a return on your own.

Don't Pay on Discharged Debt

You may receive a 1099 form in the mail from a creditor that was included in your bankruptcy. In any other situation, a 1099 must be claimed as income when filing your taxes. The IRS explicitly limits the types of money that can be considered income.

Discharged debts are protected under bankruptcy law. If you don't include the information from the 1099 in your tax information, you shouldn't be subject to any type of penalty. Your attorney should contact the creditor to remind them that your debt has just been discharged.

Claim Bankruptcy-Related Deductions

Your bankruptcy can actually be used to benefit you when filing your income taxes. Individuals who file a Chapter 13 bankruptcy are allowed to claim the payments they are making toward real property loans as deductions on their tax returns.

You will need to work with your attorney to obtain a copy of the trustee's payment report for each debt. The information from the payment receipts will let you know exactly how much you can help to claim on future tax filings.