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Is it a wise decision to pay off debt with a tax refund?

by | May 10, 2021 | Consumer Credit, Personal Bankruptcy |

Many struggling with high-interest loans like credit cards are contemplating using their tax refund to pay down that debt. Others may want to use it to pay current expenses and bills to avoid paying more debt down the road. The good news is that there is a refund, so let’s weigh the choices.

Increasing savings

Those struggling and live paycheck may not have an emergency fund. Many financial experts recommend keeping at least $1,000 in savings. This rainy-day savings account can be an emergency that can help out if someone is in a jam.

The amount of debt

If the taxpayer has trouble paying minimums, the refund may enable the payee to wipe out their balance. However, the debt amount often far exceeds the expected refund, so the refund may help pay down the debt. It is a good idea if the refund makes the debt manageable. Paying down the debt balance can also help with the credit utilization ratio, so paying down the amount could enable the individual or family to get a more favorable loan or mortgage.

Is the refund a drop in the bucket?

High-interest debt can leave many feeling that they have dug themselves a hole that they will never be able to climb out of. If the tax refund is likely to make little difference in the overall finances, it may be time to think about filing Chapter 7 or Chapter 13 bankruptcy. The former is akin to liquidation, while the latter is a restructuring of the debt while retaining more assets. The amount of debt and assets generally dictates which approach to use.