How Bankruptcy Can Affect Your Tax Situation
The tax season can be a very hectic time for most people. The complexities found within the tax code can cause anyone to have a headache. However, for those who declare bankruptcy, the tax season becomes an even more complex time for them. Here are things to consider on how a bankruptcy can affect a person’s tax situation.
The Types of Bankruptcy
There are two main types of bankruptcy: Chapter 7 and Chapter 13. Chapter 7 is when some or all debts are forgiven, but the person’s assets must be liquidated. That means any property and financial products the individual has is controlled by a bankruptcy trustee who sells off those assets to pay off the creditors. At times, Chapter 7 can end up paying back all of the debt or just some. The trustee will communicate with all creditors and settle each line of debt in relation to assets being sold.
With Chapter 13 bankruptcy, the person is able to pay their debts without their assets used to pay off those debts. However, the courts will force the individual to maintain a relationship between them and their creditors through a legally binding payment situation, usually under the management of a bankruptcy trustee. Under these situations, wages and income are automatically transferred to pay off those debts. Under law, this payment relationship is to be maintained anywhere between 3-5 years, depending on the specific court, or until the debts are completely paid off.
How Taxes Are Filed
Most governments allow the individual to file their typical individual tax sheet during the tax season. Most of the processing of income, property, and assets is done by a Brampton bankruptcy trustee, for example one of the trustees at Paddon & Yorke Inc. The trustee usually files a bankruptcy estate tax sheet that informs the government about the bankruptcy situation of the individual in relation to their taxes.
Tax Refunds
If the individual is expecting a tax refund, the refund is controlled differently under each form of bankruptcy. Under Chapter 7, a tax refund is considered an asset. However, under different regional or federal laws, a certain percentage of the tax refund could be exempted from a bankruptcy trustee. Depending on where the person lives, the bankruptcy trustee may be legally allowed to take the entire tax refund or a specific amount from it. Under Chapter 13, the tax refund is considered income. That means, the bankruptcy trustee has complete discretion over what happens to the tax refund since it is considered the individual’s regular income.
When Debts Are Taxes
For many people, the main line of debt can be their actual taxes. However, no court allows a person to file Chapter 7 or Chapter 13 bankruptcy if the debt are certain forms of taxes. Typically, only income taxes from within a three year window can be considered part of a bankruptcy filling. One important thing to note: failure to file one’s taxes yearly with the government could convert the Chapter 13 bankruptcy into a Chapter 7, since not filing taxes creates more debt. With Chapter 13’s time-frame payment plan, acquiring new debt within the Chapter 13 3-5 year window shows the courts and creditors that the debtor cannot handle their payment plan. Working with one’s attorney at any of their office locations across Ontario can be helpful concerning if the missed taxes can be considered debt and when to file the taxes in relation to the bankruptcy.
Conclusion
Taxes in the middle of a bankruptcy can seem like an incredible burden. Fortunately, with the help of a top bankruptcy lawyer in Ontario, any debtor can pay their taxes and their debts under bankruptcy.
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Category: Bankruptcy
