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The tax implications of a Chapter 7 bankruptcy

When Salem residents incur massive debts, often the most viable solution is to declare a Chapter 7 bankruptcy. Indeed, many across the country turn to this form of relief every year. According to CreditSlips.org, over 124,000 bankruptcy cases had already been filed through February of this year. However, there are certain debts that cannot be discharged through a Chapter 7 bankruptcy. Certain types of taxes are included among them.

For many years, the idea was out there that one could not include any tax debts in a Chapter 7 case. There is some truth to this. The following types of tax debts cannot be discharged through a Chapter 7 bankruptcy:

  •          Property taxes (only those within one year of the bankruptcy filing date)
  •          Tax withholdings
  •          Employment and excise taxes
  •          Custom duties
  •          Tax penalties (non-punitive)
  •          Tax liens

However, you are able to get rid of income taxes, provided that they’re deemed eligible for discharge. In order to qualify, the taxes in question must have been part of a return due at least three years prior to the bankruptcy filing date, and filed as least two years prior. Beyond that, the taxes must have been assessed at least 240 days before one filed for bankruptcy in order to qualify for discharge. Plus, there cannot be any evidence of the debtor using a Chapter 7 bankruptcy to commit tax fraud or evasion.

Along with knowing what types of taxes are discharged through one’s Chapter 7 bankruptcy, many also may want to know how they should file their taxes going forward. The Internal Revenue Service’s Bankruptcy Tax Guide states that individuals who file for a Chapter 7 bankruptcy must continue to file a regular Form 1040 every year. The Form 1041 for the assets included in the bankruptcy estate is filed by the court-appointed trustee. 

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