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What you should know about bankruptcy and taxes

One of the questions people ask when considering bankruptcy is when to file their income taxes. A related question concerns what happens to refunds.

Regardless of where you are in the bankruptcy process, you must file your tax return by April 15 or get an extension. What happens to your refund can depend on what type of bankruptcy you are filing and your individual circumstances. This is determined on a case-by-case basis. 

 

The Chapter 7 bankruptcy estate

When you file Chapter 7 bankruptcy, the U.S. Trustee will appoint a trustee to manage your case and pay your debts. In this regard, you are no longer in charge of handling your own affairs, which become part of an “estate” from which the trustee will pay your debts. However, you must still file tax returns that are currently due. A refund for income earned prior to filing bankruptcy will be considered part of the bankruptcy estate. However, some of the tax refund may qualify for an exemption. You may also be able to use it for necessary expenses.  

Chapter 11 confusion

The Chapter 11 bankruptcy estate is considered its own taxable entity. This may mean the bankruptcy estate must file its own tax return, depending on if the estate generates income (and how much).    

Chapter 13 filing

Individuals who declare bankruptcy often file Chapter 13, which employs a monthly plan for paying off debts. If you choose this type of bankruptcy, you must file a tax return on time. What happens to your refund will depend on your bankruptcy plan and when you file. Because this is so dependent on circumstances, it is best to speak to your bankruptcy lawyer to discuss specifics.  

Size matters

A bankruptcy trustee will ask about any refund you receive. While it could be used to pay creditors, the decision to do so might depend on the size of the refund as well as the type of bankruptcy you file. The good news is you may be able to keep some or all of your refund, depending on circumstances.

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