Chapter 7 Bankruptcy: The Tax Considerations
Believe it or not, filing for bankruptcy under Chapter 7, liquidating most of your assets, and starting over is not the end of the story. Chapter 7 is unique because a separate estate is created using your non-exempt assets (see Chapter 7 posts for more information). The assets within this separate estate can derive their own income, create their own costs, and they are taxable.
Who Prepares Taxes for a Bankruptcy Estate?
Your non-exempt assets are placed in the care of a trustee. This trustee is court-appointed and is responsible for preparing the Federal and State taxes of the bankruptcy estate and calculating tax due. If the trustee does this incorrectly or misses any deadlines, the bankruptcy estate is responsible for paying any fees or interest incurred. In addition, any tax return owed to the debtor that was not received before filing for bankruptcy can be intercepted by the trustee to fund the estate.
Who Prepares Taxes for You During the Bankruptcy Process?
After filing for Chapter 7 bankruptcy, you are still responsible for filing your personal tax return. However, there is an election afforded to you as the debtor which allows you to create two “short tax years”. The first taxable “short year” closes the day before the bankruptcy case starts. The second taxable “short year” starts on the day the bankruptcy case begins and ends on the last day of the normal taxable year. If you do not elect to separate the year, the bankruptcy will not affect your tax filing which means you will not receive the tax benefits of filing for bankruptcy.
Do Not Forget to File Your Personal Taxes After Filing for Bankruptcy
According to Publication 908 on irs.gov, if you do not file your personal return after filing for bankruptcy, your case might be dismissed by the bankruptcy court. If you did not file and you were notified that you must file, you have 90 days to do so or your bankruptcy case will be dismissed.
The tax implications of filing for bankruptcy are enormously complex and it is often important to retain the services of an attorney who understands these issues. Dsouza and Strachan Lawgroup Group of Plantation, Florida has the experts you need. Elias Dsouza has been helping people through the bankruptcy process for over 15 years.