Chapter 7 bankruptcy can have a significant impact on your personal income tax return. Before filing bankruptcy, it is important to note the status of your federal income tax return, whether you owe taxes or you are expecting a refund or any other financial aspect associated with your federal income tax return. If you are filing for bankruptcy, it is essential to disclose all the tax return-related information in the respective schedules and statements appropriately to minimize any errors.
Things to keep in mind while filing for Chapter 7 bankruptcy
Firstly, the bankruptcy filer must be current with the federal income tax return, and purposefully delaying accumulating refunds is not a good idea. Secondly, for a chapter 7 bankruptcy, any expected refund from the income tax return is directly facilitated to the bankruptcy trustee for the purpose of settling the dues of the lenders or settling the same with any of the exemptions applied by the filer. The reason for being current with the tax returns is to ensure IRS gets its due before any of the unsecured lenders do.
The other reasons to be current on the tax returns could be to determine the actual financial situation of the filer to minimize fraud and to accurately tally the income sources and assets listed by the filer. The return information must be facilitated for access of lenders as well to ensure they can verify the details provided by you while availing the credit and can sue you for fraud if they don’t add up. Finally, if the refund from IRS from the most recent filed return was used to evade or avoid paying lenders like for a holiday, expensive gifts, unnecessary spending, etc., the same can be re-tracked and used to settle some of the debt by the bankruptcy trustee.