Taxes after Chapter 7?

[desperation]

How exactly does it work with taxes after a Chapter 7?

When I filed my taxes this year my preparer advised (after I asked about the possiblity of my C7 this year) that I would probably owe taxes next year as it's considered forgiven debt. I haven't settled with any creditor, and I'm pretty sure mine will be a no asset case. So if I have nothing to give to the IRS then can they come after me on next years tax return?

Thanks as always for the advice!

[Granny]

If you filed CH 7 and the debt is wiped out, you do not owe taxes on the debt. It was not forgiven, it was wiped out. There are special provisions of the tax law regarding bankruptcy and it is definitely not taxable. Now if you negotiate with a creditor for a reduced payment, a percentage of the total owed or any other type of arrangement that results in less than full payment to the creditor, that is debt forgiven and that triggers a 1099 and is a taxable transaction. Bankruptcy does not trigger a 1099 and is not taxable in any way.

Basically, if your tax preparer told you that you would owes taxes because debt wiped out in a BK, then your tax preparer was incorrect.

[desperation]

Thanks Granny

Guess I should get a new tax preparer

I read your latest post on this board, and I hope everything works out for you and your husband. Will be keeping you in my thoughts.

[Granny]

It's a finer point of tax law and not all preparers are up on it...only those of us who have clients who are constantly in trouble with somebody.

Thanks for the good wishes.

[NYCountry]

You will receive a 1099 if there is any taxable money. That's one sure way to find out.

[HHM]

What most people don't know, and what happens behind the scenes is that the BK trustee files a tax return for your BK estate...you never see this document and it really does not concern you. When you file BK, all your assets and liabilities are transfered into a "Bankruptcy Estate" and the BK Trustee is appointed to manage the affairs of that Estate. The estate is a legal fiction in the sense that everything is done on paper. But, the estate is a legal entity while it exists. That entity, the BK estate, files a tax return just like any other legal entity, but it is the trustee that files the Tax return on behalf of the Estate.

Chapter 7 BK does not give rise to "forgiven" debt tax liability because the debt is not forgiven by the creditor. You file out your tax returns the same way as you always have.

[CurtInKS]

Is it true that the trustee will be able to sieze any tax refunds you get, for 5 years, after a Ch. 7?

[desperation]

CurtInKS
I hadn't heard or read of that one....so I to would be curious to know as well. Although my tax returns never really amounted to much... less than $1000 usually around $800...I'm wondering if I should change my witholding?

[familyof7]

I do not believe so only what you got 180 days before filing or after but if it is discharged they wont bother your tax returns

[CurtInKS]

CurtInKS
I hadn't heard or read of that one....so I to would be curious to know as well. Although my tax returns never really amounted to much... less than $1000 usually around $800...I'm wondering if I should change my witholding?

I have an email in to my attorney about it, so if I hear back, I'll post it here. I usually get a nice refund, because I do zero deductions, and have my daughter. I considered the same thing, upping my deductions, for more takehome pay, if they were going to sieze my refund.

[HHM]

Is it true that the trustee will be able to seize any tax refunds you get, for 5 years, after a Ch. 7?

That is not true for Chapter 7 (it is potentially true in chapter 13's where you are in a payment plan for 5 years). In chapter 7's, the trustee can generally take (depending on your BK exemptions) the tax refund only for the tax year in which you filed.

[lrprn]

Here's a good withholding calculator from the IRS - http://www.irs.gov/pub/irs-pdf/p919.pdf .

Frankly Uncle Sam makes a terrible savings account. You give away your money to the government to use as they wish for nothing for a year, and you get no interest and no access to the money you've earned. Better to keep the money for yourself by putting the money away in an interest-bearing savings account, CD, etc. of your own every month.