Bankruptcy and Filing Your Taxes: What You Need to Know

​If your debt level feels unmanageable or if you're at risk of losing your car or home, filing for bankruptcy is a solution to alleviate the financial stress of your debts and make your monthly payments more manageable. Two types of bankruptcy are available for individuals: Chapter 7 and Chapter 13.

Chapter 7 bankruptcy requires you to turn over non-exempt assets to the bankruptcy trustee. The trustee liquidates and uses the assets to pay portions of your debt. The trustee dismisses the remainder of your debt, giving you a fresh start.

Chapter 13 bankruptcy works differently. In exchange for the ability to keep your assets, you must pay back a portion of your debts over three to five years. Your income, assets, and types of debt dictate the length of your plan and your monthly payment. An experienced bankruptcy attorney can assist you in determining which type of bankruptcy is best for your specific situation.

If you have considered bankruptcy, you may wonder if this will affect your taxes, including your ability to receive a refund. Keep reading to learn important information regarding your taxes and filing for bankruptcy.
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​What Bankruptcy You File Determines the Tax Returns You Need

To file for bankruptcy, you must have certain pieces of information on hand and provide specific financial documents when your attorney submits your filing petition. Be prepared to include copies of your tax returns when filing for Chapter 7 and Chapter 13 bankruptcy. How many years of returns that you must provide depends on which type of bankruptcy you file.

When pursuing Chapter 7 bankruptcy, your filing documents typically require you to include returns for the previous two tax years. Chapter 13 requirements state that you must supply tax returns for the previous four tax years. Since Chapter 13 requires some level of debt repayment, you must file your taxes to determine if you owe federal or state income taxes.

If you've neglected to file tax returns in recent years, begin the filing process as soon as possible. Your bankruptcy trustee will reject your filing petition if you don't include the necessary documents.

When You File Can Impact Your Ability to Keep Your Refund

When you file your bankruptcy petition can influence whether you lose your tax refund. Should you file for bankruptcy after receiving your refund, you'll likely get to keep it. Be prepared to prove how you spent the refund. Ideally, you should spend the refund on necessary expenses. 

You can also use your exemptions for personal property to exempt the amount of the refund. Should you file for bankruptcy later in the year and anticipate receiving a refund, the trustee may consider the refund additional income and order you to hand over the refund when you receive it.

What Options You Have to Preserve Your Tax Refund

In Chapter 7 bankruptcy, once the trustee discharges your debt, no future impact on your tax refund exists. However, due to the duration of a Chapter 13 plan, the trustee may order you to turn over your tax refund. 

The thought process behind this is that a Chapter 13 plan requires you to use all your disposable income to repay your debts. If you've gone the whole year without your tax refund, the trustee may view the funds as disposable.

However, you have a couple options to save your tax refund.

The first solution is to change your tax withholding so that you receive more money in your paycheck each month, decreasing the amount of your refund or even eliminating it.

Another possibility is to provide documentation that proves you depend on your tax refund to pay your bills. For example, if you need your refund to make home or auto repairs, provide proof of these repairs to your bankruptcy trustee. The goal is to show the trustee that the funds are necessary for you to cover your expenses. 

Concerned about your ability to repay your debt? Call The Michelson Law Office to schedule your free consultation.