The new monthly child tax credit payments will commence on July 15, 2021. Now up to 88% of families can receive a monthly support payment from the government. They will no longer need to wait until tax time to receive such payments. How will this affect bankruptcy? It is very likely that monthly child tax credits may cause an increase in bankruptcy filings. These monthly payments may also make some changes as to what assets may be available to creditors.
Historically, many lower-to-middle-income families rely on their tax refunds to catch up on bills each year. Tax refunds are used to settle debts, buy automobiles, and purchase much-need items missing in the household. Today, tax refunds are a balancing and reckoning force that comes once a year to set financial things right.
The tax child credit being transferred to monthly payments will create a two-fold economic shift that may lead to a higher degree of bankruptcy filings. First, the larger tax refund that most people rely on annually will not be there – at least in its entirety. There will be fewer funds to pay off debts and buy essential neglected items.
The second danger is much greater. Many households live paycheck to paycheck. When new income comes into the house, expenses seem to immediately increase. Among the most common of these expenses are debt obligations, especially associated with automobile loans, more expensive housing, and discretionary credit spending. With new monthly income, there comes new credit opportunities. Both of these factors will likely eventually cause an increase in overall bankruptcy filings.
Because the cash (or intangible) exemption is low in most states, bankruptcy trustees frequently pursue tax refunds as an asset in bankruptcy cases. In Indiana for instance, the child tax credit is not exempt from creditors in bankruptcy. It is possible that lower child tax credits could reduce the amount of tax refund assets that may be available to creditors in Chapter 7 bankruptcy. This is especially true where large payments of exempt Earned Income Credit offset what is available to creditors. In states such as Indiana, this may reduce funds available to creditors in bankruptcy.
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