How does bankruptcy affect your taxes?

How does bankruptcy affect your taxes?

No one would ever want to go bankrupt, but it happens more than you might think. Every year, thousands of people in the USA file for federal bankruptcy protection, and the majority of them are individuals (non-business filings). However, there are still good things to look for after bankruptcy – for instance, income tax returns.

Filing for an income tax return after filing for bankruptcy doesn’t have to be a problem, as long as you know what you should avoid and what you should do, including when and how to file. It happens that taxpayers who have filed for bankruptcy and have ongoing cases often make the mistake of filing their tax returns as they usually do. But, this is something you should stay clear of.

What happens when you file for bankruptcy and owe taxes?

When they file for bankruptcy, most people expect or hope to repay or eliminate some, if not all of their debts under the protection of a court. If and when the court grants the bankruptcy, you will have to file your income tax form or request an extension. If you don’t do this, the court can dismiss your case.

However, if you owe your government money, not all of your tax debt will be erased. Things like student loans, court fines, child support, penalties, and others will still have to be repaid.

When you file for bankruptcy, the court then appoints a trustee whose responsibility is to collect assets, turn them into cash, and use it to pay creditors. The assets are formed on the same day when the bankruptcy petition is filed with the court and includes everything you own as of that day. The court can hold your tax refund, or a part of it, as an asset, even though you haven’t received it yet or filed your tax return.

However, just because it is considered an asset, this does not mean you will lose your tax refund due to bankruptcy. There are many nuances to every individual case, and this fact shouldn’t influence your decision to file for bankruptcy. In most cases, the tax refund will stay in your possession. However, if the court decides your tax return can be used to pay off some part of your debt, you will practically settle all of your debt for that amount of money. Keep in mind that most people use their tax refunds to catch up on bills anyway.

What does a trustee calculate?

Your trustee will calculate the following and notify you of the outcome:

  1. Refunds for the income you earn BEFORE you enter bankruptcy
  2. Refunds you earn AFTER you enter bankruptcy from the part of your taxable income for compulsory payments.


When you decide to file for bankruptcy, it is essential that you pay attention to your tax refund if you don’t want to lose it. However, you can save your refund with a proper exemption scheme. Take action early and seek help from professionals. Contact Golden Tax Relief today!

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