Tax returns are a common fixture in New York bankruptcy, so much so that debtors are well advised to file their taxes before they file bankruptcy. Because U.S. tax season has begun, it’s a message worth explaining sooner rather than later.
In all bankruptcy chapters, the Bankruptcy Code requires debtors to provide the trustee with a tax return for “the most recent tax year ending immediately before the commencement of the case and for which a Federal income tax return was filed” before the first meeting of the creditors (the 341 meeting). Although it may take a few weeks to schedule the 341 meeting, it’s definitely to the debtor’s advantage to finish the process before filing to ensure there aren’t any errors in the return (or the bankruptcy petition). This especially holds true for chapter 13 debtors who tend to have higher incomes than debtors filing in chapter 7.
Debtors who do not submit a copy or transcript of their tax returns to the trustee (or creditors who also ask for it) will see their cases dismissed if they can’t point to circumstances that are beyond their control.
But that’s just reason number one. Debtors can also use tax returns to estimate their current monthly incomes to show they don’t need to take the chapter 7 means test. Thus, filing taxes before bankruptcy ensures an accurate estimate of a debtor’s income. Undoubtedly, tax information can help debtors determine their chapter 13 plan payments because the “disposable income” used to calculate the plan payments uses the same current monthly income figures that appear in the chapter 7 schedules. Chapter 13 plans will not be confirmed without a debtor’s tax return.
Finally, it’s a bit obscure, but debtors interested in discharging a tax debt benefit from filing their taxes promptly. Bankruptcy courts in other parts of the country are frowning on late tax filings, so it’s good not to make waves. Additionally, depending on the circumstances, some tax debts do not become dischargeable until two years after the date on which the tax return including the tax debt was filed. The “two-year rule,” as it’s often called, encompasses situations in which the debtor did not include the tax debt in the tax return when it was first due.
For example, if the tax debt was due on April 15, 2016, then the debtor would normally need to wait until no earlier than April 15, 2019 to file bankruptcy. If the debtor didn’t include the tax debt until a return filed on March 5, 2018, then the earliest he or she could file would be March 5, 2020. Debtors in the latter situation should file promptly to start the clock as soon as possible.
Debtors already in chapter 13 can read about taxes in that chapter here.
Tax season is longer than any calendar season, but debtors shouldn’t procrastinate. Once you’ve filed your taxes, then you should talk to an experienced New York bankruptcy lawyer.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy automatic stay Bruce Weiner for a free initial consultation.
