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Tax refunds may prompt a surge in personal bankruptcies

Yesterday was tax day, and many people in New Jersey and across the United States are certainly looking forward to receiving their tax refunds. While everyone probably has different plans for how to use it, some may be planning to use their tax refunds to pay for a personal bankruptcy filing. According to a new study conducted by the National Bureau of Economic Research, this may hold true for more than 200,000 households nationwide.

Although it may surprise some, filing for bankruptcy can be somewhat expensive, especially due to reforms to U.S. bankruptcy laws passed in 2005, which were meant to deter people who could afford to pay their debt off from filing for bankruptcy. Before the reforms, the average cost of filing was $921. That covered legal and administrative fees. However, by 2007, the cost jumped to $1,477.

Possibly due to the increase in cost, the number of people filing for bankruptcy has declined. Likewise, more and more are using their tax refund to cover the costs of filing. Unfortunately, that may mean that some people who are facing financial hardship are unable to get the help they need.

Although filing for personal bankruptcy may cost money, it may nonetheless be the most cost-effective solution for some individuals in New Jersey and elsewhere. Bankruptcy often allows people to gain control over their debt by allowing them to restructure or even eliminate it under the protection of a court. They can then eventually emerge from the process with little to no debt, allowing them to gain a solid financial footing.

Source: CNBC, "Tax Refunds Being Used to Pay for Bankruptcy Filings," Christine Dugas, April 13, 2012

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