Stay Ahead of Law Changes & Protect Yourself Against Being Audited: Corporate Transparency Act and Reasonable Compensation

Bankruptcy: Everything You Need to Know

What happens if I declare bankruptcy?

Debt comes in many forms and can be completely overwhelming. Are you being harassed by creditors, unable to make minimum payments, or at risk of losing your house? Bankruptcy might be your best option to ward off creditors, renegotiate your monthly payments, or keep your home. This should be a last resort, however, because there are long-term consequences to consider. If you can prove in bankruptcy court that you can’t afford to pay your debts, a successful filing will allow you to create a repayment plan or forgive your debts completely. While you might not have to stand in front of a judge, you will have to take a debtor education course which will teach you about budgeting and managing your money. Once the process is complete, your bankruptcy will show up on your credit report for 7 to 10 years.

This major hit to your credit score will show up any time you need to open a line of credit, open a utility account, or apply for a job. This may be the best option you have, but it should not be taken lightly. Check out our blog on personal finance: The Cure for the Common Finances

Chapter 13 bankruptcy

There are several types of bankruptcy an individual can file for and there are many requirements for each, so it is important to consult a lawyer to counsel you on what is right for your situation. A Chapter 13 bankruptcy is called a wage earner’s plan because it will allow you to develop a repayment plan to pay back all or part of your debt on a monthly basis. The terms of repayment are typically set up by laying out a Chapter 13 repayment plan. The repayment prioritizes debt such as filing fees, attorney fees, alimony, tax debt, mortgage payment and unpaid wages to be paid in full. Other debts may be forgiven or paid in part depending on your financial situation and ability to pay.

Chapter 7 bankruptcy

If you determine that a Chapter 13 repayment plan is out of the question, Chapter 7 bankruptcy might be the best option for you. The benefits of filing Chapter 7 bankruptcy include an automatic stay that immediately stops creditors from trying to collect your debt with the goal of liquidation. This temporary block from collections actions will protect your paychecks, property, and bank accounts for a period. During this time, the court will determine if you have anything worth selling, or any transactions that can be reversed in order to pay as much debt as possible. Once the process is complete, you will have your debts discharged completely except certain debts including federal taxes, child support, student loans, and anything else the courts determine to be exempt. https://www.nolo.com/legal-encyclopedia/chapter-7-13-bankruptcy-limits-benefits-30025.html

Chapter 11 bankruptcy

Chapter 11 bankruptcy is typically filed by corporations to gain time to restructure their debts. This is the most complex type of bankruptcy proceedings, so this should be the last resort for corporations looking to reorganize. Reorganization plans may include downsizing, reducing expenses, renegotiating expenses, and liquidating assets. The benefits of Chapter 11 to a large organization include the ability to continue operating and restructure debts to stay afloat. While this option is mostly used by business entities, such as corporations, individuals have filed Chapter 11 when they don’t qualify for Chapter 7 or 13. Businesses in the midst of this type of court proceeding will be able to carry on business as usual, but there will be limits put in place by the courts. These limits involve decisions regarding assets, legal agreements, and certain other business decisions.

Tax implications of bankruptcy

The bankruptcy court will need to see your past three years of tax returns, so it is important to catch up if you have fallen behind. Once you have successfully filed for bankruptcy, you will have new filing requirements with the IRS. There will be aspects of the bankruptcy that can affect your individual return, but in a Chapter 7 bankruptcy you will also be required to file a bankruptcy estate tax return. Form 1041 estate tax returns are required when filing Chapter 7 because your assets and affairs are being handled by an estate to pay off creditors. Estates range in complexity, but commonly occur when an individual passes or become incapacitated. The IRS expects that any income earned by the estate is reported by the estate and that taxes are paid accordingly. https://turbotax.intuit.com/tax-tips/debt/filing-taxes-after-filing-for-bankruptcy/L4PpcTaiW

Cancellation of Debt

The IRS considers a forgiven debt to be income in situations such as forgiving credit card debt. This is a general rule, but usually does not apply to debts discharged in a bankruptcy or as a gift. There are situations where this forgiven debt will need to be included in your income. If a lender files a 1099-C Cancellation of Debt with the IRS before you file for bankruptcy, you will have to report this cancelled debt as income on your tax return. An exception to this situation occurs when you are insolvent, meaning that the total amount of your debts exceeds the total value of your assets.

Is there tax relief through bankruptcy?

