How Declaring Bankruptcy Impacts Your Taxes?

Declaring bankruptcy is a tough decision that should not be taken lightly. Going to bankruptcy court may not discharge all of your debts. Furthermore, going bankrupt will kill your credit score while making it impossible to get credit in the near future. Another consideration that needs to be made is how filing bankruptcy will impact your tax situation.

Current Tax Liabilities

Declaring bankruptcy will not have any impact on your obligation to file and pay taxes. Failure to file your tax returns on time can make it harder for a court to approve your bankruptcy. You also need to consider that cancelled debt could be considered as taxable income by the IRS. Therefore, it is important to make sure that you have a form 1099-C from all of your lenders. This will detail your cancelled debts and whether or not they need to be considered as income.

Past Tax Liabilities

Trying to figure out how a bankruptcy affects old taxes can be tricky. The first issue you have to consider is how much you can pay off. The next issue is to determine what kind of debt it was and whether or not a lender sends you a form 1099-C. Another issue to consider is how old your tax debt is. The IRS is more likely to allow for the discharge of older tax debts as they can be harder to verify. Debt from more recent tax years will most likely have to be settled through traditional means.

Get A Good Bankruptcy Attorney

It is important that you get a good tax attorney to help you throughout the process. Going to court is confusing and intimidating enough without getting into complicated tax issues. Having the proper legal counsel can help you negotiate a settlement that will give you maximum benefit. The IRS tends to be more lenient with those who have the proper representation. Going to court alone will simply result in you being bullied into taking a settlement that will benefit the government.

Bankruptcy is a complicated process that should never be entered into lightly. There are so many issues that you have to consider before accepting a bankruptcy settlement. As with anything that has to do with your money, the tax implications should always be considered before you take any bankruptcy action. The last thing you need is for your recently cleared debt burden to result in a tax debt that you now have to pay.

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