New Tax Refunds Lead to Temporary Increase in Bankruptcy Filings
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New Tax Refunds Lead to Temporary Increase in Bankruptcy Filings

April 4, 2012


When Americans receive their tax refunds, they tend to file for bankruptcy at a higher rate because they can better afford bankruptcy’s fees, according to a recent study that was highlighted in the Los Angeles Times.

In a recent year, the number of people who filed for bankruptcy experienced a "significant, short-run" increase of roughly seven percent after the IRS sent out tax refunds, according to researchers from the University of Chicago, Washington University in St. Louis, and Columbia University.

The researchers hypothesized that many filers used the extra refund cash to pay the fees needed to file for bankruptcy. These fees, sources say, average about $1,477 for the average consumer.

The study’s leaders also observed that, of the total number of people who filed for bankruptcy within that period, roughly 3.8 percent could not have afforded to go through bankruptcy with their tax refund money.

Sources say that changes to federal bankruptcy laws in 2005 made bankruptcy slightly more expensive, though not prohibitively so, for the average filer.

These new regulations, which were designed to prevent abuses of the bankruptcy system, were designed to reduce the number of Americans who were filing for bankruptcy. In 2001, for example, 1.3 percent of American families had filed for bankruptcy, which Congress apparently deemed to be excessive.

These new rules reportedly led to a 60 percent increase in the average cost of personal bankruptcy, although many observers note that the long-term benefits of bankruptcy may be worth significantly more than the relatively small filing fees.

But despite the intentions of Congress, the University of Chicago suggests that the 2005 amendments to bankruptcy laws actually prevented struggling families, who are the people that benefit the most from bankruptcy, from filing for debt relief.

Many of these families were only able to file for bankruptcy after receiving a cash infusion in the form of a tax refund.

So, Congress seems to be faced with a difficult choice. Thousands more American families would likely file for bankruptcy if the rules were relaxed and fees were decreased. And most of these families genuinely need some debt relief.

But federal legislators, for some reason, are reluctant to open the doors of bankruptcy to more filers. Nevertheless, as this study shows, if more people can afford bankruptcy, more consumers will seek debt relief through this unique process.

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