Will my bankruptcy chapter 7 unsecured debt discharge of 09 affect my tax return?
July 28, 2010 Categories: Debt
Question by Angelwing: Will my bankruptcy chapter 7 unsecured debt discharge of 09 affect my tax return?
Best answer:
Answer by efflandt
What do you mean “affect”. I don’t think they can suck it up directly, but you might be required to turn over some or all of it to your trustee (depending upon when bk was discharged), since it could have been used to pay your creditors sooner if you had proper tax withholding.
What do you think? Answer below!
Generally, no. Ch 7 bankruptcy is (USUALLY) “tax neutral.”
Things to watch out for though:
If your bankruptcy involved surrendering stocks and bonds to the Ch 7 trustee to repay creditors, there may be some capital gains taxes on long term financial instruments – consult a CPA or tax attorney (not a lay person who prepares tax returns for storefront tax preparers – and probably not your bankruptcy attorney who is likely not as well versed in tax issues as a CPA or tax attorney).
If your attorney was unable to exempt your anticipated tax return and you were told you would need to turn it over to the Ch 7 trustee, do whatever you were told to do. Don’t “forget” and just hope that nobody else remembers either — this could cause problems. This will not apply to everybody. In some states and some particular bankruptcy cases, your attorney is able to exempt any expected tax refund, in which case you do NOT need to turn it over to the Ch 7 Trustee. If you aren’t certain, ask your bankruptcy attorney.
You may receive ERRONEOUS 1099-C forms from some creditors. Creditors are NOT supposed to generate 1099-C forms when some part of a debt is discharged in bankruptcy, but many creditors either do not realize this or accidentally generate them anyway. This is one of the main differences between “negotiated debt settlement” and bankruptcy. Those negotiated debt forgiveness agreements can generate BIG tax liabilities, but bankruptcy never does.
Check with your bankruptcy attorney, of course, if you receive any 1099-C forms from creditors for debts discharged in bankruptcy. Your attorney will probably tell you to ignore them because – in the case of bankruptcy, but NOT in the case of “debt settlement” – they are in error — but of course do NOT take legal advice from anonymous total strangers on the internet — check with your attorney regarding ANY legal suggestions you see ANYWHERE on the Internet, including this one.