Filing Taxes Before Filing Bankruptcy: Three Things You Need to Know

Filing Taxes Before Filing Bankruptcy: Three Things You Need to Know
Information in this article does not constitute legal advice, it is for informational purposes only, and may not constitute the most up-to-date information. Readers should contact their attorney for advice on any particular legal matter.

Tax season is a time that many people look forward to because they receive a large tax refund. But what if you're struggling with debts? Should you file your tax returns before or after filing for bankruptcy relief? Here are three important things to know about filing taxes before filing bankruptcy:

Firstly, it's important to file your tax returns on time, regardless of your financial situation. Failing to file your taxes can result in penalties and interest charges, which can make your financial situation even worse. Additionally, if you owe taxes, filing your returns on time can help you avoid additional penalties and interest charges.

Secondly, if you're considering filing for bankruptcy, it's important to understand how your tax refund will be affected. In many cases, tax refunds are considered assets that can be used to pay off your debts. If you file for bankruptcy before receiving your tax refund, you may be able to keep it. However, if you receive your refund before filing for bankruptcy, you may be required to use it to pay off your debts.

Finally, if you're struggling with debts, it's important to speak with a bankruptcy attorney. They can help you understand your options and guide you through the process of filing for bankruptcy. They can also help you understand how your tax refund will be affected and how to best protect your assets.

Three Things to Know About Filing Taxes Before Filing Bankruptcy

Thinking about filing for Chapter 7 bankruptcy? There are a few things you should consider before you do. One important factor is whether or not you expect to receive a tax refund. Did you know that tax refunds are one of the most common assets that Chapter 7 trustees seize in bankruptcy cases?

The primary role of a Chapter 7 trustee is to represent the best interests of unsecured creditors. This includes things like personal loans without collateral, medical debts, judgments, credit cards, past rent and lease payments, most taxes owed to the government, student loans, and unpaid domestic support payments. These creditors don't have collateral to secure their loans, which is why most of these debts are discharged through bankruptcy. However, taxes, student loans, child support, and alimony are not discharged, so you'll still owe those debts.

If the Chapter 7 trustee seizes your assets, they'll use them to pay off your unsecured creditors. So, before you file for Chapter 7, consider these three things about tax refunds:

  • First, if you haven't received your tax refund yet, it's considered an asset in your bankruptcy case.
  • Second, if you've already received your tax refund, but haven't spent it yet, it's also considered an asset.
  • Third, if you've already spent your tax refund, the trustee may still be able to recover that money from the person or entity you paid.

Filing Taxes Before Filing Bankruptcy: Your Tax Refund Is Part of the Bankruptcy Estate

When you file for Chapter 7 bankruptcy, any assets you own or have an interest in become part of the bankruptcy estate. This means that the Chapter 7 trustee can sell any asset in the estate to pay your unsecured creditors. However, you can protect a certain amount of equity in specific assets.

Equity is the value of the asset after deducting any liens against it. For example, if you receive a tax refund of $6,000, the equity or value of the asset is also $6,000.

Fortunately, bankruptcy exemptions can protect most or all of your tax refunds. Depending on where you live, you can use either federal or state bankruptcy exemptions. Each state has its own bankruptcy exemptions, so it's essential to know which ones apply to you. You can learn more about bankruptcy exemptions here.

For instance, if you live in South Carolina, you must use the South Carolina bankruptcy exemptions. The exemption for cash, which you would use to protect your tax refunds, is $5,900 per debtor. You also have a wildcard exemption that you can use, which is $6,100.

If your bank account balances and other liquid assets are minimal, your tax refunds would be protected by bankruptcy exemptions. Therefore, the Chapter 7 trustee would not take your tax refunds, even if you filed your taxes before filing for bankruptcy.

IMPORTANT NOTE: It's crucial to check for the current exemption amounts for your state, as bankruptcy exemptions are updated according to state law. If you can use either federal or state bankruptcy exemptions, you need to compare them to determine which option is best for your situation.

Spending Your Tax Refunds Allows You to Keep the Money

Are you worried about tax refunds becoming an issue in your Chapter 7 case? Here's a solution: spend the tax refunds before filing for bankruptcy relief. It's simple - file your tax returns, receive your refunds, and spend the refund money before filing the Chapter 7 petition.

But wait! Don't spend the refund money on just anything. Be mindful of how you spend it. Spend the money on ordinary household expenses such as rent or mortgage payments, food, utilities, clothing, medical and dental expenses, car payments, repairs and maintenance for cars or homes, insurance payments, and education expenses for you or your children. These expenses are safe to spend the refund money on.

Here's the goal: have little to no tax refund money left when filing your Chapter 7 bankruptcy petition.

IMPORTANT NOTE: Before paying any debts with your tax refunds, talk to a Chapter 7 bankruptcy lawyer. If you pay relatives or friends, the Chapter 7 trustee could sue them to get the money back. The same goes for paying off a creditor - the trustee might sue the creditor to get the money back.

What Happens If You Have Not Filed Tax Returns in Years?

If you're considering filing for bankruptcy, it's essential to know that one of the requirements for receiving a bankruptcy discharge is filing all necessary tax returns. Failure to do so will result in the dismissal of your case by the bankruptcy court. The Bankruptcy Code mandates that you submit a copy of your most recently filed tax return no later than seven days before your First Meeting of Creditors, also known as the bankruptcy hearing.

However, if you are not required to file tax returns, you need not worry about this requirement. Nevertheless, the Chapter 7 trustee may still inquire as to why you are not required to file tax returns during your bankruptcy hearing.

If you have not filed the necessary tax returns, it may be best to seek legal advice before filing a Chapter 7 bankruptcy case, even if you are one of the few individuals who can file without a lawyer. The issues you face may be too complicated to handle without the assistance and guidance of an experienced bankruptcy lawyer.

What Happens to Tax Refunds in a Chapter 13 Bankruptcy Case?

Filing for Chapter 13 bankruptcy is a complex process that involves a repayment plan. Seeking advice from a Chapter 13 bankruptcy lawyer is recommended to navigate this process effectively.

When it comes to tax refunds, they can have an impact on your Chapter 13 case. Depending on your financial situation, large tax refunds might slightly increase your Chapter 13 payment. However, in some cases, you may need to surrender your tax refunds each year during your Chapter 13 case to avoid an increase in your monthly payments. An attorney can analyze your situation and provide guidance on the best course of action for you.

Bottom Line – Wait to File Chapter 7 if You Anticipate a Large Tax Refund

Before filing for Chapter 7 bankruptcy, it's best to spend down your tax refunds. However, if you can't wait, it's important to consult with a Chapter 7 bankruptcy lawyer.

We understand the challenges of managing debt and can connect you with a bankruptcy lawyer who offers free consultations. We also provide guidance on how to get out of debt without filing for bankruptcy. Feel free to contact our office for more information on debt-relief options and bankruptcy. Most of our services are free of charge. Visit our website to learn more about how we can assist you.

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