You Must File Your Tax Returns Before Filing For Bankruptcy
There is one area of an individual’s finances that really peeves bankruptcy lawyers, and that’s their taxation returns. You can only file for a Chapter 7 petition for bankruptcy if your tax returns are all up to date. It’s not unusual for a bankruptcy attorney to send a client to the local tax office as part of their bankruptcy preparation, and you’d be surprised at how many people haven’t filed that return.
Why do you need to file your tax return? A number of reasons, the primary one being the IRS wants their share of your bankruptcy estate before unsecured creditors get their hands on it. The bankruptcy court also requires this, along with last year’s return, to determine your financial state (how much money you have been earning) in comparison to your current situation. Creditors are also entitled to request copies of those tax returns before responding to your petition for bankruptcy.
Once you have filed your taxation return, the IRS will send a copy of the return to the bankruptcy trustee once an assessment has been made. This will advise the trustee of any refunds owing to you, which the trustee will claim as part of your bankruptcy estate, or how much you owe, which then becomes another debt that needs to be paid.
If you know you are going to be eligible for a refund, it is often a good idea to file your return early and to receive that refund prior to filing for bankruptcy. If you use the refund for your living expenses, then the trustee will most likely not request it, however, if you waste it on a holiday or expensive gifts, then the trustee may consider this an abuse of the bankruptcy process, possibly even dismissing your petition for bankruptcy. If you haven’t filed a tax return this year, and bankruptcy is a possibility, then you will need to see to it first, especially if you’re considering a Chapter 7 petition for bankruptcy.
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February 21st, 2012 at 2:15 pm
Question: If you have a payment plan set up with the IRS & have been making payments correctly, then file bankruptcy in the last month of the year, will the IRS keep your return for that year or send it to you since your bankruptcy is already in affect by the time you filed?
Thanks.
March 7th, 2012 at 5:33 pm
Hi,
I realize this is an old blog post but hope you see this comment and question. What about a situation where the unfiled return is 10 years old, and the person has been unemployed since then living with family members? In this case does that old unfiled return for which no tax would be due (and realizing any refund was forfeited long ago), still block filing for Chapter 7?
Thank you.