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  1. #1
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    Sep 2016
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    Default Discharging Tax Debts in Bankruptcy

    If you are filing for Chapter 7 bankruptcy and you have an old tax debt to the IRS, does it make a difference if you file bankruptcy before or after you file your taxes? That is, if you have a tax refund coming, will filing for bankruptcy before you file your tax refund allow you to get the refund instead of having it applied to back taxes?

  2. #2
    Join Date
    Sep 2005
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    Default Re: Discharging Tax Debts in Bankruptcy

    Assuming the debt is dischargeable (i.e., it's an income tax debt (not a lien) with no fraud involved, you filed your tax returns, and the tax debt was assessed at least 240 days before your petition or has not yet been assessed) then you would want to file your petition before you file your tax return, because the IRS is going to apply the refund to your tax debt the moment it processes your return. You also need to consider 11 USC 362(b)(26):
    Quote Quoting 11 USC 362(b)(26)
    (b) The filing of a petition under section 301, 302, or 303 of this title, or of an application under section 5(a)(3) of the Securities Investor Protection Act of 1970, does not operate as a stay—

    (26) under subsection (a), of the setoff under applicable nonbankruptcy law of an income tax refund, by a governmental unit, with respect to a taxable period that ended before the date of the order for relief against an income tax liability for a taxable period that also ended before the date of the order for relief, except that in any case in which the setoff of an income tax refund is not permitted under applicable nonbankruptcy law because of a pending action to determine the amount or legality of a tax liability, the governmental unit may hold the refund pending the resolution of the action, unless the court, on the motion of the trustee and after notice and a hearing, grants the taxing authority adequate protection (within the meaning of section 361) for the secured claim of such authority in the setoff under section 506(a);
    So even if the automatic stay goes into effect due to your filing your bankruptcy petition, your refund may potentially still be applied to your debt. Speak to your lawyer.

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