Know the Impact of Bankruptcy on Your Taxes
The term bankruptcy is considered as a legal status of an individual or company that happens to be unable to repay their incurred debts from their creditors. In most cases, bankruptcy is being imposed by the court orders. It is usually initiated by the debtor. However, sometimes the weight of the issue is given to the debtor from the creditors.YOU ARE ONE OF 50,000,000 AMERICANS WHO MUST FILL OUT AN INCOME TAX RETURN BY MARCH 15. FILE YOURS EARLY. – NARA – 516201 (Photo credit: Wikipedia)
The IRS pub 17 2013 signifies the legal implications on income taxes. This involves the possibility of declaring bankruptcy and its variable forms. Chapter 11 bankruptcy pertains to the debts of the person being reorganized. In this scenario, the debtors have ways to repay some or total amount of their debts. The Chapter 7 bankruptcy involves the liquidation of the debtor’s assets and liabilities. In this situation, the debtors have no means to repay most, if not, the total amount of their debt.
How can Bankruptcy Create an Impact to Debts
Basically, filling of bankruptcy is very complicated. This makes it important for you to consult a bankruptcy lawyer to ensure that all actions you make are done appropriately. In general, bankruptcy does not create impacts to your income tax return, even if there is a cancellation of debt, which is normally taxable on your tax returns.
The reason behind this is that any sources of debts discharged in bankruptcy are excluded from the incomes under the income tax regulations. The regulations pertaining to bankruptcy in relation with income tax returns are:
- If you are being audited, filling of bankruptcy will not stop the auditing. However, it will stop the collection process while the bankruptcy is on pending status. Moreover, the time collection activities stop, such as during the time that you are deemed as not collectible or during the processing of the compromise state is extended. Always consider these concerns before declaring bankruptcy.
- Not all of tax debts are entitled for discharge in bankruptcy. Items that are considered as priority debt are not dis-chargeable, as well. This includes student loans, child support, fines stemming from committing of felonies, and drunk driving cases. The priority debts should be fully repaid, which are classified under the Chapter 13 bankruptcy.
Forgiveness of debt is usually considered as taxable income. However, it becomes ineffective to insolvency and bankruptcy. Sometimes, it is good to present offer in compromise by settling your tax debt. It is still suggested to confer your debt issues with a tax professional and bankruptcy attorney in order to come up with a set of appropriate course of action. This can help you eliminate the possibilities of applying legal actions, which are not suitable for your specific case.