Should you use your tax refund to pay off debt? | Milwaukee, WI

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Home 9 Bankruptcy 9 Should you use your tax refund to pay off debt?

Should you use your tax refund to pay off debt?

by | Jan 27, 2021 | Bankruptcy

If you struggle with high-interest debt you cannot pay, you may have already set aside your tax refund to catch up on bills. On the other hand, you might wonder whether saving the money might prevent you from taking on more debt down the road.

Consider these factors when deciding whether to pay off debt with an upcoming tax refund.

Current savings

Do you have an emergency fund? Many financial experts recommend having at least $1,000 in savings. Think about setting aside this rainy-day amount before putting your tax refund toward debt payments.

Amount of debt

If you cannot keep up with your credit card minimum payments, your tax return might allow you to wipe out the balance. If your debt far exceeds your expected refund, however, you may still be unable to make the necessary payments after paying a portion of the balance with your tax refund.

Do the math to see whether debt becomes manageable if you repay a partial amount. If you cannot qualify for a favorable mortgage or loan with your credit utilization ratio, paying off some of your debt with your tax return might also make sense.

With high-interest debt, you can feel like you never make headway even as you make regular payments. If you think your tax refund represents just a drop in the bucket compared to your debt, you may want to think about filing for bankruptcy. In Wisconsin, you can retain many personal items in a bankruptcy filing including equity in your home and vehicle.