Can Bankruptcy Make Your Tax Debts Worse?

If something sounds too good to be true, it probably is.  It is easy to find big promises of debt relief if you are struggling to keep up with your debt payments.  Debt settlement companies promise miracles, and so do credit repair companies.  You know you are poor when most of your junk mail contains detachable sections at the bottom of a sheet of paper, made to look like a check payable to you, but which in fact is just another debt trap.  When you start reading about filing for bankruptcy protection, it sounds like a dream come true. You get to discharge credit card debt and medical bills, and if you own a house and a car, you probably get to keep those, regardless of whether you have a steady income.  Sure, it isn’t great for your credit score, but neither is defaulting on your debts.  Besides, if you have to go to court about debts you owe, it is better to be a petitioner in a bankruptcy filing case than a defendant in a business to consumer lawsuit.  Filing for bankruptcy can have hidden costs, though, including those in the form of tax obligations.  To find out more about how filing for bankruptcy may affect your taxes, contact a Philadelphia debt relief lawyer.

A Bankruptcy Filing Does Not Remove Your Obligation to File a Tax Return

Before, during, and after your bankruptcy case, it is important to report your income accurately on your income tax returns.  You must file a form 1040 for the tax year that your bankruptcy case is pending, just like you do for any other year.  The bankruptcy trustee might also file a form 1041 for your bankruptcy estate, but this does not absolve you of the obligation to file taxes.  It is possible that you might owe taxes even in a year where your financial situation is so bad that you filed for bankruptcy.

Discharged Debts Can Count as Taxable Income

When tax debts are a major source of stress, most bankruptcy filers find that discharging their other debts makes it more manageable to pay down their tax debts.  It is sometimes possible to discharge tax debts in bankruptcy, but the bar for eligibility is high, and in any case, you must file tax returns for the tax year debts you are trying to discharge at least two years before you file for bankruptcy.  Ignoring your tax debt does not make it dischargeable.

The worst news about bankruptcy and taxes is that the IRS may count debt amounts that the bankruptcy court discharges as taxable income.  Before you file for bankruptcy, plan carefully with your bankruptcy lawyer to see how it will affect your taxes.

Contact CONSUMERLAWPA.com

A Philadelphia consumer law attorney can help you if you are struggling with tax debt and are considering filing for bankruptcy protection.  Contact CONSUMERLAWPA.com to set up a free, confidential consultation.

Source:

hrblock.com/tax-center/irs/refunds-and-payments/bankruptcy-and-tax-return/