As tax time approaches, and you are one of the fortunate ones to receive a significant refund, take the time to consider what you are going to do with it. This is especially important if you are behind on your bills, or may have gotten carried away with your holiday spending. If you have multiple financial obligations, it is critically important that you prioritize them before allocating your refund towards those expenses. Now may not be the time to take a vacation, especially at the risk of falling any farther behind on your bills.
First of all, this is NOT a situation where the squeaky wheel gets the grease. Just because a certain creditor may be more of a nuisance or aggravation does not mean that they should get first shot at your refund money. Most lenders and collection agencies gear their collection tactics around the receipt of refund money, and will ramp up their efforts this time of year. However, the noisiest creditors are usually the ones from whom you have the least to fear.
Concentrate on your secured debts and residence obligations first. Make any past due house or car payments, and maybe even pay a month ahead if your refund will allow. This will give you some breathing room if money gets tight later in the year. Catch up your rent if you are past due, and any utilities which are behind as well. You want to protect yourself from the creditors and service providers who can do the most to you (repossess your car, evict you, or cutoff your utilities) in the shortest amount of time.
If you are up to date on any secured debts, make sure that also pay any related obligations. If your car is financed, you will be required to carry full coverage insurance. Use your refund money to pay for 12 months of coverage, rather than paying monthly or quarterly. Some insurers will offer a discount for this type of payment. Also make sure that you have money set aside for property taxes and car tags. You don’t want to spend your refund and then borrow money a few months later to cover these expenses.
Once these items are covered, then you can concentrate on tackling the other debts such as credit cards, personal loans and medical bills. If are making payment arrangements, make sure that they are in writing, so that there will be no disagreement later on as to whether or not you complied. And don’t allow any unsecured creditors or collection agents to draft money directly from your bank account. You don’t want somebody to deduct more than you agreed on, and possibly take a portion of your refund that was designated for a more important purpose.
These are items that need to be considered before the return is filed. And married couples especially need to have this discussion, so that there are no misunderstandings or hurt feelings when the refund comes in, and little is left for fun after the priority obligations have been addressed. Finally, if you realize that you are still going to be delinquent on many of your bills, even after using your refund, then it may be a good idea to meet with a bankruptcy attorney now. A bankruptcy attorney can counsel you on the best ways to maximize your refund, and on bankruptcy solutions which may assist with your remaining creditors.