I’m getting a tax refund this year, and I also have unpaid debt. Should I use my refund money to help pay down the debt?
By Tracy L. Hirsch
Here are some helpful guidelines when deciding what to do with your federal and KY tax refunds if you owe money to creditors.
If you’re carrying debt into the new year, you may be wondering if you should use your tax refund to help pay it off. In addition, you may be asking yourself how much of your refund you want to use toward that balance.
At first glance, the idea of using your tax refund to pay part of your debt sounds like a wise financial choice. However, upon closer examination, it may not be so black and white.
In certain situations, using your tax refund to pay part of your debt won’t bring the financial relief you’re seeking. So when and where should you allocate the money from your tax refund? It really comes down to how much debt you have.
Here’s are a few wise options if you find yourself in one of the following scenarios.*
1.) Paying off a small amount of debt.
As a disclaimer, when we use the terms ‘small,’ ‘moderate,’ and ‘large’ when referring to amounts of debt, the definitions are subjective. What may be a small amount of debt to one person, could be detrimental to another.
That being said, this is a general guideline that applies to the majority of the population. If you have a small or “manageable” amount of debt, it’s most likely going to be a couple thousand dollars or less.
When prospective clients come into my office to inquire about bankruptcy, and they tell me that they have $1,200 total in debt, I tell them that it’s not worth it to file for bankruptcy. If they’re up-to-date on their tax filings and they’re getting a tax refund, I advise them to use their refund to pay off the debt.
Even if the refund doesn’t cover the entire balance, it’s still best to just pay it off as quickly as possible, as it can most likely be paid off in full in a few months’ time.
For example, it your total amount of debt is $1,200 in credit card debt, and your tax refund is $600, then you have $600 left to pay. Even if you have a 24.99% APR on the card, you would only have to pay $213 a month after applying your tax refund in order to get your debt completely paid off in three months.
In this particular situation, because the debt amount is low, it’s wise to use any federal and/or state tax refund to pay it off.
When you’re expecting a tax refund, it can be wise to use it pay off your debts if it’ll cover most of your total balance. If it’s only a drop in the bucket however, it’s important to look at other options.
2.) Paying off a moderate amount of debt.
While a small amount of debt is manageable, and can often be completely covered by a tax refund, things start to get a little more complicated when there’s a moderate to large amount of debt.
It’s important to assess your income level and all financial obligations when deciding whether or not your tax refund will be helping your situation, or whether it will just end up being a drop in the bucket.
For example, if you have $6,500 in unsecured debts (credit cards, medical bills, etc.), you may be able to pay a good portion of it with your refund, and then pay off the remaining balance over several months’ time.
However, the one caveat is that you need to make certain that your refund will cover enough of your debt balance to allow you to pay the rest without going into more debt or falling behind on your bills.
Even if your refund covers half of your ‘moderate’ amount of debt, it may still be possible to pay off the rest in addition to your monthly bills if you’re budgeting meticulously.
However, if your refund doesn’t cover a good portion of your debt, or if it does, but you still can’t afford to pay the rest without getting behind on your mortgage or car loan, you’re now entering into the ‘large’ amount of debt category.
This is where your tax refund should be used in a different way.
3. Paying off a large amount of debt.
Once you’re in a situation where you can’t pay your rent or mortgage, your car loan, student loan, or any other regular bill, your tax refund most likely won’t save you.
Whether your debt amount is $8,000 or $80,000, you’ll most likely never get out from underneath it if your refund is small and creditors are already coming after you.
If this is your particular situation, it’s actually advisable to NOT put your tax refund toward your debt. While that decision may seem counterintuitive, there’s a good reason for it.
If you put all of your refund money toward an insurmountable amount of debt, you’ll not only lose that money, but you’ll still have creditors coming after you since you’ll barely scratch the financial surface so to speak. It’s basically a lose-lose situation.
While this may sound like a hopeless situation, it’s definitely not. There’s a way to get a fresh start, and that’s by filing for bankruptcy. Whether you file for a Chapter 7 or Chapter 13, a bankruptcy will not only bring you the financial relief you desire, but it can also help protect your assets, such as your home and your car.
In order to get on a path to a better financial future (where creditors aren’t knocking on your door), you can use your tax refund money to cover the filing fees for bankruptcy.
Once you pay your filing fees in full and your Louisville bankruptcy lawyer files your case, you’ll automatically be protected from your creditors.
In a nutshell, using your tax refund to pay for Kentucky bankruptcy filing fees will:
a.) allow you to file for bankruptcy right away,
b.) stop creditors from calling you,
c.) protect your assets, and
d.) help you get on a path to financial freedom by reorganizing your debts.
As you can see, when deciding what to do with your tax refund in regards to your debt, there are many variables to consider. If you’re unsure whether or not filing for bankruptcy is a viable option for you, I’m here to help.
With 20 years of legal experience, I’ll help you determine the best plan for your specific situation. Call or text me directly at (502) 435-2593, or e-mail me at tracy@hirschbklaw.com to set up a completely free consultation.
You deserve peace of mind, and your IRS and KY tax refund might help get you there!
All the best,
Tracy L. Hirsch
*Disclaimer: This blog post is purely informational, and should not be construed as legal advice. If you have debt and want to learn more about your options, meet with an experienced bankruptcy attorney in Louisville, Kentucky to find out what would work best for you.