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What effect will filing for bankruptcy have on your taxes?

As many Seattle residents may imagine, filing for bankruptcy has a wide-ranging effect on an individual's life. Your assets and financial dealings will all be scrutinized as your filing moves through the courts, which will determine which debt can be discharged and which debt can't. Some of your assets may be liquidated; others will be protected from the liquidation process. It may sound nightmarish; and in some ways, it is.

But the end goal of a bankruptcy filing is to get out of debt. A filer wants to free himself or herself from the unyielding stress caused by their crushing debt. Getting rid of that is paramount. Even though bankruptcy may be tough in the short term, it can prove very beneficial to many people in the long run.

One of the "wide-reaching" effects bankruptcy can have on an individual is their taxes.

If you have tax debt, it is important to realize that only some forms of tax debt can be discharged through bankruptcy. "Priority" tax debt can't be discharged through a bankruptcy filing. This type of debt includes child support and student loans, in addition to any fines or financial commitments relating to criminal activity. Essentially, personal income taxes are the main form of tax debt available to be discharged. Even then, there are time limits, statutes and other guidelines that govern how this debt is dealt with during personal bankruptcy; so check with an attorney to get clear direction on how your taxes are affected during bankruptcy.

Source: FOX Business, "How Bankruptcy Impacts Your Taxes," Bonnie Lee, July 25, 2013

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