Tax Consequenes of Bankruptcy Filing Taxation Consequences of Individual Bankruptcy F

This paper will discuss the tax consequences of a bankruptcy filing by a non-corporate individual. Most of the discussion will focus upon the status of the discharge of indebtedness, which is the object of a bankruptcy filing, and the tax liability of the bankruptcy estate.

Under the Bankruptcy Code, there are two different types of bankruptcy filings: liquidation and reorganization. In a liquidation bankruptcy (Chapter 7) all of the property owned by the debtor at the date of bankruptcy is placed in the bankruptcy estate, which is a separate entity from the debtor, administered by a court-appointed trustee. As will be explained later, the estate is taxed as a separate entity from the debtor. This property, placed in the estate, is then used to satisfy the debts of the debtor and the expenses of the bankruptcy proceedings. In a reorganization bankruptcy (Chapters 11 & 13) the debtors property is again placed in the bankruptcy estate, but the debtor also files a plan, approved of by his creditors and confirmed by the bankruptcy court, under which the debtor proposes to pay, in whole or in part, the debts he owes over a period of time. The creditors are guaranteed payment of no less than the amount which they would have received under a Chapter 7 liquidation. Because the debtor pays the creditors from future earnings, he or she generally remains in possession of the property in the estate; as will be explained later, the

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ate begins on the date the petition is filed; the DIP may elect either a calender year or a fiscal year and the estate's accounting period may be changed once without obtaining approval from the IRS. This last particular rule allows the estate to close its taxable year prior to the termination of the bankruptcy case, allowing for an expedited determination of the tax liability of the estate. Under Chapter 13, the estate is not considered a new taxable entity; thus the debtor must include all pertinent income and credits in his own personal return. The reason for this lies with the nature of Chapter 13; it is intended to help out middle-income wage-earners and their creditors. Thus, the debtor usually remains in possession of his property and retains control over it, since this property is not intended to serve as a source for the payments to the creditors. It is unnecessary, therefore, to transfer control of this property to a completely new taxable entity. The third effect of bankruptcy on taxation has to do with the transfer of property to the estate under Chapters 7 and 11. When the bankruptcy petition is filed, all of the non-exempt property of the debtor is transferred to the estate. Normally, this would be considered a tax
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