Do I have to pay taxes during my bankruptcy case?
The tax obligations of the person filing a bankruptcy petition vary depending on whether you file under bankruptcy Chapter 7 or 13.
Filing a Chapter 7 petition creates a separate taxable bankruptcy estate, consisting of property that belongs to you before the filing date, and is completely separate from you as an individual taxpayer. The trustee is responsible for preparing and filing the estate’s tax returns (Form 1041) and paying its taxes. The individual debtor remains responsible for filing returns (Form 1040) and paying taxes on any income that does not belong to the estate.
A Chapter 13 bankruptcy petition does not create a separate taxable estate for federal tax purposes. You file the same federal income tax return (Form 1040) that was filed prior to the bankruptcy petition. If you run into trouble paying your post-petition taxes, look into negotiating an agreement with the tax man. In addition to your bankruptcy filing, you may make an Offer of Compromise with the tax man. When you have significant tax issues and are facing bankruptcy, look for an attorney who specializes in both areas to help you choose which combination of choices will help improve your financial situation the best.
Whether you file Chapter 7 or Chapter 13, follow up with your tax professional to make sure that your returns do get filed. Failing to file your returns during bankruptcy can result in a dismissal of your bankruptcy petition or the bankruptcy judge refusing to confirm your repayment plan.
You must pay local property taxes otherwise it will probably constitute a default on your home mortgage.