3 Ways to Use Your Tax Refund to Solve Your Debt Problem

It is the time of year when people are gearing up to get their taxes filed. Many will get a nice tax refund check and while what I am about to propose may be some of the least fun things you can do with a tax refund check, you might be surprised that you can wipe out a lot of debt with even a modest tax refund check.

Here are 3 ways you can use your tax refund check to solve your debt problem:

#1 – Debt Settlement

Even if you owe a large amount of money you may be able to settle your accounts for pennies on the dollar. This is especially true if your debts are old and the original creditor has charged-off the debt. Often when debts are charged-off by the original creditor the debts will then be packaged and sold with a bunch of other accounts to companies known as “junk debt buyers“.

Junk debt buyers pay very little for the accounts they purchase and will often agree to settle the debts for relatively low amounts. If your account has already been sold to a junk debt buyer you may start receiving debt settlement letters from the junk debt buyer around tax season because they know you will have a little extra cash in your pocket due to your tax refund.

Accounts are usually settled in 15%-70% range – depending on a lot of factors.  If you plan on using your tax refund to settle your debts my recommendation is you first pull a copy of your credit report and make sure you know exactly how many accounts you have and what the total amount owed is.  Then, take the amount you expect in the form of a tax refund and figure out your “settlement budget” – what you can afford to pay each creditor.

You may decide you want to offer each creditor 10% of the balance owed.  The next step is to reach out to the creditor, either on the phone or in writing, and let them know what you can do to settle the account. You may end up paying more on one account and less on another, but keep in mind your total debt settlement plan before you agree to settle any single account. The goal is to deal globally with your debt problem, not pay your entire tax refund to one creditor.

#2 – Bankruptcy 

March through April of each year are some of the biggest months for bankruptcy filings. The reason why is because it is totally permissible to use your tax refund to pay for the legal fees and court costs associated with a bankruptcy filing.  For instance, I charge $1,950 for a chapter 7 bankruptcy with about another $400 going to court filing fees and credit counseling costs.

When it comes to chapter 7 bankruptcy the legal fees and courts costs must be paid in full before your case can be filed with the court.

If you are dealing with a lot debt and you have met with a bankruptcy lawyer and have made the decision to go forward, your tax refund can be used to pay the legal fees and completely eliminate most debts.  While bankruptcy has its drawbacks, it is a pretty good deal to get rid of all of your debt for about $2,000.

#3 – Investing in a Financial Management Course

Debt settlement and bankruptcy are not for every situation. If your debt problem is not severe and particularly if you are not facing a dire situation like a wage garnishment, foreclosure, or bank levy, then it can make a lot of sense to put together a game plan to get everything paid off.

I am a big fan of Dave Ramsey and his Financial Peace course. In fact, as part of my bankruptcy services I offer Dave Ramsey’s post-discharge bankruptcy course. I think Dave’s approach to finances and presentations are excellent and have used them myself.

You could use your tax refund to invest in a program like Dave Ramsey’s that can help you get out of debt for good.

While I generally think you should adjust your tax withholdings so that you don’t get a large refund – because after all what is a large refund other than an interest free loan you have been giving the government.  But for most people this is the one time a year when they will have a large sum of money on hand, and if used wisely it could have lasting consequences and help you get out of debt once and for all.