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Chapter 7 bankruptcy filings go up around tax day

Contrary to what many Tennessee residents may believe, many, if not most, people who file for bankruptcy are not those who have no job or income. In a good number of cases, bankruptcy filers may now have an income, but fell behind on bills due to an illness or prior unexpected period of unemployment or other unforeseen circumstances. This means that many people who are contemplating filing for bankruptcy also file federal income tax returns, and may even get income tax refunds.

In fact, over a four-year period from 2013 to 2016, the number of filings in March and April, that is, around the time many people file their taxes, tended to rise. According to a review of Chapter 7 filings, which is the 'liquidation' type most often used by individual filers, the month of March saw a spike of between 26 and 34 percent in such filings over that time period. In the Aprils of the four-year time frame, filings of Chapter 7s were up between 15 and 15 percent.

One reason for this may be that people often use their tax refunds to cover bulk expenses that they otherwise wouldn't have the cash for. Due to the modern e-filing system for federal taxes, many people can file and get an electronic deposit of tax refunds within a few weeks, if not faster. As filing a Chapter 7 bankruptcy will cost some money due to filing fees and other costs, those whose tax refunds will not help them catch up with their debts may be more likely to use that lump sum to help pay to file for bankruptcy.

Medical and credit card debt can get out of hand for anyone in Tennessee. While a Chapter 7 bankruptcy may be a big decision, it can also mean the difference between continuing to struggle with paying off debts, and foregoing other important financial activities such as saving for retirement, and starting again with a clean slate from which a debtor can begin to rebuild financial and credit health.

Source: USA Today, "When a tax refund means bankruptcy," Sean Pyle, April 3, 2017

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Mark T. Young & Associates
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Hixson, TN 37343

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