Taxes & Timing: Calculating Outcomes for Bankruptcy Debtors

bankruptcy tax refund

Bankruptcy lawyers regularly evaluate the dischargeability of taxes when deciding when to file a client's bankruptcy case. At base, the 3 year rule, the 2 year rule, and the 240 day rule routinely drive timing of a bankruptcy. But as we approach the end of the tax year, a client’s current year tax situation becomes another moving part in the “when do we file” analysis, unrelated to tax dischargeability. In the simplest situation, the client owes no back taxes and is appropriately withheld for the current year.  No timing issue. But suppose the situation is not so simple.  Several fact patterns cry out for careful timing of the commencement of the case. Client expects to owe taxes for current year Unlike a Chapter 7 case, filing Chapter 13 does not create a separate taxable entity in the bankruptcy estate.  Nor does it offer the debtor the opportunity to elect a short tax year. Instead, the start and end of the debtor's tax year is unaltered by an intervening Chapter 13 … [Continue reading...]