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How bankruptcy may affect your tax return

Bankruptcy is a complex process in itself. When you add the confusing element of filing taxes to the mix, it can seem a bit overwhelming. 

To ensure both processes go as smooth as possible, it is important to have specific knowledge. As such, there are a few key things to understand about bankruptcies and tax returns.

Taxable income

In the case of a bankruptcy, any tax return monies a party possesses counts as assets. Therefore, those assets may count towards bankruptcy. However, different types of bankruptcies handle assets differently. This means the type of bankruptcy can make your tax return monies taxable or nontaxable. That is why it is critical to take some time to understand how the type of bankruptcy you consider divides assets.

Exemptions

If you choose to pursue a Chapter 7 bankruptcy, your tax return monies will fall under assets exempt from the bankruptcy process. However, there is a cap on the amount of the exemptions you may claim. Therefore, if your tax return is larger than the allotted exemption, only part of the return counts under the exemption. The other part counts as part of the bankruptcy. To avoid this, it may be helpful to adjust your withholdings for your job.

Timing is key

Clearly, timing is essential in the way the court treats tax returns in a bankruptcy process. As such, it may be most beneficial to file bankruptcy after receiving and spending your tax return monies. It is important to note that acquiring more assets with your tax return may not be very beneficial. Using those tax dollars to pay off credit card debt, pay down bills or secure a bankruptcy attorney may be more effective.

Though the bankruptcy process can be a bit confusing, understanding key aspects can help you navigate it successfully. Take some time to consider your options and determine the best course of action for you.

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Paul Urich
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