Bankruptcy – Timing & Taxes

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    Should I File Bankruptcy

    Before or After Filing My Taxes?

    If you are considering bankruptcy, when you file your tax return can make a big difference. Filing bankruptcy at the wrong time can:

    • Put a tax refund at risk

    • Affect Chapter 7 eligibility

    • Increase a Chapter 13 payment

    • Delay or complicate your case

    There is no single right answer for everyone. The correct timing depends on income, refunds, tax debt, and the type of bankruptcy you may file.

    This page explains how to think through the decision.

    Why Tax Timing Matters in Bankruptcy

    Taxes affect bankruptcy in three key ways:

    1. Income calculations (especially for Chapter 7 means testing)

    2. Tax refunds, which may be considered assets

    3. Tax debt, which may or may not be dischargeable

    The interaction of these factors determines whether it’s better to file before or after your tax return.

    Filing Bankruptcy Before Filing Your Taxes

    When Filing Before Taxes May Be the Better Choice

    Filing bankruptcy before you file your tax return may make sense if:

    ✔ You Expect a Large Tax Refund

    • Tax refunds are often considered assets in bankruptcy

    • Filing after taxes may require you to turn over the refund (or part of it)

    • Filing before taxes may protect the refund, depending on exemptions and timing

    This is especially important in Chapter 7 cases.

    ✔ Your Recent Income Was Higher Than Your Current Income

    • Bankruptcy eligibility looks backward at prior income

    • Tax returns may reflect income you no longer earn

    • Filing before taxes are filed may better reflect your current reality

    ✔ You Are Trying to Qualify for Chapter 7

    Sometimes filing before taxes:

    • Keeps your income average lower

    • Avoids being pushed into Chapter 13 unnecessarily

    Timing can be critical for Chapter 7 eligibility.

    Risks of Filing Before Taxes

    ⚠️ Filing before taxes can also:

    • Require you to file taxes shortly after anyway

    • Delay your case if returns are missing

    • Trigger trustee requests for filed returns once available

    Bankruptcy does not eliminate your obligation to file required tax returns.

    Filing Bankruptcy After Filing Your Taxes

    When Filing After Taxes May Be the Better Choice

    Filing bankruptcy after your tax return is filed may make sense if:

    ✔ You Owe Back Income Taxes

    • Filing the return starts the clock for potential discharge

    • Some income taxes are dischargeable only if the return was filed

    • Timing rules are strict and technical

    If tax debt is part of the problem, filing returns is often essential.

    ✔ Your Income Has Recently Decreased

    • A filed tax return may document changes

    • Waiting may reduce Chapter 13 payments

    • It may improve overall case feasibility

    ✔ You Are Filing Chapter 13

    In Chapter 13:

    • Refunds are often committed to the plan anyway

    • Trustee oversight already exists

    • Timing is usually less critical than in Chapter 7

    Risks of Filing After Taxes

    ⚠️ Filing after taxes may:

    • Expose a refund to the trustee

    • Increase plan payments

    • Delay urgent relief if garnishment or foreclosure is pending

    How Tax Refunds Are Treated in Bankruptcy

    Chapter 7

    • Refunds are often considered part of the bankruptcy estate

    • Exemptions may protect some or all of the refund

    • Timing can determine whether the refund is protected or must be turned over

    Chapter 13

    • Refunds are frequently required to be paid into the plan

    • Trustees often require annual turnover

    • Filing timing may not change the ultimate outcome

    What About Owing Taxes?

    Some income taxes can be discharged in bankruptcy if strict rules are met, including:

    • The tax return was filed

    • The tax is old enough

    • There was no fraud or willful evasion

    Filing bankruptcy before filing required tax returns can delay or prevent tax discharge.

    Common Myths About Taxes and Bankruptcy

    “I should always file bankruptcy before taxes.”
    Not true — this can backfire.

    “Refunds are always protected.”
    False — protection depends on timing and exemptions.

    “I can skip filing taxes if I file bankruptcy.”
    Incorrect — required tax filings are still mandatory.

    So… Before or After?

