How the Site Works: Ascend's mission is to take the pain out of personal finance for everyone. Not everyone who comes to our site is currently best fit for the Ascend product, so we spend a great deal of time and effort finding partners that we hope will be beneficial to you.
How We Make Money: Our partners sometimes compensate us in the way of advertising. Some partners we recommend pay us referral fees for sending them new customers. If you click through an application link on our site and end up receiving the service, we may receive compensation when your application is approved, and you move forward with this product. Each partner is vetted based on the following criteria:
A lot of people considering Chapter 7 bankruptcy ask the same questions about taxes:
One of the biggest concerns people have is whether forgiven debt counts as taxable income.
Normally, outside of bankruptcy, it does.
For example, if a creditor forgives $10,000 of debt, the IRS may treat that as income. You’ll typically receive a cancellation-of-debt form and may owe taxes on that amount.
But Chapter 7 works differently.
When debt is discharged through bankruptcy, the IRS does not count it as taxable income. That means:
This is a major advantage over options like debt settlement, where forgiven debt can increase your tax bill.
Bankruptcy laws were designed to give people a true, fresh start. If discharged debt were taxed, it would defeat that purpose.
Another common question is whether you can keep your tax refund after filing.
Here’s the simple answer: it depends.
In Chapter 7, a trustee may take non-exempt assets to repay creditors. Tax refunds are considered an asset, especially if they are tied to income earned before filing.
However, bankruptcy exemptions may protect your refund.
If your available exemptions fully cover the refund amount, you can keep it. If they don’t, the trustee may take some or all of it.
So timing is important.
If you expect a refund, you may want to:
If bankruptcy exemptions do not cover your tax refunds, you might want to time your bankruptcy filing to protect your tax refunds. For example, delay your bankruptcy filing until after you receive your tax refunds.
It’s also important to use any refund appropriately before filing. Spending it on necessary expenses like rent, utilities, or groceries is generally acceptable. But using it for things like luxury purchases or paying certain creditors may create complications.
If you’re unsure, it’s always best to speak with a bankruptcy attorney before filing.
Ascend can help you locate a bankruptcy lawyer in your area who offers free consultations. Learn more in our Definitive Guide to Hiring a Debt Relief Lawyer.
Most tax debt may not be discharged in bankruptcy, but there are important exceptions.
Some older income tax debt may qualify for discharge if it meets specific IRS rules.
To be eligible, the tax debt generally must meet all of the following:
If your situation meets these criteria, there’s a chance that your tax debt could be eliminated through Chapter 7.
Because these rules are strict and timing-based, it’s worth reviewing your situation carefully with a bankruptcy attorney before filing.
Chapter 7 discharges most unsecured debts. Find out if you could qualify for Chapter 7 by using our free Chapter 7 calculator.
After your Chapter 7 case is complete, your future taxes go back to normal.
You’ll continue filing tax returns just like before bankruptcy.
However, there is one situation to be aware of:
If you expect a tax refund for income earned before filing, the trustee may still have a claim to it, depending on timing and exemption coverage.
In some cases, if the refund is small, the trustee may decide it’s not worth pursuing. This is called “abandonment” due to inconsequential value.
Still, it’s important to plan ahead so there are no surprises.
Are you struggling with debts you cannot pay? If so, Ascend can help. Call or text us at (833) 272-3631 or contact us online for a free case evaluation.
Yes
No