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Three Bad Ideas For Your Tax Refund

March 5, 2012

This time of year millions of Americans receive healthy income tax refunds. This money is often welcomed relief for families struggling to make ends meet. Unfortunately, the refund is sometimes not enough and bankruptcy relief is needed for a long term debt solution.

If you need your income tax refund to help manage your family finances, but also need a permanent solution from the federal bankruptcy laws, read on for three bad ideas for using your tax refund. These are definitely activities to avoid!

Bad Idea 1: repaying a loan to a friend, business partner, or family member. A person in a financial bind will often turn to someone close for help. The bankruptcy law labels friends and family as "insiders" – people with whom you have a personal or financial relationship. Repaying a debt to an insider creditor can be avoided for up to one year prior to your bankruptcy filing. This means that the bankruptcy trustee can force the turnover of the money and divide it equally among your unsecured creditors.

Bad Idea 2: paying off a car loan. The law allows you to exempt and keep equity in your vehicle during bankruptcy. However, there are limits. By paying off your car loan, you may create a surplus of equity beyond what you can protect. That means that the trustee could force you to sell the car and take the excess equity.

Bad Idea 3: paying a collection agency. Tax season is the collection agent’s Christmas, birthday, and Halloween all rolled into one. The collector harasses and pressures the debtor into paying from their tax refund in exchange for peace of mind. There are several reasons paying a collection agency before bankruptcy is a bad idea.

* First, if you are filing bankruptcy, the collection agency will likely be discharged. You are throwing your money away.

* Second, payments to a creditor that are made while you are insolvent can be avoided by the trustee. That means that the collection agency may not get to keep the money.

* Finally, if you need to stop the collection agency’s harassment, hire a bankruptcy attorney! The Fair Debt Collections Practices Act makes it unlawful for a collection agency to contact you personally (by phone, letter, in person, or by email) once you are represented by an attorney.

The best advice is to speak to an attorney before spending your income tax refund. Your attorney will tell you whether you are able to keep the money, or discuss strategies to spend it wisely.

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