    Filing Bankruptcy Before Taxes Often Makes Sense If:

    • You expect a large refund

    • You are trying to qualify for Chapter 7

    • Your current income is much lower than past income

    • No significant tax debt is involved

    Filing Bankruptcy After Taxes Often Makes Sense If:

    • You owe back taxes

    • You want to start the discharge clock

    • Your income situation is stabilizing

    • You are filing Chapter 13

    Why Planning Matters

    The worst outcome is filing bankruptcy at the wrong time, then discovering:

    • You lost a refund unnecessarily

    • You were forced into Chapter 13

    • Your plan payment is higher than it needed to be

    A short planning discussion can prevent costly mistakes.

    Bankruptcy & Tax Timing Decision Chart

    Should I File Bankruptcy Before or After Filing My Taxes?

    Use the chart below as a general guide. This does not replace legal advice, but it helps explain why timing matters.

    🔍 Quick Decision Chart

    Your Situation Filing Before Taxes Is Often Better Filing After Taxes Is Often Better
    Expecting a large tax refund ✅ May protect refund from trustee ❌ Refund may become part of case
    Trying to qualify for Chapter 7 ✅ Keeps income averages lower ❌ Filed return may increase income
    Recent income was higher than now ✅ Reflects current reality ❌ Return shows higher past income
    You owe back income taxes ❌ Clock may not start ✅ Required to discharge taxes
    Filing Chapter 13 ⚠️ Timing matters less ✅ Often acceptable
    Need to file urgently (garnishment, foreclosure) ✅ May need to file now ❌ Waiting may be risky
    Refund already spent on necessities ⚠️ Depends on timing ⚠️ Depends on documentation
    No refund expected ⚠️ Depends on income ⚠️ Depends on tax debt

    🧭 How to Read This Chart

    • ✅ = Often the better timing

    • ⚠️ = Depends on details

    • ❌ = Often creates problems

    There is no one-size-fits-all rule — this chart highlights risk areas.

    🧠 Why These Factors Matter

    1️⃣ Tax Refunds = Assets

    In bankruptcy, a tax refund can be treated like cash in the bank.

    • Chapter 7: refunds may be taken by the trustee

    • Chapter 13: refunds are often paid into the plan

    Timing determines who gets the money.

    2️⃣ Income Affects Chapter Choice

    Chapter 7 eligibility is based on past income averages, not just what you earn today.

    • Filing taxes can lock in higher income

    • Waiting may lower averages

    • Filing too early may force Chapter 13 unnecessarily

    3️⃣ Tax Debt Has Special Rules

    Some income taxes can be discharged, but only if:

    • The return was filed

    • The tax is old enough

    • There was no fraud

    Filing bankruptcy before filing required returns can delay or eliminate this relief.

    ⚠️ Common Timing Mistakes

    ❌ Filing taxes without considering refund exposure
    ❌ Filing bankruptcy without checking tax discharge rules
    ❌ Waiting too long when urgent action is needed
    ❌ Assuming “refunds are always protected”

    These mistakes are often irreversible.

    🧩 Example Scenarios

    Example 1: Large Refund + Credit Card Debt

    • Likely better to file bankruptcy before filing taxes

    • Goal: protect refund

    Example 2: Owes IRS from 3+ years ago

    • Likely better to file taxes first, then bankruptcy

    • Goal: discharge tax debt

    Example 3: Filing Chapter 13 Anyway

    • Timing is less critical

    • Focus is on plan affordability

    Example 4: Facing Wage Garnishment

    • Filing now may be necessary

    • Waiting for tax timing could be harmful

    ❗ Important Reminder

    You are still required to file your taxes.
    Bankruptcy does not eliminate that obligation — it only changes when filing makes sense.

    📞 Final Step: Don’t Guess on Timing

    The difference between filing before vs. after taxes can mean:

    • Losing a refund

    • Being forced into Chapter 13

    • Higher payments

    • Missed tax discharge opportunities

    A short planning conversation can prevent years of regret.

    Talk to a Lawyer Before Filing Taxes or Bankruptcy

    If you’re unsure whether to file bankruptcy before or after filing your taxes, do not guess. Timing mistakes can’t always be fixed later.

    Ginsburg Law Group helps clients plan bankruptcy filings strategically — including coordinating tax timing — so they get the maximum benefit from the process.

     

    BANKRUPTCY TEAM

    AMY GINSBURG – aginsburg@ginsburglawgroup.com

    GRACIE KLEIN – gklein@ginsburglawgroup.com

    NICOLE LOMBARDI – nlombardi@ginsburglawgroup.com