Filing for bankruptcy changes nearly everything about your financial status and outlook. Naturally, filing for bankruptcy alters how you file your taxes.
If you filed for Chapter 7 bankruptcy in the past year or if you think you will in the next year, speak with an accountant or bankruptcy lawyer to determine how it will affect your tax return. As always, each case is unique and you might have special circumstances present in yours that will require you to take certain actions.
When You File for Bankruptcy Determines what Happens with Your Tax Refund
Assuming you receive a tax refund, when you file for bankruptcy will play a role in how the refund may be used. Refunds for years prior to filing for bankruptcy become part of the debtor’s estate. They are treated like cash, which means that generally, they are exempt from being used to repay the debtor’s creditors. However, if you are in this position, speak to your bankruptcy lawyer to be certain about the status of your refund money.
For refunds for the year in which the debtor filed for bankruptcy, a refund based on the income he or she earned before filing is sent to his or her bankruptcy estate. Any refunded money for income earned after filing for bankruptcy may be kept. For the years that follow the individual’s bankruptcy, he or she can keep all the refunded money.
When You File for Bankruptcy, Your Bankruptcy Estate Becomes a Separate Entity
Because of this, you must file two separate tax returns the year you file for bankruptcy. You must still file your 1040 for your income earned that year. Your bankruptcy trustee must file a 1041 for the bankruptcy estate.
Creating a Tax Filing Strategy for the Year You File for Bankruptcy
If you anticipate filing for bankruptcy in the future, you can take a few steps to make tax time easier for you that year. One step you can take is to adjust your income withholding so you do not receive a large refund, which can mean keeping the entire amount refunded. Another strategy is to delay filing for bankruptcy until after you have filed your taxes for a given year, giving you more time to work with your lawyer to develop an effective bankruptcy and tax strategy.
Under no circumstances should you avoid filing your taxes because of your bankruptcy proceeding. Failing to file your taxes on time can result in penalties for you, which will only serve to worsen your financial circumstances.
Work with an Experienced Rolling Meadows Bankruptcy Lawyer
If you are unsure about how to approach tax season this year after filing for bankruptcy, speak with an experienced bankruptcy lawyer who can answer your questions and explain the steps you need to take. To learn more, schedule your initial legal consultation with a member of our team of bankruptcy lawyers at Newland & Newland, LLP. We serve clients in the Arlington Heights, Palatine, Rolling Meadows, Libertyville, Mundelein, Buffalo Grove, Schaumburg, Elk Grove, and Itasca areas.