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Using your tax return to file Ch. 7 bankruptcy? You’re not alone

If you filed your taxes as soon as you received all your forms in the mail and have anxiously been awaiting your returns, you are not alone. Those lucky enough to get a tax return sometimes use the money to pay off credit cards or take that wonderful vacation or maybe just enjoy a nice dinner out. But nearly 200,000 households across the country will use their tax returns to file for bankruptcy.

According to a new study by the National Bureau of Economic Research, the number of personal bankruptcy filings jumps drastically at the beginning of year. Some cash-strapped families in Burlington County will finally be able to afford to pay for their Chapter 7 and Chapter 13 filing and legal fees with their tax return.

Since 2005 when the U.S. bankruptcy laws changed and the cost of legal and administrative fees spiked, many families have had to wait for debt relief until they could afford to pay for filing. The average cost to begin a fresh financial start went from $921 to $1,477. The U.S. Government Accountability Office attributes the increase in costs to new regulations requiring the verification of additional information to prevent bankruptcy abuse. While the number of bankruptcies has decreased overall since the 2005 change, the number of abuses has not.

However, financial experts agree that raising costs to prevent abuse is counterintuitive and merely hurts the people who need bankruptcy protection and relief the most. When people are living check to check and barely keeping their head above water, they cannot pay the thousands of dollars required to achieve relief from their overwhelming debt until they get a windfall from something like a tax return.

Source: usatoday.com, “Tax refunds being used to pay for bankruptcy filings,” Christine Dugas, April 13, 2012

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