File Taxes Before Bankruptcy

A question I am frequently asked by my new clients, “do I have to file my taxes before I can file bankruptcy?  Generally speaking, in order to file your case in San Diego successfully, you will need to file your tax returns for the past four years, including the most recent tax year.  This is a requirement set forth by statute.  If you fail to comply with the tax filing requirement, you risk having your case being dismissed by the trustee.  More precisely, the trustee will bring a motion to obtain a court order dismissing your case.  There are other important reasons for filing your tax returns before bankruptcy.  Here I will discuss the three (3) most important reasons for filing your tax returns before filing a Chapter 7 or Chapter 13 petition in bankruptcy.


First of all, you will want to file your taxes so that your lawyer can submit your returns to the bankruptcy trustee appointed to oversee your case.  If your tax returns are not timely filed with the trustee, your case is subject to immediate dismissal.  Tax returns are required as part of what are called “due diligence” documents that are filed by your attorney in support of your Chapter 7 or Chapter 13 petition.  Your Statement of Financial Affairs, one of the documents accompanying your petition, lists your income over the past couple of years, but the court is not going to just take your word for it.  Unfortunately, not everyone is honest.  So the court will need you to prove that the information in your filing is true and correct.  Your tax returns are important for documenting that the income you listed is accurate.


Second, you will want to file your taxes in order to be eligible to discharge some or all of your back taxes in your bankruptcy proceeding.  In many cases, you may be able to include your taxes in bankruptcy if you meet the appropriate test for filing bankruptcy on taxes, but only if you have filed your taxes and waiting the appropriate amount of time between filing your taxes and the filing of your petition.  Your lawyer will be able to tell you just how long you have to wait after filing your taxes before you can file bankruptcy on your taxes, based upon the facts and circumstances of your case.  One thing you can be sure of, however, is that if you will never be able to include your taxes if you have not filed your tax return before you have filed your case.


Third, your tax returns disclose a significant amount of information about your finances.  So aside from the legal requirement that you file them with the trustee or face dismissal, the trustee is likely to demand the taxes in order to assist the trustee in performing the trustee's investigation of your bankruptcy case.  They list your gross income, any rental income, any business income, any income from Social Security, or any income from other sources.  Also, with businesses, tax returns may disclose information regarding business assets that may or may not have a value that exceeds the amount of assets you are allowed to keep when you file for bankruptcy relief.  And because taxes are a reliable source of information about your finances, the trustees definitely want to review your taxes.


So, in most cases, the answer is yes, you need to file your taxes before filing bankruptcy in San Diego.  And if your San Diego bankruptcy lawyer does not file your taxes, your petition and entire filing can be dismissed.  Still, in cases where no tax filing is required (see my blog post titled do I have to file taxes), you might be able to get away with not filing your taxes and simply submitting the last tax returns that you were required to file, even if it was many years ago when you were last required to file taxes.  Discuss your situation with your attorney to see if you need to file your taxes before you can file for bankruptcy.