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Economists Uncover Link Between Bankruptcy Filings and Tax Rebates
As the nation's economy continues to struggle, more Americans are using their federal or state tax refunds to file for bankruptcy protection.

As Americans begin to receive their much anticipated tax refunds, some have the freedom to spend that money on a vacation or as a down payment on a new car. But, many may decide to use the money to pay bills or apply those funds toward much needed debt relief in the form of Chapter 7 or Chapter 13 bankruptcy protection.

According to a recent study released by the National Bureau of Economic Research, significant additional costs to bankruptcy applicants came with the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). In addition to imposing costs for mandatory credit counseling, bankruptcy fees increased from $921 to $1,477 after BAPCPA was enacted.

The authors of the consumer bankruptcy study set out to examine how the increased costs of bankruptcy affected the frequency of filings. To make that comparison, the study focused on the extent to which the $300 to $1,200 tax rebates issued in 2001 and 2008 — before and after BAPCPA’s implementation — caused an increase in bankruptcy filings under Chapter 7.

When the first rebate arrived in 2001, bankruptcy filings went up by two percent over the short term. However, after passage of BAPCPA, filings temporarily shot up by seven percent when American taxpayers received their 2008 tax rebate. The authors pointed out that Chapter 13 bankruptcies did not show similar increases, which is consistent with the proof of financial difficulties required to qualify for Chapter 7 liquidation under the means test.

The authors concluded that tax rebates allowed bankruptcy applicants to avoid postponing the process and seek relief sooner. As any debt relief attorney will tell clients, exploring options to resolve a client’s financial problems is a conversation best had now rather than later.

Applying Tax Returns to Debt Relief

According to the IRS, the average individual tax refund in 2009 was just over $3,000 and the entire value of refunds to taxpayers was $333 billion, a considerable infusion into the U.S. economy. For individuals and couples who must contend with medical expenses, student loans, credit card debt and other obligations, that money might be used to target debt or provide the key to moving ahead with a bankruptcy application.

Timing is an important consideration given the complexities of the bankruptcy process. A bankruptcy lawyer can look at a client’s full range of obligations, income and prospects and advise them accordingly on the best course to pursue.

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