More Americans Using Tax Refunds to Pay for Bankruptcy

With tax season upon us, many New Jersey residents are trying to decide what to do with that much-anticipated refund check.  Increasingly, people in New Jersey and throughout the country are using their refunds to file for bankruptcy.

The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act raised the average cost of filing for bankruptcy by about $500. In addition, it required filers to pay to participate in credit counseling.

The Act was designed to root out unnecessary or spurious bankruptcies. However, many experts are worried that it simply makes it harder for honest consumers to get the debt relief they need.

A new study shows these fears may be grounded in fact. It found that total bankruptcies tend to go up when a large percentage of Americans receive tax refund checks. The authors say this happens because cash-strapped debtors often have no other way to pay the filing fee.

The study’s leader, Dr. Tal Gross, a professor at Columbia University’s Mailman School of Public Health explained the situation as follows: “Bankruptcy can be a Catch-22 when a substantial amount of money is needed to get out of a situation defined by having little or no money. If it weren’t for these rebate checks, many families would have to postpone filing for bankruptcy for months until they save enough money.”

In the wake of the study, Dr. Gross concluded lower barriers to bankruptcy could benefit both individual consumers and the American economy as a whole. When done right, he said, bankruptcy allows individuals to get back on their feet and participate in consumer spending, which, in turn, provides a much needed economic stimulus.

Source: Forbes, “Tax Rebates Boost Bankruptcies, and Why That’s Not So Bad,” David DiSalvo, March 22, 2012.

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