Evidently, we have a deal on the fiscal cliff — well, sort of.  We have a deal for two months, and then all bets are off.  So, I’m not completely sure that what I have read so far accurately describes the contents of this deal (so double-check my facts before relying on them, please); but even better, anything that does (or doesn’t) change today might in 60 days or so.  I’m sorry, but Congress needs to grow up.

What does this have to do with Bankruptcy and Tax Refunds?  Well, first of all, it appears that the tax exemption for forgiveness of debt income on a principal residence has been extended for a year — or at least until March.  So, if your primary reason for filing for bankruptcy was to avoid tax consequences from a foreclosure or short sale; now, you may not need to.  The emphasis there is on MAY.  Do pay the relatively trivial amount of money to check this with a qualified tax expert — which I am not, and this tax exemption is deceptively complicated.

Now, for the bad news, your pay check will get smaller.  Tax withholding rates are going up 2%.  Most people who file for Bankruptcy have been living pay check to pay check  for many months.  A 2% withholding hit can make all the difference in the world between keeping the heat on and not.  Of course, the problem is that filing for bankruptcy isn’t cheap; and if you are living close to the edge, you probably don’t have the cash laid by for attorneys fees and filing fees.  So, before you spend your 2012 tax refund getting current on bills (like credit cards) and then realizing that you’ve blown your refund and still owe more than you can pay; consider whether you will be better served using that money to pay for a bankruptcy filing.

Every year people call me in late April or May who got back several thousand dollars in March or early April.  They spent that getting current on a bunch of debt and then realize a month later, that their balances aren’t going down and their income isn’t going up.  If your tax refund is enough to get you out of trouble, enough that you won’t need to file, enough that you will then be in a position to take care of yourself and your kids instead of Chase and Discover; then, by all means, use it to pay the bills — but do the math first.  Then, take a look at your retirement accounts and your kids’ college funds.  J.P. Morgan Chase made record profits in the 3rd quarter of 2012.  Did you?

Elaine