As I mentioned earlier, federal tax debt is not easily resolved through bankruptcy filing. The IRS requires that certain rules be met before individual income taxes can discharged through Chapter 7 bankruptcy. The requirement that the last two years of tax returns are filed applies to most bankruptcy proceedings. New tax debt does not qualify for bankruptcy discharge, but past due taxes greater than 3 years old may qualify. If you have tax debts that can’t be erased through bankruptcy, the IRS offers alternatives. Before making any important tax decision, contact an advisor at Molen & Associates to solve your tax headaches. If the tax debt is from unfiled returns or taxes assessed in error, filing original or amended returns can cut down on your IRS debt significantly!

Another common option to paying off your taxes is setting up or renegotiating a payment plan. Your debts will continue to gain interest, but the IRS will consider you to be in compliance. An offer in compromise is an IRS program that involves a negotiation to pay what taxes you can, and have the rest forgiven. While there is no ‘one size fits all’ approach, our advisors can help you get the relief you need.

Austin Long
Tax Advisor, EA

The Molen & Associates Difference

Mike Forsyth

“Super helpful and timely. This is our first year with them and we look forward to trusting them with our taxes and business books for years to come.”

Caitlin Daulong

“Molen & Associates is amazing! They run an incredibly streamlined process, which makes filing taxes a breeze. So impressed with their attention to detail, organization, and swift execution every year. Cannot recommend them enough!”

Sy Sahrai

“I’ve been with Mr. Molen’s company for few years and I felt treated like family respect and dignity. They are caring, professional and honest, which hard to find these days. Love working with them.”

Self-Employment Taxes: A Deeper Dive

Self-Employment Taxes: A Deeper Dive Self-employment taxes are a critical component of the tax system in the United States, impacting individuals who work for themselves. Understanding the nuances of these taxes can help self-employed individuals plan and manage their...

Education Tax Benefits: Maximizing Savings with Credits and Deductions

Education Tax Benefits: Maximizing Savings with Credits and Deductions Navigating the complexities of tax season can be daunting, but for those bearing the costs of higher education, there are valuable tax benefits that can ease the financial burden. Among these are...

How to request Individual Penalty Abatement

How to Request Penalty Abatement Penalty abatement is a great way to help reduce your client's tax debt. Here's how you can request apenalty abatement from the IRS. Let’s say you’ve determined that your client is eligible for a penalty abatement to help reduce their...

Understanding the Child Tax Credit for 2023

Understanding the Child Tax Credit for 2023 The Child Tax Credit (CTC) is a significant provision in the U.S. tax code designed to offer financial relief to families with qualifying children. As we navigate the 2023 tax year, it’s crucial to understand the current...

Tax-Smart Strategies to Pay for College

Tax-Smart Strategies to Pay for College   As the cost of college continues to rise and inflation soars, families are looking for ways to make ends meet. One way to do this is by taking advantage of tax breaks that can help offset the cost of tuition and other...

Unlocking Financial Freedom: The Strategic Power of Revoke-S Elections

Unlocking Financial Freedom: The Strategic Power of Revoke-S Elections As a small business owner, you understand that time, money, and peace of mind are precious commodities. The world of taxes can often feel like a labyrinth of complexities, with ever-changing rules...

The Augusta Rule: A Comprehensive Guide to the Section 280A Deduction for Small Business Owners

As a small business owner, you’re likely familiar with the home office deduction. This popular tax break allows you to write off up to 300 square feet of workspace in your home at a rate of five dollars per square foot, resulting in a potential $1,500 annual...

Unleashing the Mega Backdoor Roth: Maximizing Your Retirement Savings

Unleashing the Mega Backdoor Roth: Maximizing Your Retirement Savings Embark on a financial adventure with us as we introduce you to the not-so-secret world of the Mega Backdoor Roth – the financial strategy that's not only powerful but sounds almost as charming as a...

Get Organized and Sail Smoothly with a Family Tax Firm

How to Get Organized and Sail Smoothly with a Family Tax Firm? Tax season—an annual event that can trigger a range of emotions, from anticipation to anxiety. For small business owners, the prospect of tackling complex forms, deciphering intricate regulations, and...

Tax Troubles in Houston?

Tax Troubles in Houston, Texas?Houston, Texas—a city of boundless opportunity, where dreams are forged and businesses thrive. Yet, beneath the gleaming skyscrapers and bustling streets, lies a challenge that many small business owners face: navigating the complex maze...

Request an Appointment Today

5 + 4 =

Call us at

Pin It on Pinterest

Share This