If you’ve been dealing with debt and trying to find a way to overcome it, you may finally have decided to use bankruptcy to help yourself. Filing for bankruptcy is a good way to resolve your debts or to get yourself on a reasonable debt repayment plan, but did you know that bankruptcy could impact your taxes?
During a bankruptcy, there are a few ways that your taxes may be impacted. Here is more on what you should know.
First, if your bankruptcy eliminates a portion of local, state or federal taxes that you owed, you’ll have to consider that impact on your tax forms this year. Typically, not all tax debts can be erased.
Second, if a creditor forgives your debt during the bankruptcy, then that debt forgiveness will come to you on a 1099 form during the tax season. You don’t have to claim this as taxable income as long as the forgiveness happened during bankruptcy. You may need to file additional forms, such as a 982 form, to tell the government that the debt was discharged due to bankruptcy.
Will your tax refund be affected by going through a bankruptcy?
It could be. If you go through a Chapter 7 bankruptcy, for example, the money that comes to you through a tax refund may need to be used to repay your creditors. If this tax season is the year after your bankruptcy, then you should be able to keep that refund.
If you chose Chapter 13 bankruptcy, your tax refund will be seen as disposable income. That might need to be used to fulfill the monthly debt obligation that you have to pay for 3 to 5 years.
Tax laws can be tricky, especially when you have significant changes in your finances over the course of a year. Bankruptcy can have an impact on your taxes, so it’s worth going over what to expect when you file for bankruptcy and as you begin to put your tax return together this year. Taking some time to learn exactly what you need to do on your tax forms will help you avoid mistakes that could hurt you later.