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Study Shows Rise in Bankruptcy Filings After Tax Rebates Arrived

A recent study of consumer bankruptcy looked at the effect of legal fees on the rate of bankruptcy filings, and found that the rare tax rebates issued in 2001 and 2008 caused significant increases in Chapter 7 bankruptcy filings.

The study, authored by economists at Columbia University, the University of Chicago and Washington University, set out to examine the effect of increased bankruptcy costs that accompanied the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). According to the study, administrative bankruptcy fees increased from $921 to $1,477 after BAPCPA took effect, and the act also required applicants to pay for mandatory credit counseling.

The fact that individuals and couples may be concerned about being able to pay for bankruptcy is not surprising, given that they may already be overwhelmed by debt from credit cards, medical expenses, back taxes or student loans. To determine the effect of "liquidity restraints," the authors looked at the two income tax rebates authorized by the federal government over the past ten years, which provided between $300 and $1,200 to American households.

While this cash infusion led to only a two-percent short-term increase in bankruptcy filings in 2001, that figure jumped to seven percent after the 2008 rebate. Notably, the authors found that the increases were not attributable to Chapter 13 bankruptcy increases, but were instead a result of more liquidation bankruptcy petitions.

The study found that the increases meant that applicants used the tax rebates to file more quickly instead of postponing their pursuit of financial relief. An experienced bankruptcy lawyer can explain the full implications of the timing of a consumer bankruptcy application, and the likely timeline for obtaining meaningful debt relief.

Source: The Huffington Post, "Bankruptcy Filings Delayed Until Tax Refund Arrives," Bonnie Kavoussi, 3/23/12.

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