Bankruptcy & Taxes

Bankruptcy and Taxes

People are often confused when it comes to filing of taxes during bankruptcy. When you file for bankruptcy the way your taxes are done changes.

The biggest change is that you will have to have two tax returns done for the year you file for bankruptcy. Essentially what happens is that the date you file for bankruptcy is deemed to be a year end. All this means is it separates the year into two parts, at least for taxes. So you will have one tax return that is done from January 1 of that year to the date you actually filed bankruptcy, this is called the pre-bankruptcy return. The second return will be done from the date of bankruptcy to Dec. 31, 2013, this is referred to as the post bankruptcy period.

For example, if you filed for bankruptcy on June 2, 201X there would be two tax returns filed. The first tax return, the Pre-bankruptcy tax return, would be done from January 1, 201X to June 2, 201X. The second tax return, the Post-bankruptcy tax return, would be filed from June 2, 2013 to Dec. 31, 2013. In most instances your trustee will file both tax returns on your behalf, this is the way it happens at Goth & Company. So you are only responsible to provide the proper information to your Trustee. Your Trustee will prepare these returns and then send you a copy of each of them.

The reason for this is very simple, if you owe taxes in the pre-bankruptcy period these taxes will be cleared by the bankruptcy. But the government doesn’t know whether there is anything cleared until we actually do the return. However, if you owe taxes for the post-bankruptcy period (i.e. the date of bankruptcy to the end of the year), this is money that you will still owe. The reasons for this is that a bankruptcy cannot protect you from something that happens after the day you filed a bankruptcy, so any taxes owing in the second half of the year are your responsibility.

The other major change relates to a tax refund. Any refunds for the year of bankruptcy or any prior years are automatically lost as part of the bankruptcy process. So a refund was calculated on either your pre or post-bankruptcy return, that money gets paid directly to your trustee and is used to create a disbursement that is made available to your creditors.

As you can see, the relationship between filing your taxes and a bankruptcy is anything but simple. If you are unsure what will happen in your situation when it comes to taxes I would recommend contacting my office directly. We would be happy to help you understand what you can expect.