This time of year people generally get a breath of fresh air when their refund hits their bank account. Whether it is a few dollars, or a few thousand dollars, it is important to remember that this sum of money is subject to the claims of your creditors. Few people have a cash collateral lender who actually holds a security interest in their bank account but many, if not most, people have a banking relationship that involves more than one kind of account. Often these accounts, checking, savings, credit cards, car loans, and home mortgages come with a provision that the Bank can “set off” their obligation to give you your own money against your obligation to pay them what you owe them. In plain English, they may be able to take your tax refund to apply to an open loan account.
Knowing what can be done with your cash is part and parcel to having a cash flow plan to manage your expenses and your debt. Therefore, it is important to know your rights in your checking and savings accounts. Having money direct deposited by the Treasury into the wrong bank account can have significant ramifications in your overall cash management strategy. Finally, using tax refunds to cure defaults where the default was the result of a temporary situation that has been cured can be a very effective credit management move. Using tax refunds to pay against defaults that are going to continue well into the future until something changes in your income or spending patterns can be like trying to fill up a lake with a bucket. Careful consideration about your needs and realistic assessment of your prospects is an important part of tax refund planning.