Filing your taxes before starting a bankruptcy case is helpful because federal law requires proof of recent tax filings to move forward with either Chapter 7 or Chapter 13. Bankruptcy trustees use these documents to verify your reported income, confirm that your financial disclosures are accurate, and ensure that the information provided in your bankruptcy petition matches your official government records.
Why Bankruptcy Law Requires Recent Tax Returns
Bankruptcy law mandates the submission of tax returns. When you file for relief, the trustee assigned to your case must verify that the income you claim on your bankruptcy schedules is consistent with what you reported to the Internal Revenue Service. This step helps prevent fraud and ensures that the court has a transparent view of your finances before granting a discharge of debt.
What Tax Documents Trustees Typically Request
Trustees generally require at least the two most recent federal tax returns filed prior to the bankruptcy petition. Depending on the complexity of the case or the specific requirements of the local court, you may be asked to provide returns from the last two to four years. These documents help the trustee evaluate your income history and confirm your financial eligibility for the specific chapter of bankruptcy you have chosen.
How Unfiled Taxes Can Delay or Block Your Bankruptcy Case
Filing for bankruptcy with unfiled tax returns can stall or even terminate your legal proceedings. In Chapter 13, if the required returns are missing and not filed within the first 120 days, the court may refuse to move forward with your case or decline to confirm a Chapter 13 repayment plan.
Filing Requirements for Chapter 7 and Chapter 13
In a Chapter 7 case, tax returns are not required, but are helpful. You are required to provide your total income for the prior 2 years, and if available, you must provide the most recently filed tax return to the trustee at least seven days before the meeting of creditors. For Chapter 13, the requirements can be more extensive, as you must demonstrate that you have filed all required tax returns for the four years prior to the bankruptcy filing. Additionally, Chapter 13 debtors are generally required to remain current on all tax filings throughout their three- to five-year repayment plan.
Potential Consequences of Missing Tax Returns
The failure to provide required tax returns in Chapter 13 can lead to several negative outcomes, including a formal objection from the trustee or a motion to dismiss your case entirely. Without these returns, the court cannot confirm your plan. In Chapter 7, no tax on an unfiled return is dischargeable.
Why Filing Taxes Early Can Simplify Bankruptcy Planning
Using Tax Information to Evaluate Bankruptcy Options
Doing the work to prepare your tax return usually means you have already taken the first step in gathering all the pertinent financial information. This detailed information is vital for determining eligibility for Chapter 7 through the means test, which compares your income to the median income in your state. For those considering Chapter 13, tax returns provide the data necessary to structure a manageable repayment plan that meets the court’s requirements for disposable income.
Identifying Potential Refunds or Tax Debts
Early filing helps identify whether you are entitled to a tax refund, which may be considered an asset in your bankruptcy estate, or if you owe significant back taxes. Understanding your tax liabilities is important because certain older tax debts may be eligible for discharge in bankruptcy if they meet specific timing and filing criteria.
What to Do If You Owe Taxes but Still Need Bankruptcy Relief
You should file your tax returns even if you cannot afford to pay the balance due to the IRS. Many individuals hesitate to file because of a high balance, but from a bankruptcy perspective, filing the return is a separate and more immediate requirement than making the payment.
Sasser Law Firm: How a Bankruptcy Attorney Can Help You Prepare
Our team can assist in identifying potential tax-related hurdles and help you identify the documentation needed for a smoother process. If you are struggling with debt and need to understand how your taxes will impact your filing, reach out to discuss your situation.
Contact Sasser Law Firm at (919) 319-7400 to schedule a free consultation regarding your next steps
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