There are many important aspects of filing bankruptcy and getting the relief that the bankruptcy code offers. In setting the stage for filing bankruptcy and getting the relief you need, debtors need to be aware of some important obligations: the need to file tax returns.
In Chapter 13
Under § 1308 of the US Bankruptcy Code, chapter 13 debtors must have filed all tax returns for the year/tax period ending during the 4-year period prior to the date of the filing of the petition. In other words, if the case is filed on January 3, 2009, the returns for 2008, 2007, 2006 and 2005 will need to be filed. If they are not filed (and chances are, the 2008 return will not be filed by then), the creditor’s meeting will be held open for a period of time to allow the debtor to file. But chapter 13 debtors also need to be aware that there is a 4 year look-back.
If a return has not been filed, the taxing authority will file a Notice of Unfiled Tax Returns. This document puts everyone on notice that the debtor has yet to comply with Section 1308. It is important to note that if a debtor does not comply with Section 1308, the case can be dismissed under Section 1307. With that said, if you’re thinking of chapter 13, get your tax filings in order.
Chapter 7 & 11
If you believe a chapter 7 is on your horizon, Sections 1307 and 1308 do not come into play. However, under Section 521(j) the case can be dismissed if tax returns have not been filed which are due after the case has been filed (this also applies in Chapter 13s).
In chapter 11, the case can be subject to dismissal or conversion for failing to file post-petition tax returns or pay post-petition taxes. Small business debtors are obligated to have on hand either their Federal income tax return, or ate least a statement that no return has been filed.
From a practical perspective, I find that having the income tax returns finalized (and preferably filed, if at all possible) gives me a more complete snapshot of the client’s financial picture. In chapter 11 and 13 cases, that information can prove useful in determining what potential issues may arise in the confirmation process.
Sometimes, a client might be reluctant to file back tax returns because taxes are owed. However, this is precisely why I would want them filed – to learn what’s owed, and to learn how we can address it in a bankruptcy plan.
My Storm Prep Recommendation this week: get all of those tax returns filed (and please keep complete and signed copies!).
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