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The Pitfalls of Refund Anticipation Loans

Tax refund season is upon us, and most of my bankruptcy clients are anxious to receive their refunds. In fact, some are so anxious that they take out refund anticipation loans. These loans are offered by some tax preparation services as a way to get your refund money to you faster. Unfortunately, quicker is not always better, and most consumer advocacy groups agree that these loans are not a good deal for the consumer.

A refund anticipation loan is essentially a cash advance loan with a high interest rate and high fees. These costs are in addition to whatever you must pay the tax service to prepare and file the returns on your behalf. These loans are actually very similar to payday loans, which have excessive fees and high interest rates, and are notoriously bad deals for the consumer.

When you take out a refund anticipation loan, you are effectively borrowing against your tax refund. You get your money now, and the tax preparer gets your refund when it arrives. But what happens if you do not get as much back as you had anticipated? There is always the possibility that a mistake was made on your tax return, but that will not eliminate your liability on the refund anticipation loan. If that happens, you are now in debt to the tax preparer, which will result in additional interest and fees being paid to the lender.

Even with these risks, most taxpayers are still willing to consider refund anticipation loans because, in our bad economy, everyone has bills that need to be paid now. Fortunately, the federal government has introduced a new program aimed at offering an alternative to refund anticipation loans for individuals without access to bank accounts. The United States Treasury will be sending information to 600,000 low income individuals as a means to test out the program. The card features include free point-of-sale transactions, free online bill pay, free ATM cash withdrawals at thousands of ATMs nationwide.

Since this is a pilot program, the Treasury will be randomly offering different variations of the card in order to evaluate product features. The results of the pilot will help the Treasure determine the benefits and feasibility of this program for tax refund distribution. This concept is not new. Several government programs have already implemented a debit card program, such as the Social Security Administration. In addition, many employers are offering debit cards as a payroll option or those who are not able to do direct deposit. Ultimately, the goal of this program is to offer a lower cost alternative to individuals who might be interested in refund anticipation loans.

It is also important to note that debtors in St. Louis bankruptcy cases should talk with their St. Louis bankruptcy attorney prior to taking out a refund anticipation loan. Oftentimes, St. Louis debtors must turn all or part of their tax refund to the bankruptcy Trustee. If you are supposed to be turning over your refund, and you took out a refund anticipation loan, the Trustee is not going to deduct the fees and interest from the amount owed to him, which may leave you scrambling to find the extra money to turnover. It is always a good idea to speak about such things with your St. Louis bankruptcy attorney prior to filing your taxes.

JPA