Does Filing For Bankruptcy Affect Your Taxes?

Does Filing For Bankruptcy Affect Your Taxes

Bankruptcy Taxes Consequences

All your actions are potential connected with tax consequences. It also includes filing to bankruptcy. On the other hand we should note that there are several types of bankruptcy. Each type may have different influences on your taxes without any notice for your side.

How does bankruptcy affect taxes?

At the same time you should also have a clear understanding of the fact that all discharged debts in the face of bankruptcy have no actually any impact on your taxes. The thing is that discharged debts are not considered to be taxable revenue. On the other hand you need to file for bankruptcy in case you are eager to take tax credits in future. Such actions will be impossible in case you do not file. This is rather important when it comes to bankruptcy and taxes.


You should always keep in mind that you need to think twice before filing. You are supposed to evaluate all possible bankruptcy consequences in order to decide whether bankruptcy is the best solution to financial problems in your situation.

Separate Taxable Estates

If you turn to consequences of Bankruptcy Chapter 7, you need to consider that it will create two separate estates. They are divided into bankruptcy and individual estates. At the same time in some situations both spouses are filing for their common bankruptcy. In such occasion both types of estates are handled and supervised by a trustee who will be determined by a court.

This is the main difference between Chapter 7 and 13. The last one does not consider separately treated estates. You are able to file bankruptcy and tax returns normally.

Individual Filer Responsibilities

Even in case individual has declared bankruptcy in accordance with Chapter 7, he is still obliged to send tax returns. They must be forwarded to the IRS. In this case you should pay attention to the fact that you do not have to indicate any deductions and revenues which are connected with other estates that are considered to be separate in accordance with the lawsuit.

An individual has a right to end his tax year the day before declaring bankruptcy. However you should note that in some cases such actions may result in the fact that you will also be obliged to pay all taxes even after you have filed to bankruptcy. Tax bankruptcy estates are handled and managed by trustees. If the case is closed, you will receive all assets of your estates back. No tax consequences will take place in this case.

Don’t forget about automatic stay which we have already described in one of your articles. It comes into force as soon as you file for bankruptcy. It means that creditors are obliged to stop their efforts to collect any debts and payments from you. On the other hand automatic stop will not prevent you from number of IRS actions which include:

  • auditing;
  • demanding of tax returns;
  • forwarding tax deficiency notices.

If you declare bankruptcy in accordance with Chapter 7, you protect yourself from any action made by the IRS connected with collecting your property or money in order to pay income taxes. On the other hand the IRS has a right to demand proof of claim. It will be paid out left bankruptcy estate which still can be used to cover taxes.