Unpleasant Truths About Bankruptcy and Taxes

When you decide to file for bankruptcy, you can feel the emotional burden being lifted off of you even before the court discharges a penny of debt and even before you are sure of where you can get the money to pay for the bankruptcy filing.  Bankruptcy will not solve all of your financial problems, though, and not only because it will reduce your creditworthiness.  Filing for bankruptcy can have hidden costs, especially when you consider that some of your financial obligations continue as normal even while the bankruptcy court rearranges other financial obligations.  To get the most relief out of filing for bankruptcy protection, you must carefully think through the short-term and long-term consequences of your bankruptcy filing.  The easiest way to do this is with the help of a Jupiter chapter 7 bankruptcy lawyer.

It Is Difficult to Discharge Tax Debts in Bankruptcy

Everyone has the right to file for bankruptcy protection, but not all debts are eligible for discharge.  The easiest debts to discharge are consumer debts such as credit card debt, medical bills, car loans, and personal loans.  The bankruptcy court will not discharge obligations that arise from orders issued by other courts, such as alimony, child support, lawsuit judgment, and criminal fines.  This is why, if creditors are threatening to sue you, it is better to file for bankruptcy protection now instead of after the lawsuit.

Meanwhile, there are also debts which the court may discharge, but where the standard of eligibility for discharging them is high.  For example, it is difficult to discharge federal student loan debts, but in several recent cases, bankruptcy courts have discharged them.  It is possible to discharge tax debts, but only if you filed the relevant tax returns at least two years before your bankruptcy filing, even if you filed the tax returns later than you were supposed to.  You are ineligible to discharge tax debts if you have previously incurred penalties from the IRS for tax irregularities, even if you did not get criminal charges.

You May Still Have to Pay Taxes While Your Bankruptcy Case Is Pending

Your bankruptcy case may grant you relief from your old tax obligations, but it will not stop you from incurring new ones.  You must still file an income tax return while your bankruptcy case is pending, and if your income is high enough, you might owe taxes.  Not all financial obligations that are dischargeable in bankruptcy are tax deductible.  While your bankruptcy case is pending, the bankruptcy court trustee may also need to file a tax return on behalf of your bankruptcy estate.

Discharged Debts May Count as Taxable Income

If you have reached the point where you are filing for bankruptcy, then you already know that nothing in life is free.  Despite this, it still hurts when, as soon as the bankruptcy court discharges your debts, the IRS counts the discharged amount as taxable income.

Work With a Debt Lawyer About Debt That Outlasts Your Bankruptcy Case

A South Florida debt lawyer can help you if you are worried about still being broke after filing for bankruptcy.  Contact Nowack & Olson, PLLC in Jupiter, Florida to discuss your case.

Source:

hrblock.com/tax-center/irs/refunds-and-payments/bankruptcy-and-tax-return/