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Can I Keep My Tax Refund and Go Through Bankruptcy?

Many folks call us and ask if they can keep their tax refund and still file for bankruptcy protection.  The short answer for many people is yes.  Of course, the real answer is that you should meet with an experienced Massachusetts bankruptcy attorney before trying to undertake your own bankruptcy planning.

On the one hand, reducing your consumer debt is often more important than investing for the future because of the interest on consumer debt.  On the other hand, if you use your tax refund to pay off consumer debt and then still have to file for personal bankruptcy, you may have lost an opportunity to plan for retirement, repair your home or make your student loan payments.

Study Shows Folks Using Tax Refunds to Pay Down Debt

In a study undertaken by the National Foundation for Credit Counseling (NFCC) there was a finding that 68% of tax refunds were going to be spent on paying off credit card debt.  While this may be exactly the right thing for many people, for someone who still may have to file for personal bankruptcy, this may be unwise.  It may also violate the law if you pay one creditor at the expense of another and then file for bankruptcy.

The IRS reports that the average refund for 2014 is $3,034.  The NFCC claims that the average consumer debts are $5,047.  Thus, for “average” folks, paying off sixty percent of your consumer debt in one moment would be considerable.   And this study did not even review state refunds; Massachusetts has a state income tax so there would likely be a commensurate refund to Massachusetts taxpayers.  However, if you were to have the average refund but had significantly above average debt and were unable to make monthly payments on that debt even after applying all of the tax refund, it may make sense to undertake some bankruptcy planning with an experienced bankruptcy lawyer in Massachusetts.

How Do You Determine Whether To Pay Off Debt With A Tax Refund?

The NFCC discusses ways of balancing the various factors in making a decision regarding paying off debt:  First, consider if the interest on the debt is higher than the interest on savings.  Most savings accounts pay very little interest these days so this factor may not be too relevant.  Second, if payment does not eliminate the debt balance, is there a plan to pay off the rest?  If not perhaps bankruptcy is in order.  However, if a few months of payment would erase the balance, perhaps this is a good decision.  Third, if you negotiate the debt, good for you.  However, be forewarned that the forgiven debt may result in a1099 form from the creditor, and you will have to count the forgiven debt as income on your 2015 taxes.  Fourth, if you determine that you will pay off debts, start with the ones that have the highest interest rate.  Finally, avoid getting into debt again.

It is critical that you look at both immediate picture and the situation in the long run.  It may make sense to pay off your debts and get a fresh start using your tax refunds.  It may also make sense to undertake bankruptcy planning and use your tax refund for long-term goals and get a fresh start after eliminating all your debts under federal bankruptcy protection.

Experienced Bankruptcy Lawyer

Before expending your 2014 tax refund on credit card debt, consider a free consultation with experienced personal bankruptcy attorney Neil Burns.  After 29 years of representing debtors in Chapter 7 bankruptcy Attorney Burns can help your family.  Call for a free initial consultation.



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