It's happened. You have more bills than paycheck at the end of the month and it's clear at this point, that absent either winning the lottery or filing for bankruptcy, your financial mess is just not going away. Creditors are calling you several times a day and you've just been served a law suit in your local small claims court. You know you probably need to file for bankruptcy, but filing for bankruptcy costs money. If you can't pay your water bill, how are you going to pay for an attorney?
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In the United States, 1.5 million people file for bankruptcy relief every year. So, obviously they are paying for it somehow. Based on my experience working in a law firm that provides bankruptcy relief services, these are the top 5 ways people pay for the costs of filing for bankruptcy:
1. They stop paying their other bills.
Depending on the circumstances of your individual case, your attorney might give you the go-ahead to stop paying certain bills. These might include credit card payments, medical payments, car loan payments, even house payments. As long as you have a job, or some sort of income, not having to pay your bills suddenly frees up an awful lot of money. For instance, if you were paying $400 per month toward credit cards and $150 per month in medical bills, that's a potential of $550 per month you can pay instead toward your bankruptcy.
Do NOT stop paying your bills without consulting your bankruptcy attorney. He or she will be able to tell you if this will work for you and which bills it will work for. What ultimately happens to the credit accounts that you stop paying on is that they get wiped out in bankruptcy. It doesn't make sense to keep paying on something that you're going to erase through bankruptcy relief. This is probably the most common way people cover the cost of filing for bankruptcy.
2. They make a payment plan with their lawyer.
Some law firms have a payment system where clients can make payments toward their bankruptcy case. When they have paid in full, the attorney files the bankruptcy case. For instance, if you are interested in filing bankruptcy and, just for example, the total cost is $1,500, you can bring in $300 per month until you've paid the $1,500. Once you've given the attorney $1,500, your bankruptcy will be filed with the court. In the meantime, the attorney will deal with your creditors on the phone, letting them know your intention of filing for bankruptcy. Many times that is enough to keep the creditors at bay long enough to get the bankruptcy paid for.
The reason that the attorney does not file the bankruptcy case first, and then take payments is because if you file a Chapter 7 Bankruptcy, then most money you owe, including fees for legal services, will be wiped out. Basically, the attorney would bankrupt out his own legal fees. They don't really want to do that, so they get the money first.
3. They get the money from their family or friends.
Another way in which people pay for their bankruptcy is through a gift from dear old mom. Now, no one dreams of growing up and having their parents pay for their bankruptcy, but desperate times call for desperate measures. Sometimes parents or family members offer to pay for someone's bankruptcy because they hate to see what is happening in their loved one's life. No one wants to see their grandchildren evicted or see the repo man take the mini-van their daughter uses to drive to her three jobs.
In addition, friends and family are often in the closest position to see that your need to file bankruptcy isn't because of frivolous spending. It's because of a medical emergency, or getting laid off a job, or a divorce. If you rang up your debt buying designer handbags, you might not get much sympathy from those around you. But, if, like most people, some unexpected catastrophe entered your life, your family and friends are often your biggest supporters. Especially when they know the money is going to actually fix the situation instead of just put a band-aid on it. While your family may pay for your bankruptcy with their own credit cards, be sure to read the note below.
4. They use their income tax refund.
Contrary to some people's beliefs, persons in need of filing for bankruptcy protection are not deadbeats. They are often people with considerable employment records. Most bankruptcy filers are in fact employed and do have an employer who withholds funds from their wages for income tax. Often, this results in an income tax refund being paid in the beginning of the year after their income tax return is processed. Even persons laid off or finding themselves unemployed during the year can still get a refund on any employment that they did have during the tax year. This refund amount may be increased by any earned income credit that they may be eligible for.
Rather than using the income tax refund to pay portions of bills that are outstanding, paying the bankruptcy attorney becomes a more effective way to resolve the financial problems.
5. They cash out their IRA.
Cashing out an IRA is something of a last resort, but in some cases it might just be the dynamite needed to break the log jam. The downsides include early withdrawal penalties and income tax repercussions, as well as loss of compound interest. Factors that might go into deciding whether to cash out an IRA to pay for a bankruptcy include the person's age, overall financial situation, how much the IRA is worth, and whether the person can "afford" to wait for other payment options.
A person considering a cash out on their IRA to pay for bankruptcy should speak with a bankruptcy attorney before taking any steps toward withdrawing funds. IRA money is protected in a bankruptcy action and even if a person's other debts are wiped out and assets distributed, the IRA stays untouched by the courts. The wisdom of cashing out an IRA is a decision that should be made with the help of an attorney and/or an accountant.
Borrowing the Money Not Allowed
You'll notice that borrowing the money is not included in the list. Paying for your bankruptcy with your own credit card is the financial equivalent of wishing for more wishes. It's not allowed. If you take on new debt right before you file for bankruptcy, the bankruptcy court may not allow your bankruptcy and it can cause compilations in your case. Be sure to tell your attorney if you have any credit card activity in the 90 days before you file for bankruptcy.
When you are in financial trouble, don't make matters worse by not taking the steps you need to take to get back on track. Going through a bankruptcy is a difficult time for those involved, but it can provide tremendous relief and a new start for those who qualify. Talk to a bankruptcy attorney about ways you might be able to pay for your bankruptcy and how to handle debt collectors while you are gathering funds. Ignoring the problem won't make it go away, but working through it can give you the fresh start you need.
Is Bankruptcy Right For You? Talk to Bankruptcy Attorneys Free and Confidential. Licensed bankruptcy attorneys are available. Attorneys will call you to discuss your case for free. Find out if bankruptcy is right for your situation.
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