Payment for back taxes are usually built into a chapter 13 bankruptcy plan. Most taxes are exempt from bankruptcy discharge and in order to pay the claims back, receive priority payment status in any bankruptcy plan. The arrears occurring prior to the bankruptcy filing date are built into the plan. Where does a tax refund go when a debtor is in a chapter 13 bankruptcy plan? Continue reading
At a time when Americans who chase the American Dream should be spending their tax refunds on lavish lifestyles and dream vacations, many are spending their tax refunds on trying to get out of hock. According to the National Bureau of Economic Research (NBER), more than 200,000 Americans will use their tax refunds to pay for bankruptcy filings and legal fees in 2012.
Bankruptcy filings were down 12 percent in the first quarter of 2012 compared to the first quarter of 2011, but those statistics have not changed what NBER has known for a long time: “At the first part of the year, when Americans receive their tax refunds, there almost always is a spike in personal bankruptcy filings.”
Since the passing of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, bankruptcy costs have continued to soar because lawyers must now verify more today than they did before the law change. Time is money to all professions and especially to the legal profession. The U.S. Government Accountability Office says that legal cost for bankruptcy administrative and legal fees has grown from $921 in 2005 to $1,477 in 2007.
In many cases, the only way a bankrupt debtor can afford to pay the legal costs to file bankruptcy is their tax refund. The average tax refund last year was $2,913, enough to pay to file for bankruptcy.
The 2005 laws were supposedly passed to slow down the abuse of filing for bankruptcy protection. Instead, the Great Recession brought record numbers of bankruptcy filers to the bankruptcy courts. Now that the recession has officially ended, bankruptcy filings are beginning to slow down again, but many wonder if it is because now so many can not afford to file.
Many have questioned whether raising the costs of bankruptcy filings is the way to slow down abuse. The argument goes that desperate people often might use desperate means to accomplish their short term goals. Another argument offers that the ones who really need bankruptcy protection are the ones who will be unable to pay the fees. The various arguments has caused one law professor at the University of Illinois to opine, “It just means that financially distressed people are not necessarily getting the help they need.”
It is a sad day for many Americans when the search for the American Dream has become a simple search for the almighty dollar, in of all places, a tax refund. This, just to get out of hock.
Filing for bankruptcy protection should be about a chance to start over for those who have fallen on hard times in their pursuit of happiness. Instead, for some, it might quickly be becoming an end to the means. Some of these Americans not able to file for protection may not be experiencing a physical debtors prison, but will their ultimate fate be the prison of the streets?
With everything financially costing us today from birth to death, and from having to not having, where does it all end?
- Closing Asset Cases in Bankruptcy (betterbankruptcy.com)