Bankruptcy provides a solution for those who are unable to pay their debts and are struggling to make ends meet. If you are considering bankruptcy, you should understand the role that your tax returns play in the process.
Not only do you need to ensure that you have filed the proper returns in the years leading up to and following your bankruptcy, but any tax return you receive may be a factor.
Understand the tax return filing requirements
Before you file for bankruptcy, you have to file returns for the four years preceding your bankruptcy if you have not filed them already. In addition, you must file returns for four years following your bankruptcy case as well. Failure to do so could lead to complications with your bankruptcy discharge.
Know what happens to your tax refunds
Your bankruptcy trustee may claim any tax refund you should receive in the year you file for bankruptcy. Depending on the timing of your filing, you may receive some of the money. For example, if you file for bankruptcy in April, you might be eligible for a quarter of the refund. The remainder applies to income earned during the bankruptcy, so your trustee can use it to pay creditors. There are certain exemptions that may allow you to keep your refund in some circumstances.
Review your current tax filing status and discuss any anticipated tax refund with your bankruptcy trustee when you file for bankruptcy. Addressing the issue as early as possible can help you establish a plan for your case.