It's tax season. Interestingly, there seems to be a correlation between tax season and bankruptcies. According to the Los Angeles Times, bankruptcies rise after tax refunds are issued.
A study conducted by several universities found that for the 2008 tax year, bankruptcy filings increased 7% after the IRS issued tax refunds.
So in a way, are we seeing a "bankruptcy season" following tax season? Quite possibly. But why is that?
Bankruptcies cost quite a bit, even if they have the effect of reducing a person's overall debt. So it makes sense that when debtors have cash on hand, they may try to file for bankruptcy.
The increased filing fees and mandatory credit counseling make bankruptcy all the more difficult and expensive a process. (In fact, according to this study, the increase in costs actually deterred some people from filing for bankruptcy.)
The fees alone to file for Chapter 7 bankruptcy run into the hundreds of dollars. There's not only a filing fee, but also a miscellaneous administrative fee and a trustee surcharge to pay. These fees must normally be paid to the clerk of the court upon filing.
And let's not forget attorney's fees. These can range anywhere from a few hundred dollars to a few thousand, depending on the nature of the bankruptcy.
Another reason that bankruptcies might arise after a tax refund is because many people can use the newly acquired refund check to pay down some of their non-dischargeable debt. If those funds are still in their bank accounts, they'll likely be used to pay off bankruptcy creditors. Meanwhile, the non-dischargeable debts, such as student loans, will remain.
Bankruptcy is a challenge, but it's also a relief. Talk to a bankruptcy lawyer or have a look at our related resources below to learn about bankruptcy.