How Does Bankruptcy Affect Taxes?

While most people don’t think about tax season around the holidays, it’s critical to think ahead and start thinking about how your decisions may influence your financial future, including the 2021 tax season.

For most people dealing with financial woes, the last thing they want to think about is sharing their income with the government, but the Internal Revenue Service (IRS) may work with you in order to alleviate your tax dues and other financial woes.

Do I have to pay taxes?

The answer depends on your strategy. If you file for Chapter 13 bankruptcy, it releases liability surrounding specific financial assets, such as tax debts. However, there are specific conditions you have to meet, so it’s best to work with a bankruptcy attorney to determine eligibility. There is also the caveat that it works for some taxes.

Could I still receive a refund?

Most bankruptcy recipients are entitled to their refunds – no matter their filing status. However, the refunds are subject to delays or applied to your tax debts, according to the IRS.  There is even a tracking tool that the IRS recommends to see where your refund check is and how it will be applied. It can be great news or terrible news depending on whether the participant depends on that refund for financial basics.

Is there anything else I should know?

Bankruptcy doesn’t hurt your tax season. If anything, it helps you conquer your tax debts over a reasonable time period. You do not have to worry about it costing you or reducing your refund necessarily.

If you have more specific questions, it’s best to refer to an accountant or a bankruptcy attorney to determine the best process before you file for bankruptcy or start collecting your tax information.