If You File for Bankruptcy Can You Pay Off Debt with Your Tax Refund

income tax refund from the irs sitting on desk


By:Mike Cibik


If You File for Bankruptcy Can You Pay Off Debt with Your Tax Refund


A sudden income or monetary gain from any source is always a matter of relief for the receiver. However, if a person has been going through considerable financial crisis leading him/her to be in subsequent debt, this gain can seem all the more godsend.


A tax refund is one such financial bonus that comes to you without you putting in a lot of effort or planning. Now, if this refund is of a sizeable amount, you can actually utilize it to pay off certain debts. A tax refund can be used to wipe out credit card debt, educational loans and the likes provided that you channelize the money in the right direction.


But before going into the details of the best ways of using your refund amount, let’s look into how tax refund is a financial gain for you.


How Can You Financially Benefit from the Tax Refund?


A tax refund is like a blessing in disguise for anyone who is in debt, especially after recovering from a bankruptcy case. The extra dollars give you a one-of-a-kind opportunity to manage your debts in the following situations:


If you have a compound interest loan, it is definitely a financial burden on you because the interest rates for these loans accumulate much faster. You can use the refund to pay off the interest portion as much as possible.


You might be paying the loan installments regularly and yet you have a long way to go for full repayment as you cannot reduce the principal amount. In such a situation, the tax refund is your chance to repay a certain part of the principal amount so that the interest is lower next month.


If you are unable to pay your credit card debt, leading to a not so impressive credit history, you can use this refund to pay off and let it get reflected on your credit score.


If you are on the last lap of loan repayment, it is the refund again with which you can steer clear of all debts whatsoever.


How to Use the Tax Refund in the Best-Possible Way?


Being in immense financial debt that is a burden to pay off is the main reason why people file for bankruptcy. Just as you have to seek the assistance of a bankruptcy lawyer in coming out of a difficult situation, you have to learn the ways of utilizing the tax refund to your maximum benefits too.


The question arises as to which debt you should pay off first or whether you should repay the loans with higher interest rates or those with relatively smaller ones? Now, the way you strategize your financial activities largely depends on your situation, especially the terms and amount of your specific debt.


For starters, it is essential for you to use the tax refund amount in paying off debts, in which you are lagging behind. Addressing this crisis immediately ensures that you prevent the arrears, additional fees etc. from adding up to your main balance.


All this can ruin your financial credibility in the long run by affecting your credit score.


If you are unable to tackle a large amount of debt but can pay the minimum about; you should use your refund to pay it off.  When a part of the largest balance gets paid off, the future monthly payment amounts automatically get reduced.


That being said, it is not always possible for all your debt to have similar rates of interest. When it comes to deciding on whether to pay the highest or the lowest interest rates, you have to make a calculation.


The small debts with higher interest rates are more damaging than the higher debts with lower interest rates. That is why; it is usually advisable that you use your tax refund in targeting the accounts with higher interest rates, even though they might not have the highest current balance.


Paying off small amounts can also give a sense of satisfaction and accomplishment at having cleared a part of your debt. If you are unable to decide and choose the right course of action, you can always consult a bankruptcy attorney.


If you are contemplating filing for bankruptcy, you may be aware of the pros and cons of filing. Talk to us at Cibik and Cataldo, you can reach us at 215-735-1060  and talk about why people file for bankruptcy and if it’s advantageous in your case.


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