Tax refunds = more bankruptcy filings: study

In the thick of tax season, a new study suggests that when Americans get their refunds, they file for more bankruptcies – because they can finally afford all the related fees.

Researchers from the University of Chicago, Columbia University and Washington University in St. Louis found that, in 2008, the number of people who went broke went through a “significant, short-run” 7% increase after the IRS sent out refunds.

Many used the extra money to pay the average $1,477 in fees needed to declare bankruptcy; without the refunds, 3.8% of filers could not have afforded to go through the process, according to the report.

In 2005, the government implemented regulations that attempted to curb abuses of the bankruptcy filing system, which 1.3% of American households were using each year by 2001. The new rules boosted the associated legal and administrative fees by 60% from an average of $921 and required filers to pay for their own mandatory credit counseling.

But the University of Chicago study suggests that the new fees actually kept struggling households – the ones that would benefit the most from bankruptcy – from filing. With the tax rebates in hand, they were likely able to “file months earlier than they otherwise would have been able to file,” researchers wrote.

In 2005, more than 2 million Americans declared bankruptcy, the Huffington Post writes. But by the next year, the numbers had tumbled 71% to 598,000, according to the American Bankruptcy Institute.

RELATED:

An escalating war over taxes

Orange County man convicted of tax fraud

IRS cracks down on fraud as tax return season begins