When filing bankruptcy, it is common and understandable to worry about how it will affect your tax filing status. At Kain + Henehan, we want to assure you that seeking a fresh financial start is a brave decision, and we are here to clarify how bankruptcy interacts with your tax situation.
Your Tax Filing Status: What Changes After Bankruptcy?
One of the first concerns people often have is whether filing for bankruptcy will alter their tax filing status with the IRS or the Minnesota Department of Revenue. The good news is that bankruptcy generally does not change your tax filing status. That’s because your filing status is based on factors that are not changed by bankruptcy, such as your marital status or number of dependents.
A Fresh Start: How Bankruptcy Works
Bankruptcy gives you a way of starting over financially when your finances are too far underwater to recover from. In most cases, individuals file Chapter 7, which involves liquidating certain assets to pay creditors, and Chapter 13, which establishes a repayment plan over several years.
Tax Debts: Can Bankruptcy Clear Them?
A critical question for many is whether bankruptcy can eliminate tax debts. The answer is not always straightforward, as not all tax debts are dischargeable. The Minnesota Department of Revenue may file a bankruptcy claim to seek payment for tax debts in certain cases.
Generally, older income tax debts that meet specific criteria (such as being due at least three years before filing, filed at least two years before filing, and assessed at least 240 days before filing) may be discharged. However, newer tax debts, payroll taxes, or taxes for which you filed late or fraudulently are typically not dischargeable. We can help you determine which of your tax debts might qualify for discharge.
Your Tax Refund and Bankruptcy: What to Expect
When you file for bankruptcy, your tax refunds become part of the bankruptcy estate, and how they are handled depends on when the refund was generated and the type of debt. Refunds from periods before you filed for bankruptcy (pre-petition) can be applied to debts incurred before filing (pre-petition debts).
Similarly, refunds from periods after you filed (post-petition) can be applied to debts incurred after filing (post-petition debts). If you have joint tax debts and your spouse is not filing for bankruptcy, their portion of a joint refund can still be applied to that shared debt. It is important to note that in Minnesota, Property Tax Refunds are not applied to any debt while you are in bankruptcy.
What the Minnesota Department of Revenue Can Still Do
Although you file bankruptcy, the Minnesota Department of Revenue can still do a few different things that are not prohibited by bankruptcy. They can still issue notices of tax delinquencies, assess taxes, and process refunds, using those refunds to offset existing debts.
For any tax debts that are not discharged through bankruptcy, Minnesota Statutes, section 289A.41, extends the time the Department has to collect the debt by the duration of your bankruptcy case, plus an additional 30 days.
If your bankruptcy case is dismissed, debts are not discharged, and creditors regain their original collection rights, with the statute of limitations also extended by the length of time the bankruptcy was open, plus 30 days.
Contact Kain + Henehan for Bankruptcy Guidance
If you are in St. Cloud, Minnesota, and considering bankruptcy, we at Kain + Henehan are here to help. We know the nuances of both federal bankruptcy law and Minnesota’s specific regulations, and we can guide you through every step of the process.
Do not face this challenging time alone. Contact Kain + Henehan at (612) 438-8006 or by filling out the online form.