Bankruptcy does not keep the taxman away.
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When an individual, a partnership, or a corporation is engaged in a bankruptcy, they still must continue to file federal and state tax returns. Additionally, the bankruptcy estate itself is a separate entity and must file a tax return. The bankrupt party files its tax return in the normal manner. When a trustee is appointed for the bankruptcy estate, it is the trustee's duty to see that the bankruptcy estate's tax return is filed. A bankruptcy filing does have certain tax consequences for both debtors and creditors. When an individual's debts are discharged in whole or part, this may create income to the debtor, which is subject to both federal and state income tax. As a general rule, a discharge of debts will create income. However, this rule only applies to the extent it renders the debtor solvent. Download legal forms For example, assume that Don, a debtor, has received a $100,000 discharge of debts. Under normal federal income tax rules the discharge creates $100,000 o...