3 Tax Issues Regarding Bankruptcy. . -- Kiritsis Law Firm Group 212 922 0005

Apr 27, 2021

Bankruptcy often raises interesting tax issues, going to the very core of federal income tax principles.

1. Filing taxes is required for bankruptcy protection. Bankruptcy relief is a right of U.S. citizens, and largely extended to business organizations, that is constitutionally protected, and specifically addressed in the U.S. constitution. However, no right is ever truly absolute. For example, to properly obtain bankruptcy relief, a debtor petitioner, would typically be required to files taxes.

2. Discharged debt could trigger tax liability. If a taxpayer comes out of bankruptcy debt with a shaved off or eliminated debt, he may be subject to taxes on the cancelled debt (or a portion of). It is paramount that any party and/or party's counsel, seriously consider the tax ramifications, and how they factor into metrics, such liquidity, and cash flows, prior to, during, and even (sometimes, especially) after a bankruptcy filing.

3. Tax debt may escape bankruptcy estate and/or is either wholly or partially exempt. Similar, to student debt, it is possible, that all or some of the tax debt a taxpayer has, is not part of the bankruptcy estate (fancy term, to say that debtor is still responsible after that debt). It is important to note, that the federal government, by virtue of writing the laws, has not surprisingly, put debts owed to its chief accounts receivable agency (IRS), pretty high (generally, the highest) in the list of creditors, in terms of getting paid first.

 

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