Turbotax: Bankruptcy Info & Licensed Trustee

 

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Q: What is Netfile Error 15? A: "You have indicated this is a pre-bankruptcy return. Please delete the selected financial data statements, as they should not be transmitted with a pre-bankruptcy return" *** Q: What is error code 22? A: "According to the Canada Revenue Agency’s records, this taxpayer was bankrupt last year, or is currently in bankruptcy status. This taxpayer’s T1 for the period from January 1 to the date just before the assignment is the only return that is eligible for EFILE; however it must be filed by the taxpayer’s trustee."

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Relevant Material: ÈFiling for bankruptcy is a complex legal and financial process that has significant tax implications, requiring coordination with a licensed trustee and potentially limiting the effectiveness of do-it-yourself tax software like TurboTax. 

Significance of a Licensed Trustee
A Licensed Insolvency Trustee (LIT) (or a court-appointed trustee in the U.S.) is a federally regulated professional crucial to the bankruptcy process. 
  • Sole Authority: LITs are the only professionals authorized to administer government-regulated insolvency proceedings (consumer proposals and bankruptcies) that can discharge your debt.
  • Neutral Party: The trustee does not represent you or your creditors but ensures the integrity of the process and a fair outcome for all parties involved.
  • Creditor Liaison: Once a bankruptcy is filed, the trustee deals directly with creditors on your behalf, halting collection actions and legal proceedings.
  • Tax Filing Responsibilities: The trustee is responsible for filing specific tax returns related to the bankruptcy estate (e.g., Form 1041 in the U.S.) and may handle pre-bankruptcy personal returns if they are past due.
  • Financial Counseling: Trustees provide mandatory counseling sessions on budgeting and rebuilding credit as part of the process. 
Interaction with TurboTax
While general tax returns can be filed using software, navigating the specific tax implications of bankruptcy often requires professional assistance beyond what software can provide. 
  • Handling Form 982: If a creditor cancels a debt (and sends a Form 1099-C), you may be able to exclude the canceled debt from your income due to bankruptcy or insolvency by filing Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment). TurboTax's online versions may not fully support the required insolvency worksheet, and the desktop version provides limited guidance, recommending consultation with a tax professional.
  • Filing Multiple Returns: For a Chapter 7 or Chapter 11 bankruptcy, two separate tax returns are often required for the year of filing: an individual Form 1040 (for the debtor) and a Form 1041 (for the bankruptcy estate). This dual filing can be complex.
  • Refunds: Tax refunds for periods prior to the bankruptcy generally become property of the bankruptcy estate and are sent to the trustee.
  • Professional Advice Recommended: Because the rules surrounding the taxability of canceled debt, filing requirements, and the handling of specific forms like Form 982 can be intricate, TurboTax and the IRS recommend seeking guidance from a licensed tax professional or the IRS Centralized Insolvency Operations Unit.  (Google) 
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