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How does filing for Chapter 7 liquidation affect taxes?


For businesses and individuals in Texas, it is not unusual to face financial problems making it necessary to consider bankruptcy. In some instances, the economy factors in and leads to struggling with debt. In these cases, filing for Chapter 7 may be necessary to get back on better financial ground. If a business files for Chapter 7 for businesses, a liquidation will be part of the process. There are many factors that must be remembered when using Chapter 7 including how it affects tax payments.

Chapter 7 is available regardless of how much is owed or if the debtor is solvent or not. With Chapter 7, there will be a Trustee appointed to take the remaining assets and convert them into cash to be distributed to the creditors. Those who are moving forward with a Chapter 7 need to remember that they should not accrue more debt. People or businesses that are filing because they are in arrears for federal tax payments must remember that it might be necessary to increase the withholding and estimated tax payments.

Those who are due a tax refund during Chapter 7 can receive it. The refund could be delayed, be subject to turnover requests of the Trustee or used as a way to pay down the taxes that are owed. Once the Chapter 7 process is complete, the debts will be discharged. That means that the debtor will no longer be liable for the debts that were dischargeable. In some cases, certain taxes can be dischargeable. The situation dictates whether or not that is the case.

While it might not seem to be a viable option or one that is preferable, Chapter 7 for businesses and individuals is often the only way to get back into a better financial position and move on. This is especially true if there are federal tax debts. When thinking about Chapter 7 bankruptcy, it is always smart to speak to a qualified legal professional about the various options and how the process works before making a decision.

Source: irs.gov, "Chapter 7 Bankruptcy -- Liquidation Under the Bankruptcy Code," accessed on Nov. 23, 2015

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