While saving up to declare bankruptcy sounds odd, that’s exactly what many people have had to do. Ever since the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act was passed. Many families wait for their tax refund to file for bankruptcy. This trend has been increasing as costs related to the filing have gone up. Researchers have looked at the relationship between tax refunds and bankruptcy filings in 2001 and 2008; two years when a high percentage of Americans received refund checks. Total bankruptcies increased by about 2% after the 2001 refunds, and by 7% after the 2008 refunds.
This increase follows the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act legislation. It raised legal and administrative fees from an average of $921 to $1,477. And, it mandated credit counseling paid for by the filer. As a result, the number of bankruptcy filings quickly fell by more than half. Although, they have since returned to near pre-2005 levels.
The 2005 legislation has been at the center of debate since it passed. The question is whether the more expensive rules help screen out spurious bankruptcies. Or, if they just prevent legitimate bankruptcies from being filed. Bankruptcy can be a Catch-22 when a substantial amount of money is needed to get out of a situation defined by having little or no money. If it weren’t for these refund checks, many families would have to postpone filing for bankruptcy for months. That is until they save enough money.
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