Will Filing for Bankruptcy Affect My Tax Return in Michigan?

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The saying goes that there is nothing certain but death and taxes, and you know from experience how different types of taxes impact your life. Therefore, if you are considering bankruptcy, you can expect that a key topic will be taxed. In the same way that you might owe amounts for a credit card, you incur a debt on your record when you do not pay taxes. Another aspect of taxes to review when looking at your options under Chapter 7 or Chapter 13 is your yearly return. For many, your annual tax return is often followed by a refund that provides critical financial support when you are overwhelmed with debt.

Understandably, you want to know whether filing for bankruptcy will affect your tax return in Michigan, especially when you expect a check from the IRS. The answer depends upon numerous factors and timing, as well as your unique circumstances. Whether you opt for Chapter 7 or Chapter 13, you should rely on a Michigan bankruptcy lawyer to assist with tax matters. A summary of how bankruptcy impacts taxes and tax returns is also informative.

Basics of Chapter 7 Bankruptcy

There are two main parts of a Chapter 7 bankruptcy case:

  1. Discharge: If you qualify, you can eliminate all qualifying debt at the end of your case. Chapter 7 wipes out unsecured debt, which means credit accounts and loans you took without pledging your property as collateral.
  2. Liquidation: Upon filing, the bankruptcy trustee has authority over your assets and debts. To pay back creditors, the trustee may exercise its power to liquidate real estate and personal property. However, assets that would not bring a good return will probably not be sold.

The criteria to qualify for Chapter 7 are quite narrow, and they are based on income. You are automatically eligible if your earnings fall below the state median income level in Michigan, as pertains to a household of your size. If your income is above the amount, you may still qualify through the Means Test. With this analysis, your income and important monthly expenditures are considered to determine whether you qualify for Chapter 7.

Chapter 13 Bankruptcy Overview

If you do not qualify for Chapter 7, Chapter 13 is another option for individuals and married couples. Plus, even when you are eligible for Chapter 7, you might opt for Chapter 13 because of one critical point. There is no liquidation with these cases, so you are not at risk of losing assets in bankruptcy.

There is one simple rule to qualify for Chapter 13 bankruptcy. You must have a job and earn income to support the central part of the case, which is the debt repayment plan to satisfy your debt to creditors. During the Chapter 13 process, your debts are restructured into an affordable monthly payment. These amounts become part of the debt repayment plan that you will pay for 3 to 5 years.

In sum, you will pay less through the debt repayment plan than the total amount you owe to creditors. When you complete the terms, your case ends and your qualifying debts are eliminated.

Bankruptcy and Your Tax Return

The basic rules of income tax laws seem rather unfair in the sense that you may pay more than what you owe in a given year. This is common for most taxpayers, who will receive a refund check for the overage that they paid through the payroll taxes of the employer. Unfortunately, the bankruptcy trustee has control over your assets, and this includes amounts due to you through work or transactions. The tax return that you might be expecting in the future may be intercepted by the bankruptcy trustee and used to pay creditors. The details depend upon how the tax year and calendar year fall, and when you file for bankruptcy. For instance:

  • If you filed for bankruptcy in 2023, your tax return on income for that year becomes part of the bankruptcy estate. Even though you do not get your refund until 2024, your check is taken to pay creditors.
  • When you file during 2024, the rules work differently. You are entitled to keep any refund that is based on the income you earn after filing for bankruptcy. Prior income goes to the bankruptcy estate.
  • Filing in the middle of the year means that your tax refund will be split between you and the bankruptcy estate since you can keep the refund amount traced to your earnings after filing.

Additional Facts About Bankruptcy

There are countless details and rules involved with Chapter 7 and Chapter 13, and many could affect your case. One factor that will apply is the automatic stay in bankruptcy, which ceases all creditor efforts to collect your debt. Creditors cannot sue in a collection lawsuit, garnish wages, foreclose on your home, or take other actions. In addition:

  • Bankruptcy is suitable for discharging unsecured debt, such as credit cards, medical debt, and personal loans.
  • A Chapter 7 case takes around 4 to 6 months to complete, while Chapter 13 is 3 to 5 years because of the debt repayment plan.
  • When you file for Chapter 7, the bankruptcy will be on your credit report for 10 years. For Chapter 13, the duration is 7 years.

Legal Help with the Bankruptcy Process

Your tax return is a valuable source of funds when you have bills to pay, so you certainly want to minimize the impact of bankruptcy rules that take it from you. With assistance from a Michigan bankruptcy attorney, you can leverage timing and determine when is best to file for purposes of maximizing your refund. You will also need advice on whether Chapter 7 or Chapter 13 is the best solution for your situation. When you are ready to file, your attorney will help by:

  • Organizing all financial documents;
  • Assisting with developing a Chapter 13 debt repayment plan;
  • Preparing and filing the bankruptcy petition;
  • Attending the meeting of creditors with you, where creditors may inquire about your petition and finances; and,
  • Obtaining the final bankruptcy discharge order.

Our Michigan Bankruptcy Lawyers Will Guide You

If you are considering Chapter 7 or Chapter 13, it is important to know the basics of how filing for bankruptcy affects your tax return in Michigan. You might miss out on your return, but the benefits extend into your future in the form of new opportunities. While this overview is helpful, you can rely on Kostopoulos Bankruptcy Law for personalized advice on your circumstances. For details, please contact our firm to schedule a consultation. A bankruptcy attorney will explain options after discussing your goals for debt solutions.

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