Tax Refunds Fuel Bankruptcy Filings

March 28, 2012

A recent study conducted by economists at Columbia University, the University of Chicago, and Washington University in St. Louis found that bankruptcy filings increase after tax refunds are received. According to this study, the total number of bankruptcy cases increased seven percent in 2008 after debtors received their tax refunds.

This research confirms what consumer bankruptcy attorneys have known for years. However, the economists concluded that many Americans could not afford to pay the bankruptcy fees without the tax refund money. Granted, in some cases the bankruptcy client is unable to pay bankruptcy fees and needs tax money for this purpose. However, in many cases the debtor’s attorney will recommend delaying the bankruptcy filing until after the tax refund money has been received and spent.

When you file a bankruptcy case, all of your assets become part of a bankruptcy estate overseen by a bankruptcy trustee. If you are owed an income tax refund, the refund belongs to the bankruptcy estate. In many cases you are allowed to keep all or a portion of your anticipated tax refund by applying legal exemptions. However, if your tax refund amount exceeds your entitled exemptions, you may lose the excess amount. In these cases your attorney may advise you to delay filing until after your refund is received and spent.

The way your tax refund is spent can sometimes cause you headaches. For instance, paying off a loan to a family member just before filing is considered a "preference" payment. The bankruptcy trustee can "avoid the payment and ask for the money. Similarly, paying off a secured loan (like a car loan) may create an equity issue and you may lose the collateral. It is important to discuss the specifics of your bankruptcy case with your attorney before your receive and spend your tax refund check.

Tax refunds can be a big help if you are struggling with debt, and can provide options to help restructure your finances. Whether the money is used to help pay your bankruptcy fees, or used to catch up on rent or utilities, it is important to discuss your financial situation with your attorney.

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