If you file for bankruptcy, some of your taxes may become dischargeable under the IRS rules. It’s important to verify exactly which debts could get discharged and which tax returns you still need to file and pay. Also, your tax obligations vary slightly depending on whether you file for Chapter 7 or Chapter 13 individual bankruptcy. For these reasons, we highly recommend consulting with a knowledgeable bankruptcy attorney in your area to learn more.
Tax Debts and Bankruptcy
During the bankruptcy process, most Chapter 7 and Chapter 13 individual filers can seek to discharge IRS tax debts that (1) are older than three years and (2) they owed from before they filed a bankruptcy petition. If the debtor filed returns late, the timeline is slightly different. Collections on these older tax debts will be stayed during bankruptcy due to the stop collections order imposed by the bankruptcy court.
For newer tax debts incurred less than three years before filing bankruptcy, filers likely will not be able to discharge those debts unless they have filed for Chapter 13 bankruptcy. In Chapter 13 bankruptcy, newer tax debts may be included in the repayment plan. If a debtor completes a repayment plan that includes tax debts, those tax debts will be discharged.
To summarize, someone who files for Chapter 7 bankruptcy will not have the ability to discharge a tax debt that accrues just before or after they make the bankruptcy filing, but a Chapter 13 filer might if the debt is incorporated into their repayment plan. Finally, the time in bankruptcy also extends the IRS’s time to collect debts that accrue during the bankruptcy period. In other words, it’s best to pay your taxes while you’re in bankruptcy or the IRS will have more time to pursue those debts later.
Tax Returns and Bankruptcy
Bankruptcy does not stop your obligation to file tax returns. A debtor must file tax returns for the last four tax periods prior to the bankruptcy under IRS rules. As the bankruptcy progresses, the debtor also must file taxes when they are due and make tax payments in a timely fashion. If the debtor overpays on any post-bankruptcy filing tax returns, the IRS can offset the overpayments to other tax debts or send them to the bankruptcy trustee if it’s requested.
State Taxes and Bankruptcy
The law varies by state regarding tax debts and tax returns during bankruptcy. In Oregon, some pre-bankruptcy filing state tax debts can be discharged in bankruptcy. Same as for federal tax returns, you do need to continue filing state tax returns and paying state taxes while your bankruptcy is pending. However, collections on your older state tax debts will be stayed during the bankruptcy process. We strongly encourage individuals who owe state or federal tax debts to consult with a local bankruptcy lawyer for guidance on possible discharge or repayment options.
Frequently Asked Questions
Can you receive a tax refund while you’re in bankruptcy?
It depends. While you potentially can receive a tax refund while in bankruptcy, the bankruptcy trustee may intercept the refund to incorporate it into your bankruptcy estate because it is viewed as income. Or the IRS may use the refund to pay down your existing tax debt. What happens to your refund depends on a variety of factors, including when you filed for bankruptcy and which tax filing the refund is associated with. In a Chapter 7 bankruptcy, it’s likely that you’ll have to turn over at least one year of refund money unless an exemption applies or your attorney identifies a legal strategy for using the refunded money.
Which exemptions or strategies could allow me to keep my tax refund?
The federal bankruptcy laws have many exemptions that could apply to your individual situation. For example, you may have the option to spend a refund that you were due just before filing for bankruptcy on essential items, such as food and utilities. Or you may qualify for exemptions that allow a certain amount of assets to be retained for day-to-day needs. We cannot emphasize enough how important it is to get a lawyer before spending your tax refund if you are going to file for bankruptcy or are already in bankruptcy. There are too many complicated rules you could violate, so you should not guess about whether to spend the refund.
Our Oregon Bankruptcy Attorneys Are Here to Help You
Do you need legal advice about filing for bankruptcy in Oregon? Do you have tax debts that you need to discharge or pay back? We offer free and confidential consultations to Oregon clients who have questions about their tax debts and tax returns if they file for bankruptcy. There’s nothing to lose by talking with a Chapter 7 bankruptcy attorney at the Law Offices of Alexzander C.J. Adams, P.C. about your debt-relief options. To get started, call us at 503-278-5400 or complete our online contact form. We look forward to hearing from you!
