Los Angeles Bankruptcy Spikes After Tax Refunds

March 31, 2012

A new study conducted by economists at three universities shows that bankruptcy filings in Los Angeles and across the country spike after tax season. pigbank.jpg

Los Angeles bankruptcy attorneys understand the new statistics reveal that bankruptcies in the U.S. went up about 7 percent in 2008 after Americans got their tax refunds in the mail.

Researchers at the University of Chicago, Columbia University and Washington University in St. Louis found that the reason for this phenomenon is that it does cost money upfront to file for a Los Angeles bankruptcy. On average, it cost about $1,500. That figure actually represents an increase of about 5 percent from 2001.

That's because the Bankruptcy Abuse Prevention and Consumer Protection Act, passed in 2004, increased the cost for administrative and legal fees needed to file for bankruptcy. The law also required individuals to cover the cost of their own credit counseling before they could file as well. The idea was to curb abuses of the bankruptcy system, but it had latent effect of making it somewhat more difficult for average Americans to file. It also came at a really bad time - just prior to the burst of the housing bubble.

There is good news though: Filing for bankruptcy can actually save you a great deal of money - and headaches - in the long term.

For example, a Chapter 7 bankruptcy will allow you to liquidate any major assets that aren't covered by the law in order to pay your credits. However, many of your most important assets are going to be protected. This often includes your home and cars.

And in a Chapter 13 bankruptcy, as soon as you file, you will be spared the barrage of calls from aggressive creditors, who call you both at work and at home at all hours. It can also mean that you will be allowed to drop your second or third mortgage, particularly if your home's value has dropped below what you own on it, as has been the case with so many Americans amid the housing crisis. It will also allow you to pay off your debt for pennies on the dollar. After the bankruptcy period is over, you are left with ZERO debt.

So the $1,500 you pay up front actually pays off fairly quickly.

For many people, though, it's getting that amount together. That's where the refund comes in. The number of overall bankruptcies actually went down quite a bit from 2005 to 2006 - about 71 percent, from 2 million to about 600,000. That's because many people couldn't get the funds together to pay some of those costs upfront. Now, though, those figures are rising again, and 1 million filed for bankruptcy in 2008.

If this is a concern for you, our Los Angeles bankruptcy attorneys can help. We offer a free consultation to help you determine what your options are before you file anything.

If you are considering filing for bankruptcy, contact Los Angeles bankruptcy attorneys at the Nader Law Firm to schedule your free consultation. Call 1-800-568-0707.

Additional Resources:
Tax refunds = more bankruptcy filings: study, By Tiffany Hsu, The Los Angeles Times

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Bryan v. Stanton Compares Annuities and Life Insurance Policies for Use as Exemptions in Los Angeles Bankruptcy Cases, March 26, 2012, Los Angeles Bankruptcy Lawyer Blog