Chapter 7 and Tax Refunds

• When you file Chapter 7, you risk losing at least some of your assets; bankruptcy court trustees can sell your assets and distribute the proceeds to your creditors. If you have an open Chapter 7 case and are owed a federal tax refund, your bankruptcy trustee must write the Internal Revenue Service requesting permission to get the tax refund. Generally, the same rule applies to state tax refunds. But once a judge finalizes your Chapter 7 case, you can keep all future tax refunds unless you owe the federal or state government money.
  
  

Chapter 13 and Tax Refunds

• Chapter 13 allows a partial debt repayment plan that takes three or five years to complete. During this time frame, your trustee can compel you to use part or all of your tax refunds toward creditor repayment. If you have an emergency financial situation such as an unexpected car repair, you can request permission to keep your tax refunds. Once you finish your Chapter 13 plan, your tax refunds are yours to keep.
  
  

Potential Tax Liability

• When a creditor forgives your debts without bankruptcy, that relief can be considered taxable income, according to the Internal Revenue Service. But you do not pay taxes on debts forgiven in bankruptcy, nor do you have to disclose personal bankruptcy on your federal or state tax returns. If you filed bankruptcy as a business owner, you need legal assistance to determine your tax liability.
  
  

Additional Tax Considerations

• You must have filed your last four tax returns to declare any type of bankruptcy. Also, if a tax return comes due while your case is still before a bankruptcy judge, you must file the return on time or obtain an extension. You cannot discharge or reduce your recent tax liabilities through the bankruptcy court system; you must arrange a payment plan with the taxation body. But if your tax debts were incurred at least three years before filing bankruptcy, you can usually include them in your bankruptcy case.