Hafemeyer Law

Too Broke to File Bankruptcy

Clients that are having difficulty raising the funds to pay for attorney and filing fees may feel even more discouraged about their financial situation. Bankruptcy attorneys often hear clients say that they are too broke to file bankruptcy.

So what can a debtor do to raise the funds needed to make a new start? The following are just a few options:

401k Plan

Some 401k plans allow for emergency withdrawals to pay for attorney fees. Whether or not this type of withdrawal is available depends on individual plan rules. Funds that are taken out of a 401k under an emergency withdrawal typically do not have to be paid back. However, they will likely have to be added as income on the Means test and there may be tax implications.

A 401k loan is another option. These loans, unlike most unsecured debt, are usually not dischargeable. This means that the loan used to pay the fees would most likely have to be repaid after the bankruptcy is final.

Borrowing Money

Debtors can raise funds by borrowing money from a family member. Due to the fact that this is a debt, it would need to be listed on the petition and would likely be discharged along with other dischargeable debts. Once the filing is final, there isn’t a requirement to repay the debt, but there is also not a rule against repaying the debt if desired.  There is no issue, however, with a relative paying your fees with no expectation of being repaid.

Selling Property

Selling property at its fair market value is another viable way to raise funds. Selecting property that may be lost to the trustee, or non-exempt property, and then using this money to finance the costs associated with filing may be a good financial decision.  Like most transactions, this sale will need to be reported on the petition.

Credit Cards

The use of a credit card to pay for fees is not a good idea. Purchases made on a credit card 90 days prior to a bankruptcy filing are typically not dischargeable. Payments made to an attorney or court will likely not be eligible for discharge and may make it difficult for the debtor following the discharge.  However, if you are planning to discharge a credit card balance, you should stop paying the monthly payment, which can free up extra funds to be used to pay your attorney.

Tax Refund

It is very common in my practice for people to use tax refunds to pay for a bankruptcy filing.

If you are contemplating filing for bankruptcy and have questions regarding the types of resources that can be used to pay fees, please contact my office.

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