Paying for Bankruptcy: “Running on Empty”

By Kenneth Lenz, Board Certified Consumer Bankruptcy Attorney
So while you may be running on empty, you can still be creative and get your case filed

In my Connecticut bankruptcy practice, I’m frequently asked, “how much will it cost me to file bankruptcy?”  The amount of the fee should not be your primary focus in hiring an attorney.  After all, you want quality representation, you want to keep all the property you can legally exempt, and  you want all the debts discharged if they can possibly be.  In short, you should think value, not price.

But that leads us to another issue.  How do you pay your bankruptcy lawyer?  After all, you’re not flush with cash if you’re filing bankruptcy.  Here are some ideas:

(1) Stop paying for debts you’ll discharge in your bankruptcy.  For example, if you owe credit card debt, there’s normally no sense in continuing to make payments on your credit cards.  This holds true for secured debts as well if you are surrendering the property securing the loan. For example, if you plan on surrendering your home in bankruptcy, don’t waste your money making mortgage payments.  Save your money to pay for your bankruptcy.

(2) Normally, I’m not a big fan of withdrawing money from IRAs and 401(k)s.  That money can’t be reached by your creditors, so it’s best to just leave it alone.  Also, if you withdraw funds, you’ll be hit with penalties and interest.  This is why I stress the importance of not waiting to file bankruptcywhile paying your debts with retirement funds. You’re just throwing your retirement funds away.

But it may be appropriate to use a relatively small amount of those funds to get your case filed. Filing bankruptcy is extremely cost-effective. You’ll typically pay two or three thousand dollars–more for more complicated cases–to file your case.  But some clients end up discharging hundreds of thousands of dollars of debt.  Because of the huge value to your long-term financial plan, it’s one of the few instances in which I would, in the right case, advise clients to pay me with retirement funds.  However, always discuss this with your bankruptcy lawyer prior to withdrawing any funds from your retirement accounts.

(3) You could borrow the funds from relatives.  Maybe your parents have already been helping you with your finances.  They likely know continuing this is not realistic for you or for them.  However, they probably also understand that if you can file bankruptcy, you can end the viscous cycle.  And you can always pay them back once your case is over.

(4) You could consider filing a Chapter 13 bankruptcy. Chapter 13 is a payment plan bankruptcy in which you repay your creditors some–or even all–of what you owe them.  In Chapter 13, your lawyer will allow you to pay some of your fees up front and the balance of the fees in the Chapter 13 plan.  While our new bankruptcy law negatively affected the Chapter 13 process–mainly by forcing above-median income debtors to pay for five years instead of three–it’s still an option you may want to consider.

So while you may be running on empty, you can still be creative and get your case filed.  If your lawyer says you should file, bankruptcy will be very cost-effective for you and will help you immensely with long-term financial planning.  So it pays to get your case filed as early as possible.