Some Americans spend their tax refunds on high-tech gadgets and long-awaited vacations. Others use the cash to file for bankruptcy.
More than 200,000 money-strapped households will use their tax refunds this year to pay for bankruptcy filing and legal fees, says a new study by the National Bureau of Economic Research.
The NBER research confirms what bankruptcy lawyers have long known: At the first part of the year, when Americans receive their tax refunds, there almost always is a spike in personal bankruptcy filings.
But that has been especially true since the cost of bankruptcy soared after U.S. bankruptcy laws changed in 2005. And many more families have been forced to delay filing until they can afford to pay the fees, the NBER study says.
“If people are expecting a big refund, they go as fast as they can to a tax preparer,” says Henry Sommer, a bankruptcy lawyer in Philadelphia. “They need the money so they can afford to file for bankruptcy.”
The average cost of legal and administrative fees jumped from $921 in 2005, before the reform in the law, to $1,477 just two years later, the U.S. Government Accountability Office says.
The largest slice of the overall cost is attorney fees, because lawyers now must verify much more information in a case than they did before 2005, says Robert Lawless, law professor at the University of Illinois. “Like any other professional services, the longer something takes, the more it costs,” he says.