Filing your taxes is almost always confusing and stressful, but what should you do if you recently filed for a Chapter 7 bankruptcy? Will you have to pay taxes on the discharged debts, and will you have to file a second return? The bankruptcy attorneys at Dothan, AL-based The Gil Law Firm know how complex the bankruptcy code can be, especially where it intersects with tax law, so they're here to explain a few things about taxes and Chapter 7 bankruptcy.
Many borrowers struggling with debts they can't pay hesitate to file for bankruptcy due to worries about paying the taxes on their erased debts. While in general, a forgiven debt is usually treated as income by the IRS, this isn't the case in a Chapter 7 bankruptcy, in which most of your unsecured debt is completely eliminated. Bankruptcy protection extends to your tax liabilities as well, shielding you from further economic hardship.
You may have heard that you'll have to file a second tax return if you file for bankruptcy, but this is only true for those borrowers who file for a Chapter 11. When you file for a Chapter 7 bankruptcy, you'll file your normal tax return, as you do every year, and the trustee of the bankruptcy will file a separate one for the estate. Since you're relieved of your debt obligations and any property that was not exempted by law, this tax return is completely separate from yours and does not even require your signature.
The Gil Law Firm understands how difficult navigating this complex terrain can be, which is why they're committed to making the legal system as transparent and easy as possible. If you're struggling with debts you can't pay and are ready to move on, visit their website or call their office at (334) 673-0100 today to schedule a consultation with an experienced attorney.