February and March are the months when most working Americans will receive their income tax refunds. And while many consumers will have the advantage of being able to save their refund money, or spend it on a minor luxury such as a vacation or television, some will use that money to catch up on bills that have become delinquent. Creditors are aware of the sudden cash availability for many of their borrowers, and will often increase their collection activity in order to claim a portion of the refund. As a result, it is important that the consumer prioritize their debt payment in a manner that will allow them to maximize the financial benefits of their refund.
The first thing that a consumer should do is catch up on any secured debts that are delinquent, such as house note or car loan. Because secured lenders have the right to repossess their collateral, curing any delinquency on these debts will prevent the loss of the collateral. If possible, it may be wise to pay a month ahead on these debts to allow yourself additional flexibility in the future, especially if your income is prone to fluctuate over the course of the year. If you rent rather than own, then catching up your rent should be a priority, with the same recommendation that it be paid in advance if possible.
Secondly, a consumer should catch up any utilities as they can be cancelled much sooner than other debts could be collected. The reason that utilities are listed after the secured debts is because losing your house would negate the need to have any utilities in the first place. Only after these other debts have been addressed should the consumer tackle any other remaining debts, such as medical bills, credit cards or personal loans. If you are paying off a debt such as these in full, make sure you confirm the balance before mailing your check.
If you find that your refund has been exhausted before you are able to address the remaining debt, then you should probably take a hard look at your finances. If you do not expect any significant change in income or expenses, then it may be a good idea to meet with a bankruptcy attorney. This is especially true if you are facing a lawsuit or wage garnishment. Too often we meet with individuals who have exhausted thousands of dollars in refund money on various debts, only to resume the next billing cycle without sufficient funds to maintain those debts. By prioritizing your debt repayment, you can better protect the assets that you need – such as your home or means of transportation – even if a bankruptcy will be necessary later on.