How Bankruptcy Affects Tax Filings

Bankruptcy for most tax-payers will either be of the chapter 7 type or the chapter 13 type. Both involve a process of liquidation of assets to repay debts. In most cases, it has to be voluntary on the part of the debtor unless they are in business. 

Paying taxes after chapter 7 bankruptcy

Chapter 7 bankruptcy is the most common and simple form of bankruptcy. The debtor’s assets are sold and their creditors are paid. Individuals and married couples are eligible to file for chapter 7 bankruptcy which is for people who are earning less than the average income in their state. The individual or entity filing for chapter 7 bankruptcy must still file their taxes, however. Chapter 7 bankruptcy brings about two separate estates: one for the individual, and one that is the bankruptcy estate. They key word there is “separate”. The individual will not file taxes relevant to the bankruptcy estate, and the income and deductions for the bankruptcy estate are not included in the filing for the individual estate. The bankruptcy estate’s taxes will be paid separately. If taxes are due within three years of filing bankruptcy, the IRS will file a proof of claim to take the money out of what is left of the bankruptcy estate after creditors are paid.  

Paying taxes after chapter 13 bankruptcy

Chapter 13 bankruptcy is different in that it is for people with an income who will be able to repay debts over time. These are people who make too much money to qualify for chapter 7. Chapter 13 does not create a bankruptcy estate like chapter 7, instead, the person who files for chapter 13 bankruptcy will file a regular tax return. They will pay their taxes over three to five years based on how the debt repayments are scheduled. Under chapter 13, old taxes become like other debts where the debtor may only have to pay a small fraction of what they owe.