Jackson Hewitt Tax Service Inc. filed for Chapter 11 bankruptcy, reportedly holding a prepackaged bankruptcy deal with secured lenders that will allow the tax-preparation company to exit bankruptcy protection within 60 days.
The filing comes after U.S. regulators moved to curb the loans that tax preparers arrange for customers expecting refunds. Jackson Hewitt listed as much as $500 million in assets and debts in Chapter 11 documents filed in U.S. Bankruptcy Court in Wilmington, Delaware. Chapter 11 of the bankruptcy code is typically used by companies trying to reorganize and continue operating.
Tax refund anticipation loans came under fire last year after regulators ruled them to be mostly predatory and moved to restrict the issuing of the loans. A matter of fact, H&R Block stopped issuing tax refund loans this year and JPMorgan exited the tax refund loan business completely in April 2010. It was expected that some tax preparation companies which depended heavily on the loans would either close or suffer enough financial damage that they would seek the protection of bankruptcy to save their businesses. The Jackson Hewitt Chapter 11 bankruptcy filing may just be a prelude of things to come as more tax preparers feel the impact of losing this important source of revenue.
Even for those tax preparation companies who have continued to offer tax refund anticipation loans, the amount of resources required to meet the regulator requirements could turn the once profitable service into a serious money loser. Next year we could see more tax preparation companies restructure their debts in bankruptcy as they try to tweak their business models so they can prosper without the revenue from the tax refund anticipation loan business.