Any bankruptcy analysis includes an investigation into the debtor’s individual tax status. The date that you file bankruptcy can have an important impact on how your tax refund or tax debt is affected.
When a Chapter 13 debtor expects to owe taxes
If you expect to owe taxes for tax year 2010, now may be a good time to file your bankruptcy. A tax debt is not owed until the end of the tax year. If your tax year ended on December 31, 2010, your 2011 Chapter 13 bankruptcy case will include the 2010 tax debt as a pre-petition debt.
When a Chapter 7 debtor expects to owe taxes
A recent tax debt is non-dischargeable – which means that your bankruptcy case will not eliminate the tax debt. If you owe taxes, speak with your attorney regarding your best strategy for dealing with this debt. You will have some temporary relief during the bankruptcy as the IRS is prohibited from collecting. After your bankruptcy case ends, there are IRS programs that allow repayment over time or even forgiveness of the debt.
Older tax debts may be dischargeable under certain circumstances and should be discussed with an experienced bankruptcy attorney.
When a Chapter 13 or 7 debtor expects to receive an income tax refund
Speak with your bankruptcy attorney about your refund. The general rule is, before you file bankruptcy: file your taxes ASAP, receive the refund ASAP, and spend the money appropriately ASAP. Your bankruptcy attorney can instruct you as to how much cash money you can have at the time of your filing and what bills or debts you are allowed to pay from your tax refund.
Every year debtors spend their refund money without first consulting with an attorney and every year it creates problems. In some cases paying a debt may delay your bankruptcy filing. In other cases a payment may cause a turn-over issue. These are problems that can be easily avoided if you consult with an attorney before spending your tax refund.
If you need to file Chapter 7 bankruptcy and cannot wait until you receive your income tax refund, there may be options to keep your refund. You may be able to use personal exemptions to protect your anticipated refund. Your attorney can also discuss other legal options for avoiding turn-over of the refund, including applying the amount to your future taxes. See In re Graves, No. 08-1462 (10th Cir.2010.
In many respects this is the best time of year to speak with a bankruptcy attorney. Your attorney is in the best position right now to discuss your options for filing bankruptcy and avoid any unnecessary tax problems. Call Haines and Krieger to set up a free bankruptcy consultation at 702-919-6380.