Bankruptcy and taxes can go together in a couple of different ways.
For people in search of debt relief, bankruptcy can potentially allow the discharge of income tax debt. This could include stopping an IRS tax levy.
There's another way as well. New research shows that many Americans who are short of cash are using their tax rebates to pay for a bankruptcy filing.
Jialan Wang, a business finance professor at Washington University in St. Louis, collaborated with colleagues at two other schools on the research. The focus was on the connection between tax rebates and bankruptcy filings. The study examined two different years: 2001 and 2008.
Those years were chosen because they were years in which many people received rebates.
In 2001, bankruptcy filings increased by two percent after rebate checks were issued. In 2008, the increase was even greater: seven percent.
As Prof. Wang pointed out in her published paper, the 2005 overhaul of federal bankruptcy law significantly increased the cost of filing for bankruptcy. Legal and administrative rose substantially. The amended law also imposed a new requirement of credit counseling, which the bankruptcy filer had to pay for.
The number of bankruptcy filings in the first few years after the new law took effect dropped. But then, especially during after the Great Recession, they rose again. The number of filings every year now is approaching levels of before 2005.
Numbers are likely to remain high, Prof. Wang believes, as long as so many Americans are dealing with large amounts of personal debt.
Source: "What thousands of Americans are doing with their tax rebates: filing for bankruptcy," Neil Schoenherr, Washington University in St. Louis, 3-27-12
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