Tax Refunds and Your Bankruptcy

It’s that time of year again. Tax time! Some anxiously await their W-2, so they can file their taxes and get that refund as soon as possible. Others dread filing their taxes, because they suspect or know they will owe taxes and put off filing for as long as possible. Here are some practical ideas for taxes, as they relate to bankruptcy:

FILE YOUR TAXES. Everyone knows they need to file their taxes, if they are required to file. Additionally, everyone knows they are supposed to file their taxes on time, or, at least, get an extension. The number of people who don’t file taxes simply because they will owe is always amazing. Burying your head in the sand and not filing does not eliminate the tax debt, and it actually makes the situation worse by adding interest and penalties. Lastly, failing to timely file your taxes can delay or eliminate the possibility of discharging tax debt later.

Some Taxes Can Be Discharged. You read that last sentence correctly. Some taxes can be discharged! There are several potentially complicated requirements and dates that must be met to discharge taxes, but it is possible. Even if some taxes are not necessarily dischargeable, you may be able to pay taxes through a chapter 13 bankruptcy at a far lower rate than paying them yourself. If you have tax debt, you should contact us to discuss possible debt relief options in bankruptcy.

Dos and Don’ts for Refunds. There are several things you should consider spending your tax refunds on, and several things you definitely shouldn’t.

-Dos: Many people are worried that they will be judged by the Court or the Trustee for how they use their refund, or that it will get them in trouble. While it may not reflect well on a debtor for blowing their refund on a vacation or a big screen TV, in most cases it will have little impact. You will, however, want to keep track of what the refund was used to pay. Trustees want to be sure funds aren’t used for an impermissible use, discussed below, or that debtors aren’t trying to hide money. In most cases, a tax refund is exempt, and will not be taken by the Trustee. If you find it is difficult to save money to pay for a bankruptcy, you can use your tax refund to pay attorney and court fees.

Don’ts: Before paying any creditor within 90 days of filing your case, talk to an attorney before paying any one creditor more than $600. If they are a creditor you do not want unnecessarily burdened by your bankruptcy, you will want to avoid paying them more than $600 within 90 days of bankruptcy filing. These types of issues come up when paying a doctor, back rent, or friends/acquaintances. Also, if you are sure you will file bankruptcy, it is typically a waste of money to pay an unsecured creditor, like a credit card, before filing your case, since they will be discharged. Do not pay any family member $600 or more within 1 year of filing a bankruptcy, or a Trustee will sue them to recover the money.

Call us at 503-352-3690 or visit our website www.pacificbankruptcy.com to schedule free initial consultation to discuss tax issues in bankruptcy, and to take your first steps to becoming debt free!

We are not accountants, tax attorneys, or any other licensed tax professional, and cannot offer tax law advice. The purpose of this article is to provide helpful ideas of what to do and what not to do with taxes as it relates to bankruptcy. If you need tax advice, you should consult with a licensed tax professional.