How Does Bankruptcy Affect Your Tax Filing Status?

How does bankruptcy affect your tax filing status? If you have recently filed for bankruptcy, there are some things you may want to be aware of before filing your taxes this season. One bit of good news...

One bit of good news for those going through a bankruptcy is that the Government has mandated that, when you're filing bankruptcy, creditors need to keep a respectable distance. Explains Brian K. Gilroy, CPA and Florida Attorney, "There's an 'automatic stay' associated with bankruptcy... that's a term that refers to how much a person in a bankruptcy situation can be harassed by creditors... and they're not supposed to be harassed anymore." Being aware of this can help alleviate a great deal of headaches that you may be dealing with during your bankruptcy.

As per what to know if you're filing taxes after bankruptcy, there really are no clear-cut answers since there are so many variables. "Bankruptcy is very complicated," explains Mr. Gilroy. "In all cases, I recommend you see a tax advisor."

One thing that makes bankruptcy a difficult issue is that the Bankruptcy Code is extremely complex and it may be difficult for a layman to understand it. Another thing that makes bankruptcy so problematic is that, in the United States, even though bankruptcy is filed through the United States Bankruptcy Court, much will depend upon State laws, which vary.

Mr. Gilroy expresses that there are far too many things to consider when filing taxes after bankruptcy. He gives an example: "If you owed somebody money and they forgave that loan, loan forgiveness is a taxable event. So, if you owed $10,000, and that amount was forgiven, then you may have $10,000 in taxable income. So, in a situation where you've had a loan forgiven, you're going to want to see somebody."

Trying to file without seeking the advice or services of a tax professional after bankruptcy would be a potential mistake that could cost you in the long run. Even the "simplified" computer programs touting that all you need to complete your taxes forms is to plug in a few numbers in the right boxes really are only as good as the understanding of the person entering the information- if you don't know what you're putting in, you simply can't be sure if it's coming out correctly. "Every year they add on to the tax code, every time they make a change, there is more people that don't understand something. With today's computers, it's pretty easy- the computer does parts of it, but garbage in is garbage out. Just... entering stuff on the line doesn't necessarily mean you're doing it correctly, and, in some cases, more importantly, to your best advantage," Gilroy stresses.

"In a bankruptcy situation, you've probably already been to an attorney to do your bankruptcy. You want to get advice from your attorney and you want to have competent legal and your CPA for your bankruptcy..." Gilroy states. "In a very complicated situation, you're only going to be better off financially after seeing your tax advisor than before in a fair number of situations."

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