Should I File for Bankruptcy Before or After Taxes?

If you're thinking about bankruptcy, it's a good idea to make sure your tax returns are up to date.

Updated by , Attorney · University of the Pacific McGeorge School of Law

You won't gain any real advantage by waiting to file your income tax return until you file a bankruptcy case. But, there are many reasons you'll want to be current when filing your Chapter 7 or Chapter 13 matter.

Tax Returns and Chapter 7 Bankruptcy

When you file for Chapter 7 bankruptcy, the trustee assigned to oversee your case will ask for your most recently filed tax return. That doesn't necessarily have to be the tax return for the last tax year, but if it isn't the most recent return, the trustee will ask why you haven't filed. Many people explain that they're exempt from filing because of a lack of reportable income.

If you'd like to learn about discharging tax, read Tax Debts in Chapter 7 Bankruptcy.

Tax Refunds in Chapter 7 Bankruptcy

The trustee will compare the income you report on your return to the amount in your bankruptcy paperwork. If you show that you're due a refund, the trustee will also want to check that you have the right to protect (exempt) it and that you've claimed the proper exemption amount. If you can't, you'd be required to turn the refund over to the trustee, who would, in turn, distribute it to your creditors.

Many people plan their bankruptcy to use the return for necessary items—such as living expenses—before filing for the case. If you choose this approach, keeping records of your expenditures is a good idea. Learn more about keeping a tax refund when filing for Chapter 7 bankruptcy.

Tax Returns and Chapter 13 Bankruptcy

In general, you must be up to date on your tax returns before you file a Chapter 13 case, but the rules allow you a little wiggle room. You must provide copies of the returns for the previous four tax years to the Chapter 13 trustee before the 341 meeting of creditors (the hearing that all filers must attend).

If you're not required to file a return, your trustee may ask for a letter, an affidavit, or a certification explaining why. Sometimes local courts will impose additional rules for documents in their districts.

If you owe the IRS a return but don't file it before your 341 meeting of creditors, things can happen to derail your case.

  • A motion. The trustee will file a motion giving you a very brief period to provide your returns. If you miss the deadline, the court can dismiss your case automatically, leaving you no chance to plead your case to the judge.
  • A substitute return. The IRS might have to file a claim with its best estimate of what you owe based on your past income. The problem? IRS estimates are almost always higher than you would owe after filing a proper return.

Learn about reasons the bankruptcy court might dismiss your case.

Managing Tax With Chapter 13 Bankruptcy

Filing your tax return might not be as burdensome once you realize that using Chapter 13 bankruptcy to manage your tax debt can be smart. Here's why:

  • Dischargeable taxes (generally those older than three tax years) might be forgiven without any payment, depending on your disposable income after your reasonable and necessary expenses are deducted from your pay.
  • Past dischargeable past due taxes will not incur additional interest or penalties while you're in Chapter 13 bankruptcy (you'll have to pay interest on nondischargeable tax).
  • You can satisfy an IRS tax lien through the Chapter 13 plan.
  • The IRS must abide by the plan as long as you include all your outstanding income tax and keep your tax returns and post-petition tax obligations current during your Chapter 13 plan.

Remember that any nondischargeable tax that won't go away in bankruptcy (generally, those incurred during the last three tax years) must be paid in full during the three- to five-year Chapter 13 plan. At its completion, you'll be caught up on your taxes, along with most or all of your other debts.

Learn more about Chapter 13 bankruptcy and taxes.

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