Contents
If you’ve recently filed for bankruptcy or are considering it, you may be wondering why your bankruptcy trustee needs access to your income tax returns. This is a common question, and it’s important to understand why these documents are critical to the process. As an attorney with over 30 years of experience in bankruptcy law, let me break down why the trustee asks for your income tax returns and how it impacts your case.
Understanding the Role of the Bankruptcy Trustee
The bankruptcy trustee is appointed to oversee your case, ensuring that the process runs smoothly, that all legal requirements are met, and that creditors are treated fairly. The trustee’s main job is to evaluate your financial situation, determine whether any of your assets are not exempt and can be sold to pay off your debts, and ensure you qualify for a bankruptcy discharge or wiping out of your debt.
The previous two years income tax returns must be provided to your Bankruptcy Trustee in all cases.
Trustees are required to verify the information you provide in your bankruptcy filings. This includes confirming the accuracy of your income, debts, assets and expenses. This is where your income tax returns come in—they provide a detailed, third-party verification of your income and other financial information. Additionally, they also may alert the trustee to any businesses, investment accounts, retirement plans or other potential assets that you might have.
Verifying Your Income and Financial Condition
When you file for bankruptcy, especially Chapter 7 or Chapter 13, you’re required to disclose all sources of income. This helps determine your eligibility for bankruptcy relief and how much you may have to pay to your creditors, if anything. Your income tax returns are one of the most important documents that must be provided to the trustee. The trustee will use your tax returns to:
- Verify Your Income: Your tax returns show a comprehensive view of your income for the past year or more, including wages, self-employment income, investment income, and other sources. This allows the trustee to confirm that your reported income matches what you’ve filed with the IRS. Discrepancies between what you report and what your tax returns show can raise red flags, potentially leading to delays or complications in your bankruptcy case.
- Ensure Proper Calculation of the Means Test: For Chapter 7 bankruptcy, the means test is a tool used to determine whether you qualify for a discharge or your debt under this chapter. The test compares your income to the median income for a household of your size in your state. Your income tax returns provide a reliable measure of your income for the prior year, which, in addition to your past 6 months pay-stubs, is used to calculate your monthly income and can assist in determining whether you pass the bankruptcy means test.
- Check for Unreported Income: The trustee will also use your tax returns to look for any unreported or underreported income. This could include income that didn’t show up on your bankruptcy petition or that you may have forgotten to mention, such as income from operation of a business, retirement disbursements or 401k liquidations, investment capital gains or dividends, etc. If the trustee finds inconsistencies or omissions, it could delay your case or even raise concerns about fraud.
- Assess Financial Trends: All trustees in Michigan request the previous two years of income tax returns (Federal and State of Michigan) to understand whether your financial situation is stable or if there has been a significant fluctuation in your income. This helps them get a clear picture of your financial health and how your income might change in the future.
Other Reasons the Trustee Needs Your Tax Returns
Your income tax returns provide valuable insight into other aspects of your finances, such as:
- Deductions and Exemptions: The trustee will review deductions and exemptions listed on your tax return to ensure they match what you have claimed in your bankruptcy petition. This ensures that you are accurately reporting your financial situation.
- Potential Tax Liabilities: If you owe back taxes, the trustee will need to know the full extent of that liability. Your tax returns give a clear picture of any unpaid taxes, which may be treated differently in bankruptcy than other debts.
- Asset and Property Verification: If you own property or have other investments, your tax returns can provide documentation of those assets. For example, if you have rental income or business income, the trustee may look at your tax returns to determine how much income is coming from those sources and whether any of it can be used to pay creditors.
What Happens If I Don’t Provide My Tax Returns?
Failure to provide your tax returns can have serious consequences for your bankruptcy case. If you don’t submit your returns or refuse to provide them, the trustee will likely move to dismiss your case, resulting in a missed opportunity for a fresh financial start. In some cases, the court may even find you in contempt for not cooperating.
Additionally, the bankruptcy process may be delayed as the trustee may need to request your returns from the IRS, further slowing down the proceedings and increasing the likelihood of additional complications.
In some cases, tax returns cannot be provided to the trustee because they were not required to be filed because the debtor did not have sufficient taxable income to be required to file returns. In those bankruptcy cases, our office will assist the debtor in filing an affidavit with the bankruptcy court attesting to the fact that they did not have enough income to be required to file returns.
Why Does the Bankruptcy Trustee Need My Income Tax Returns: The Bottom Line
So, why does the trustee need your income tax returns when you file for bankruptcy? The short answer is that the trustee needs them to verify your income, ensure that you qualify for the appropriate bankruptcy relief, and confirm that all the information you’ve provided is accurate and complete. By providing your tax returns, you help the trustee do their job efficiently, and you ensure that your bankruptcy case progresses as smoothly as possible.
Remember, bankruptcy is a legal process, and full transparency is key. Your cooperation will go a long way in ensuring that your case moves forward without unnecessary roadblocks. If you have any concerns about your tax returns or the bankruptcy process, consult an experienced bankruptcy attorney who can guide you through every step.
If you are considering bankruptcy, don’t hesitate to contact my office for a consultation. Together, we’ll make sure your financial future is on the right track.
