d be unnecessarily complex, given the size of the assets and debt involved. Thus Chapter 13 is intended to benefit both the debtor and the creditors by allowing a lengthy period of time for a plan which pays back the creditors while leaving the debtor in possession of vital property. In order to be eligible for a Chapter 13 reorganization, the debtor must be a non-corporate individual with a "regular income," whose noncontingent and liquidated debts do not exceed $100,000 of unsecured claims and $350,000 of secured claims. These amounts ensure that Chapter 13 will be available to most consumer debtors and many self-employed debtors; those with larger amounts of debt must use Chapter 11 reorganization.
Under Chapters 7 and 11, where the estate is a separate taxable entity, the trustee or debtor in possession is required to obtain an employer identification number and file an income tax return for the estate and a Form 56 (Notice Concerning Fiduciary Relationship). During the bankruptcy period, the debtor continues to file a Form 1040, reporting both his pre- and post-petition income and deductions. The estate, meanwhile, must file as if it were a married taxpayer filing separately, which qualifies it for the standard deduction for that filing status, as well as one personal exemption. Attached to the estate's Form 1040 must be the first page of Form 1041, which acts as a "cover letter" for the 1040 form.
There are nine major ways in which bankruptcy affects the taxation of the debtor: the discharge of indebtedness, the tax status of the estate, the transfers of property and tax attributes to the estate, the election to close the debtor's taxable year, the tax liability of the estate, abandonment of property by the estate, the state and local consequences of bankruptcy, the status of pension plan assets in bankruptcy, and the discharge of tax liabilities in bankruptcy.
The discharge of indebtedness would normally result in income...