For many bankruptcy attorneys, the first quarter of the year is often a busy time. Getting out of debt is a popular New Year’s Resolution and bankruptcy attorneys often encourage clients to use their refunds to pay their legal fees for a bankruptcy filing. While doing some research for this article, I read a number of blogs discussing different ways to use a tax refund. This one from Forbes Magazine suggesting 7 ways to discuss use a tax refund caught my attention and below are my reactions to each suggestion from the Forbes article.
- Get caught up on old bills. This can make sense under some circumstances if you need to prevent a home foreclosure or a car repossession. If the refund is not enough to get these payments caught up, a Chapter 13 bankruptcy might help you accomplishment this. Helping people get caught up on past due car or house payments are two common reasons to file for Chapter 13 bankruptcy.
- Put it in savings for emergencies. I agree with the suggestion of having 3-6 months of expenses set aside as an emergency fund. If you are considering filing for bankruptcy, you attorney can tell you if this money would be vulnerable in a bankruptcy case.
- Pay down high-interest debt. This can make sense if you are not eligible for bankruptcy for some reason. For people in need of bankruptcy, paying down debt is usually a waste of resources.
- Contribute to a Roth IRA. This would be protected in a bankruptcy filing and give you a tax deduction, but having an emergency fund would be a higher priority.
- Purchase U.S. Savings Bonds. I am personally not a big fan of savings bonds. The interest rates are very low and this is how the U.S. government finances the national debt.
- Contribute to an education savings account. I recently wrote about tips on saving for college and a college savings plans can help you avoid the “sticker shock” of college down the road, but only if you have paid down your other debts first.
- Go on vacation. I am not a big fan of this suggestion unless you have an emergency fund, a college savings fund and have your retirement plans on track. If you have debt problems, going on vacation isn’t the best use of the money either.
In reality, you shouldn’t even have a tax refund. It is an interest-free loan to the government. Adjust your withholding and force yourself to put the money in savings so you can make your money start working for you.
If you are reading this and are wondering how you can do any of theses things with your tax refund because you have to many bills, now might be the time to call a bankruptcy attorney to make this a year of moving forward. If you live in Southern California and would like a consultation, please call me at (619) 448-2129.
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