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A Chapter 7 or Chapter 13 bankruptcy discharge is an effective way to get back in control of your finances and your family’s future. But even bankruptcy has its limitations, and one of those involves taxes. After your discharge, you’ll still need to stay current on your tax liabilities, or you’ll quickly discover how easy it is to rack up debt again. And before you receive a debt discharge, you’ll need to follow certain tax rules to avoid jeopardizing your case.

You cannot accrue any new debt before your discharge.

While your finances are under the jurisdiction of the bankruptcy court, you are subject to its rules. One of those rules is the prohibition against accruing any new debts before you receive a discharge or your case is dismissed. This doesn’t necessarily mean that receiving a tax bill will cause your case to be dismissed. However, if you’re unable to pay that tax bill, you’ll encounter problems. If your case isn’t dismissed outright, it might be converted to a Chapter 7, if you initially filed for a Chapter 13 or 11.

Chapter 7 bankruptcy treats new tax debt differently.

If you initially filed for a Chapter 7 bankruptcy, and you accrue new tax debt after you filed the petition, this new debt won’t be discharged. You’ll be responsible for paying the balance, including all penalties and interest.

Discharged debts are not taxed as income.

Under most circumstances, debts that are forgiven are considered to be a form of income, and they are taxed accordingly. A bankruptcy discharge gives you an advantage in this area. You do not have to report your discharged debts as income. However, it’s possible that you’ll receive an IRS Form 1099-C, Cancellation of Debt. If this happens, you’ll have to file another form with the IRS to inform the agency that the debt was discharged in bankruptcy.

Your life after bankruptcy is a fresh start in life, and the lawyers at Cutler & Associates, Ltd. want to help you make the most of it.