When you consider filing for bankruptcy, your bankruptcy lawyer can help you explore options and explain how filing will affect your financial situation. One factor to consider is in filing your income taxes and how the two processes affect one another. The below guide explains how filing your income taxes will affect you, whether you’re filing Chapter 7 or Chapter 13.

How Do Tax Returns Affect Chapter 7 Bankruptcy?

You should work with a bankruptcy lawyer when filing Chapter 7, especially if you expect a tax refund. Unless you register for exempt status, your return may go to creditors. During this process, the bankruptcy trustee will liquidate some of your assets to pay back your unsecured debts. This will include any refund you may receive unless you seek an exemption.

Some people wait to file bankruptcy until after receiving their refund. You can do this, but only if you plan to cover essential living expenses with it. The bankruptcy trustee will expect to see the documentation that shows how you spend the refund. Anything you receive after 12 months is yours to keep, which is why bankruptcy lawyers recommend filing at the start of the year.

How Does a Chapter 13 Bankruptcy Affect Your Refund? 

In Chapter 13, trustees will not liquidate your assets to repay your creditors, but you must adhere to a repayment plan. Over time, you will have to repay all or most of your debts, and this includes past-due taxes. Therefore, you must file your taxes on time each year, or obtain an extension.

As you file for Chapter 13, your bankruptcy trustee will expect you to provide tax returns for the most recent four years. This is because you cannot discharge tax debts that aren’t at least three years old. If you’re missing a tax return, the trustee may give you time to file the return before proceeding with the bankruptcy. Filing your taxes before bankruptcy can also benefit you by reducing the debts you owe. Any refund you receive will go toward your debts so that you won’t face a more complex repayment plan.

Whether you file for bankruptcy before or after your annual income taxes will largely depend on the type of bankruptcy you pursue. A bankruptcy lawyer can help you determine the best approach for your situation. Located in Batavia, OH, Swartz Law Office services clients in Cincinnati and all of Clermont County. Backed by years of experience, they help you seek the ideal debt relief option for your situation. To schedule a consultation, call (513) 732-0900. Visit the website for more information about their practice areas.