Will filing for bankruptcy affect your taxes?
Many people who are considering seeking bankruptcy protection are concerned about taxes. Are tax liens stayed in bankruptcy? Are discharged debts taxed? Depending on the type of bankruptcy a person is filing, and his or her tax obligations and debts, the tax concerns will vary.
There are a number of complicated tax implications related to bankruptcy, and Georgia residents should discuss these with their bankruptcy attorneys in order to ensure they understand all of their rights and responsibilities related to taxes.
There are three general tax rules related to bankruptcy:
- The only taxes that are dischargeable in bankruptcy are personal income taxes that are at least three years old, judging by the date that the returns were due; applicable tax returns must have been filed by the taxpayer.
- Filing for bankruptcy will not stop an audit that is already underway. It may, however, stop collection when the bankruptcy is pending.
- Although debt that is forgiven is typically treated as taxable income, this is not true when it involves bankruptcy. Debt that is discharged in bankruptcy is not taxable income. Lenders may send borrowers 1099 forms after debts have been discharged in bankruptcy, and there is a way to properly address these on tax returns in order to avoid paying taxes on discharged debts.
These rules are just a few general principles. The intersection of tax law and bankruptcy law is very complicated, and, as mentioned above, it is important for Atlanta residents to seek individualized counsel regarding these issues.
Source: Fox Business, “How Bankruptcy Impacts Your Taxes,” Bonnie Lee, July 25, 2013