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The Surprising Way Many Americans Spend Their Tax Refunds

money, payment Credit: Hand money image via Shutterstock

Forget splurging on vacations or new iPads, a surprising number of Americans will spend their tax refunds on something you might not expect — filing for bankruptcy.

That's the finding of a researcher who studied the relationship between the increased cost of filing for bankruptcy and the number of people who do so after receiving tax refunds.

The researcher, Jialan Wang, a finance professor at Washington University in St. Louis, looked at the relationship between tax rebates and bankruptcy filings in 2001 and 2008, two years when many Americans received rebate checks. Total bankruptcies increased by about 2 percent after the 2001 rebates and by 7 percent after the 2008 rebates.

[Crazy (And Illegal) Tax Deductions to Avoid]

This uptick, Wang said, follows the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, which raised legal and administrative fees associated with filing for bankruptcy from an average of $921 to $1,477. It also mandated that filers receive credit counseling, which has to be paid for by the filer. As a result, Wang said, the number of bankruptcy filings quickly fell by more than half after the legislation, although they have since rebounded to near pre-2005 levels.

"The 2005 law assumed that rising bankruptcy levels were caused by abuse of the system by wealthy debtors, but the recession has caught many households in a rising tide of unemployment and foreclosure through no fault of their own,” Wang said. “According to our research, bankruptcy fees prevent the most financially distressed households from being able to file, and tens of thousands of households will have trouble saving up for bankruptcy in 2012."

More than 1.3 percent of all U.S. households filed for bankruptcy in 2011, Wang said.

Jeanette Mulvey

Jeanette has been writing about business for more than 20 years. She has written about every kind of entrepreneur from hardware store owners to fashion designers. Previously she was a manager of internal communications for Home Depot. Her journalism career began in local newspapers. She has a degree in American Studies from Rutgers University. Follow her on Twitter @jeanettebnd.

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