Too Broke to File Bankruptcy? Part 2

Find the cash necessary to make this investment in your future.

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It's ironic in a way, but bankruptcy can seem like a very expensive undertaking. Are you wondering how you can actually afford to file bankruptcy? It’s a conundrum we bankruptcy lawyers hear all the time. “How can I pay for a bankruptcy attorney if I’m so broke I need to file bankruptcy?” But if you take a moment to think about it, filing a bankruptcy case will save you thousands of dollars. It's an investment in your future and one that will bring you an almost immediate return. 

In another article, I talked about how much it costs to file bankruptcy. In this article, I discuss ways to either come up with the money or find help so that you don’t have to.

Take Advantage of Free Consultations

The first thing to remember is that many, if not most, bankruptcy attorneys provide a free consultation. A qualified bankruptcy lawyer can take a look at your personal circumstances, help you decide whether bankruptcy is a good fit for you, which type of bankruptcy to file, the timing for the case, and how to pay for it. A good place to look for a qualified lawyer is the National Association of Consumer Bankruptcy Attorneys

Once you're sitting down with an attorney, you can discuss ways to pay for the case. Your bankruptcy attorney has a lot of experience with this.

Use Your Tax Refund

When tax refunds arrive in the spring, many bankruptcy lawyers see an uptick in the number of folks seeking information about bankruptcy. Treating the federal government as a savings bank is not usually the best way to save your money, but in this case, that nest egg could help you reap dividends by allowing you to rid yourself of burdensome debt.

Stop Paying Your Credit Cards

I’ve heard this called the “let your creditors pay for your bankruptcy” approach. Once you’ve decided to file bankruptcy, if you hold onto the money you would use to pay your unsecured creditors (those without collateral on the debt), in a few months you'll have enough to get on with the bankruptcy case. 

Get the Money from Family or Friends

I understand that it may be hard for you to ask for help. You might feel uncomfortable telling your loved ones why you need the money. Nevertheless, many of my clients found that when they asked for help, they had more resources than they ever thought in people who just want the best for them. Your attorney will need to know where the money came from because this has to be disclosed in your bankruptcy paperwork. If it’s a loan, that person will need to be listed as a creditor. The loan will be discharged in the case, but that doesn’t mean that you can’t pay it back. If it’s a gift, it may have to be listed as income. Your attorney can advise you on this.

Get Your Bill Collectors to Pay

If you’re being harassed by bill collectors, there’s a pretty good chance those collectors are overstepping their bounds and violating the Federal Debt Collection Practices Act or your state’s equivalent. If so, you can be paid $1,000 per instance of harassment, plus actual damages, plus attorney fees and costs. This will require that you keep accurate records, record your phone conversations and have an attorney willing to follow through. Not all bankruptcy attorneys handle this type of consumer litigation, but they will refer you to someone who does. We’ve had collection companies settle for thousands of dollars. Click here for a list of Fair Debt Collection violations.

Reduce Expenses

Easier said than done, right? But there’s a lot of truth there. Not spending that $4 for a cup of designer coffee can add up fast. How about cutting HBO and Showtime? Or, take your lunch to work instead of spending $10 or $15? Many people can find an extra few hundred each month without feeling too stretched. Keep in mind that you will be listing your expenses in your bankruptcy case, at least in general terms. You don’t want to cut to the bare bones and be stuck with an unworkable budget long term. Your attorney can help you figure out the best expenses to trim.

Work With Your Attorney

Many bankruptcy attorneys will let you pay out your Chapter 7 fees over time, but they will usually require that your fees be paid in full before the case is filed. For a Chapter 13 case, however, the attorney fees can be included in your monthly Chapter 13 payment. Some bankruptcy courts will allow you to file a Chapter 13 case through which you pay only your attorney’s fees over some number of months, then convert the case to Chapter 7.

Ways to Get Low-Cost or Free Help

If your income is low, you’re out of work or have a disability, you may qualify for no or low-cost legal services. Check with your local Legal Services Corporation or Legal Aid Society. Many local bar associations also make referrals to attorneys willing to provide free or almost free services to low-income individuals. Even some law schools have legal clinics staffed by law students under the supervision of professional attorneys.

Don't Do This if You Can Help It

The following is a list of last resorts. You should not consider these options unless you’re desperate to file quickly. Please talk with a qualified bankruptcy attorney before taking any of these steps because they can cost you more in the long run. 

Taking out more credit to pay attorney and filing fees. If you’re thinking that you can take out a payday loan, car title loan or an advance on your credit card and discharge those amounts in your bankruptcy, it might not work. If you take out a car title loan, you’re jeopardizing your vehicle and will have to pay the title loan company to get the vehicle released anyway. Any debt you incur in the 90 days prior to filing bankruptcy – or with the intent of including it in a bankruptcy - may not be discharged, and in fact, you could lose your right to a discharge under certain circumstances.

Withdrawing from your 401(k), your IRA or home equity. This money will be protected (exempted) when you file a bankruptcy case. If you use it to fund your case, you may incur penalties for early withdrawal or high tax bills. Using home equity loans can put your home in jeopardy if you have trouble making the payments later. Only if you owe huge amounts of money that will be discharged in a bankruptcy case will this ever outweigh the disadvantages of this approach.

Filing bankruptcy on your own. This is called filing a case “pro se” or “pro per”. If you file without the aid of an attorney, your chance of successfully completing a Chapter 13 case is less than 1%. In a Chapter 7 case, your chance of successfully completing it is less than 50% without an attorney. But this depends somewhat on the area of the country you’re in and how cooperative your court is. If you have any secured debt, you’ll have to deal with reaffirmation agreements yourself, and appear before the bankruptcy judge. If you have any non-exempt property, you’ll have to work with the trustee. You could very well lose more to your creditors in a pro se bankruptcy case than you would have paid an attorney in the first place.

See also the article on Bankruptcy Petition Preparers

Updated by Carron Nicks.