Filing Taxes After Filing for Bankruptcy: What You Need to Know

A lot of Michigan residents have suffered financially due to the pandemic, and are either contemplating bankruptcy or already filed. If this is your situation, you may be wondering how your bankruptcy will affect the way you file and pay your 2019 income taxes. In this blog, the team at Maxwell Dunn PLC will explain how the process differs from what you’re used to and what you can expect.

Two Tax Returns Are Necessary

Under the Bankruptcy Code, you still have to file your usual 1040 for the current tax year or request an extension. In addition, your bankruptcy trustee must file Form 1041 for the bankruptcy estate.

Yes, that’s right. After you’ve filed, there are two types of tax forms involved. Sometimes this can cause problems: debtors who file Chapter 11, which allows them to maintain control of their assets and serve as their own trustee, can forget to complete and send in both returns. If you’ve filed Chapter 7 or 13, the process is comparatively straightforward because you’re only responsible for the same 1040 you send in every year.

What If You Receive a Refund?

This is one of the most common questions we get when people file bankruptcy, especially if the petition is close to tax season. The answer depends on a variety of factors, including what chapter you filed and when you earned the income that resulted in a refund.

Tax Refunds and Chapter 7

With Chapter 7, you can keep any refund that results from income you earned after filing. If it’s based on income earned before, it is part of the bankruptcy estate no matter when you actually receive it, and in most cases will have to be turned over to your trustee unless you protected the money with a bankruptcy exemption or spent it on necessary expenses like food, rent, clothing, and medical care. 

Tax Refunds and Chapter 13

If you receive a tax refund during your Chapter 13 case, your trustee could consider it disposable income and require you to surrender for payment to your creditors unless the refund is excused. For example, if you experience an income reduction because your hours were cut back at work, the court may allow you to keep your refund if you can prove that you need it to cover your reasonable living expenses. You will have to file a plan modification every year for each refund you want to excuse.

You can also draft your Chapter 13 plan so that it excuses future tax refunds, but your trustee and creditors likely won’t agree unless you have a compelling reason to keep the money. A Michigan bankruptcy attorney will advise you whether such a proposal is likely to succeed.

Seek Guidance From an Experienced Michigan Bankruptcy Law Office

Bankruptcy can provide you with much-needed relief from a difficult debt load, but it can be legally complex, which is why you should seek advice and representation from a bankruptcy attorney. At Maxwell Dunn PLC, we will let you know what to expect regarding an expected or future tax refund and help ensure that you don’t inadvertently jeopardize your bankruptcy. To schedule a no-obligation consultation, contact us.