When filing for personal bankruptcy, there are many factors to consider, including your tax debt. Taxes are considered priority claims in most bankruptcy proceedings, so you may think that delaying their payment will be beneficial. However, this isn't always the case.

How Bankruptcy Filings Affect Your Tax Return

Many people plan to wait until after tax season to file for personal bankruptcy, hoping their tax liabilities will be discharged. In general, taxes are considered priority claims in all chapter filings, which means they have to be paid in full first, before other creditors. This also suggests that there won't be any significant difference if you choose to settle these debts following your declaration of bankruptcy.

Typically, it's best to file all required tax returns before submitting the bankruptcy petition since these documents are necessary during the proceedings. Failure to do so can lead to the dismissal of your case or higher taxes based on IRS estimates.

What Happens During Each Chapter?

In Chapter 7 and Chapter 13 bankruptcy, the trustee will need the latest tax return filed to compare the income declared in the bankruptcy petition. If you're entitled to a tax refund, it'll likely be applied to your outstanding debts, and not for your living expenditures while under personal bankruptcy proceedings. This is why some petitioners choose to file their cases after tax season and use the refund for necessary expenses.

Under Chapter 7 bankruptcy, tax debt can be discharged if it meets all criteria. The taxes due must have tax returns at least three years old, and they must've been filed two years ago and assessed 240 days before the bankruptcy petition.

Under Chapter 13, the same criteria may apply to classify tax obligations as non-priority. This means you may still have to settle these debts, but not all of them under the repayment plan. Keep in mind that you're required to file tax returns on time and pay current taxes, even while under bankruptcy proceedings.

If you have questions regarding taxes when filing for personal bankruptcy, turn to Brian R. Cahn & Associates, LLC for advice. Headquartered in Cartersville, GA, attorney Brian Cahn and his team have helped countless clients throughout Northwest Georgia navigate debt settlement and relief through bankruptcy law. Call (770) 382-8900 today or set an appointment through their website.