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Study: 200,000 consumers will use tax refund to pay for bankruptcy

A new study indicates that roughly 200,000 taxpayers will use their tax refund this year to file for bankruptcy. The study, conducted by the National Bureau of Economic Research simply confirms what bankruptcy lawyers across the country have long been aware of.

Struggling Cincinnati area residents who are buried under a mountain of debt, like consumers anywhere in the nation, often what for the tax refund to come and use that money to find meaningful debt relief under the bankruptcy code.

The 2005 bankruptcy reforms placed different controls on how bankruptcies can proceed. The law requires that bankruptcy fees be reported to the bankruptcy court in the petition for debt relief. Part of the theory underlying the way fees are handled was lawmaker's fears that too many people were filing for bankruptcy who could afford to pay their debts without seeking a bankruptcy discharge.

A professor of finance at Washington University essentially says that the bankruptcy reform provisions enacted to prevent bankruptcy abuse makes it more difficult for financially strapped debtors to seek relief. He recently told USA Today that, "The people who really need bankruptcy are the ones who will be unable to pay for the fees."

The recent NBER study provides consistent information in the trends in the area of bankruptcy law. It confirms that many people who are struggling under excessive debt loads often wait to seek bankruptcy protection until they come up with some form of one-time increase in cash flow, like a company bonus, a tax rebate or a tax refund.

Many consumers find that a tax refund can be nest used to file a bankruptcy petition and begin the process of gaining a fresh start from bankruptcy. Statistics showed that a large number of Americans filed for bankruptcy just before the 2005 reforms went into effect.

The numbers of consumers who have sought bankruptcy protection since the reforms took effect have generally bee fewer. The Washington University professor of finance says that recent bankruptcy statistics may not reflect that fewer people need debt relief. He says, "It just means that financially distressed people are not necessarily getting the help they need."

Source: USA Today, "Tax refunds being used to pay for bankruptcy filings," Christine Dugas, April 13, 2012

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