Tax Refunds = Bankruptcy Filings

In reading the news today, I noticed the following article: http://usat.ly/HBFdf8.  The article discusses how bankruptcy filings increase because Debtors use these refunds to pay their attorney so that they can file bankruptcy.  There are several reasons for this:

(1) Tax refunds can be part of the bankruptcy estate, so the Debtor could lose their refund if they don’t receive and spend it prior to filing.  It is not in the clients best interests to throw away that money!

(2) Attorney’s fees for filing bankruptcy can be substantial.  A $1,500 legal fee may not be much money in the legal world, but to a client who’s struggling financially, it can be a lot of money.  It can be, in some cases, more money than a client makes in a month.  If the client’s only means or even the best means of paying those fees is to use their tax refunds, why wouldn’t they do so?

(3) Many clients wish to spend their refund prior to filing on frivolous expenditures.  Hot tubs, furniture, shopping sprees, gambling…  There’s nothing worse than having to explain to your client why they don’t want Harrah’s Casino to show up on their bank statements prior to filing.  Although I don’t feel that this factor alone will raise to the level of kicking a client out of a Ch. 7 case, combined with other factors, it could certainly raise to that level and prevent the Debtor from obtaining a Ch. 7 discharge for bad faith.  Spending refunds on attorney’s fees are an easy way to steer the Debtor in the right direction to avoid these potential problems.  

(4) Any creditor who is paid more than $600 in the 90 days prior to filing is deemed to have been paid a preference payment.  If a Debtor wants to pay a credit card off so they can keep it, or pay a medical bill because they like the doctor, they can’t do that.  But attorney’s fees are not seen as preferences.  If the attorney’s fees will have to be paid anyway, why wouldn’t that be an appropriate use of those funds?

(5) Many Debtors fall behind on secured debts prior to filing and can use their tax refunds to get current.  Secured debts are typically not seen as preference payments.  If a Debtor can get current on payments, keep their property, and avoid the time, expense, and hassle of filing Ch.13, it’s highly advisable.  If the Debtor had to file Ch.13 to get current, it will cost at least twice as much in attorney’s fees, plus they’ll be in bankruptcy for 3-5 years as opposed to 90 days and done in a Ch. 7.

(6) I’m not sure what other attorneys do, but I offer discounted fees to my clients if they pay their bill in full up front pror to filing.  A 10% discount doesn’t sound like much to you or me, but to my clients, it can be substantial.  On a basic Ch. 7 case with a $1,500 fee, a client could save $150 if they use their refund to pay the balance of their fees before filing.  That could buy a family a week’s worth of groceries!  

These points on using tax refunds to pay attorney’s fees are not simply for the blood-sucking lawyer to get paid, but they are truly points that help put the Debtor client in the best possible financial situation after they file bankruptcy.  

For more information on bankruptcy, please visit www.abankruptcyfirm.com or contact Betsy Lynch, a local Lee’s Summit bankruptcy lawyer, at 816.434.6616.

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