Bankruptcy Tax Guide ::

Individuals in Chapter 7 or 11

If you are an individual debtor who files for bankruptcy under chapter 7 or 11 of the Bankruptcy Code, a separate ‘‘estate’’ is created consisting of property that belonged to you before the filing date. This bankruptcy estate is a new taxable entity, completely separate from you as an individual taxpayer.

If a husband and wife file a joint bankruptcy petition and their estates are jointly administered, treat their estates as separate entities for tax purposes. Two separate tax returns must be filed (if they separately meet the filing requirements).

The estate, under a chapter 7 proceeding, is represented by a trustee. The trustee is appointed by the bankruptcy court to administer the estate and liquidate your nonexempt assets. In chapter 11, the debtor remains in control of the assets as a ‘‘debtor-in-possession.’’ However, sometimes the bankruptcy court will appoint a trustee in a chapter 11 case. In this case, the debtor-in-possession must turn over to the trustee control of the debtor’s assets and operations.

The estate may produce its own income as well as incur its own expenses. See The Bankruptcy Estate, later. The creation of a separate bankruptcy estate also gives you a ‘‘fresh start’’ —with certain exceptions, wages you earn and property you acquire after the bankruptcy case has begun belong to you and do not become a part of the bankruptcy estate.

If your bankruptcy case began but was later dismissed by the bankruptcy court, the estate is not treated as a separate entity, and you are treated as if the bankruptcy petition had never been filed in the first place. File amended returns on Form 1040X to replace any returns you previously filed. Include on any amended returns items of income, deductions, or credits that were or would have been reported by the bankruptcy estate on its returns and were not reported on returns you previously filed. However, you may not be able to deduct administrative expenses the former estate could have claimed. Also, the bankruptcy exclusion cannot be used to exclude debt that was canceled while you were under the bankruptcy court’s protection. But the other exclusions (such as insolvency) may apply.