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Pew Law Center Blog
April 23, 2012 Lawrence 'D' Pew

Why Not Use Your Tax Refund to Pay for Bankruptcy?

Taxpayers struggling with debt know how meaningful the tax refund can be in easing financial pain, albeit for only a short while. But this year, many individuals will use their tax refunds to permanently resolve their painful out-of-control debt problems. As many as 200,000 consumers are expected to use their 2011 tax refunds to cover the cost of filing for bankruptcy protection under Chapter 7 (Liquidation), Chapter 13 (Wage-Earner Repayment Plan), and Chapter 11 (Reorganization).

Call Your Arizona Bankruptcy Lawyer

When individuals expect a substantial tax refund, they tend to get their tax returns prepared and filed early. They’re eager to get their money back from the U.S. Treasury! Once they have the refund, the next stop for many debt-burdened taxpayers is the Arizona bankruptcy lawyer’s office.

According to the National Bureau of Economic Research (NBER), there is an annual increase in bankruptcy filings shortly after tax refunds go out. Tax rebates and tax refunds are often the only external source of cash for financially distressed people needing money for legal expenses in anticipation of bankruptcy. The average tax refund is just over $2,900, about the right amount for most petitioners to pay the petition filing fees and all or part of their bankruptcy lawyers’ fees.

Real Cost of Bankruptcy Abuse Prevention and Consumer Protection

With the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) came substantial changes to the U.S. Bankruptcy Code, making every consumer bankruptcy filing more complex. Because bankruptcy lawyers spend more time working through each case and verifying detailed financial information in compliance with BAPCPA, there has been a corresponding increase in legal fees compared to pre-2005 bankruptcies.

In the U.S. Government Accountability Office’s (GAO) June 2008 report on the increased cost of bankruptcy under BAPCPA, attorneys’ fees in Chapter 7 increased by 51% in the first two years after BAPCPA went into effect in 2005. For the same period, the GAO estimated that Chapter 13 fees increased by as much as 55%.

Expanding the U.S. Trustee Program

Under BAPCPA, the U.S. Trustee Program (Department of Justice) was expanded to include greater oversight of case administration and enforcement of bankruptcy laws. BAPCPA responsibilities assigned to the U.S. Trustee included:

Implementation of the Means Test, which is used to determine the debtor’s eligibility for Chapter 7 or Chapter 13 bankruptcy.

● Supervision of both random and targeted audits to determine accuracy of the Chapter 7 debtor’s bankruptcy documents.

● Certification of non-profit credit counseling and financial education agencies that are now involved with every consumer bankruptcy.

● Carrying out “enhanced oversight” over Chapter 11 small business debtors.

Increased financial disclosures and heightened oversight by the U.S. Trustee have resulted in higher bankruptcy costs for consumers across the nation. With increased costs, individuals seeking debt relief through bankruptcy will need cash from somewhere to get their cases filed. Which brings us back to our initial question – Why not use your tax refund to pay for bankruptcy?

Phoenix Bankruptcy Resource:

Tax Refunds Being Used to Pay for Bankruptcy Filings

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