With April 15 fast approaching, one of the most frequent questions we receive from those considering filing bankruptcy is when should they file their tax returns. This will be Part 1 of a 2 Part posting on this issue.
In Part 1 below, we discuss reasons TO file taxes as quickly as possible in anticipation of bankruptcy.
Reasons to File Tax Returns as Quickly as Possible
- Anyone who files bankruptcy this time of the year will eventually have to turn over their 2011 tax returns to the Trustee. Having the returns completed and filed eliminates one more task.
- By filing your returns early, and receiving your refund before you file, you should be able to keep and use the refund. Make sure that you do not use your refund to pay creditors to whom payment could be considered a preference or to those creditors you are expecting to discharge in your future bankruptcy.
- If you file your tax returns and believe any refund is relatively small, it may be protected by state exemption laws. So, even if you file a bankruptcy, depending in which state you live, that tax refund may be exempt from the Trustee. Of course, it will depend on the amount of the refund and the amount of cash the state allows you to protect.
- In order to file bankruptcy, it is a requirement to have filed your last two years of tax returns. Filing them as quickly as possible will let you utilize your most recent returns (currently your 2010 and 2011 returns, which could be a benefit over using the 2009 returns) in the event your income has decreased.
- If you determine there is a large refund expected, you may want to take the opportunity to review the number of deductions you claim. Over-withholding while in bankruptcy denies you the ability to use money you earn. Adjusting your deductions to the actual amount you are entitled to may provide you with some extra cash in your paycheck and help with the month-to-month bills while in bankruptcy and thereafter.
- By filing your returns early, and filing your case as soon as possible, you are lessening the chance the Trustee will want to see your 2012 returns next year. Some Trustees will hold cases open to see if they will be entitled to any money from tax refunds in 2012. This can prolong a case and may be costly.
Tomorrow we’ll discuss in Part II reasons NOT to file as quickly as possible. If in doubt, give us a call. We may be able to help you with a new financial start through Chapter 7 or Chapter 13 bankruptcy filing. If you live in Kansas or Missouri, pick up the phone and call for a free consultation. Call (816) 561-1818 today!