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Financing a bankruptcy filing

Filing for bankruptcy isn't easy, but finding the money to pay for an attorney can be almost as hard.

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"Lawyers don't like being put in a position of being just another creditor," says Ray R. Graves, who served 20 years as a federal bankruptcy judge in Michigan, and now works for BBK, Ltd., a business consultancy headquartered in Southfield, Mich. "They're going to want to be paid up front."

In other words, paying your bankruptcy lawyer on the installment plan isn't a viable strategy. If you haven't paid an attorney before filing for bankruptcy, he will just become another creditor, something he's familiar with and won't want to contend with.

Rick Mitchell, a partner with Iseman, Cunningham, Riester & Hyde of Poughkeepsie, N.Y., recalls several instances when bankruptcy filings were delayed, most probably because the lawyer hired to handle the case wanted to get paid first. "He was waiting for 'Mr. Green,'" Mitchell says.

Unfortunately, you may not have enough green in your wallet to hire an attorney. Fees vary, but lawyers will charge anywhere from $400 to $1,200 for your run-of-the-mill filing and it can cost even more if it's a complicated case. In high-priced urban areas, filing for bankruptcy can cost on average from $1,000 to $3,000. And your lawyer will want his payment before he'll represent you.

Now with the new bankruptcy laws in effect, a cost-estimate report with the Congressional Budget Office expects attorney costs to increase by $150 to $500 per case. Under the new law, attorneys have increased liability and paperwork and the CBO says that the "additional costs incurred by attorneys would most likely be passed on to their clients."

It may sound like a Catch-22 -- you have no money so you're filing for bankruptcy, but you need money so you can file for bankruptcy -- but there are a few things you can do.

Hatch a bankruptcy nest egg. If you think you're a candidate for a bankruptcy filing, start building up an attorney fund now, before interviewing lawyers. Set aside whatever you can so you'll have the money when you need it.

Seek an attorney that will take your case for free. Pro Bono work is uncommon for bankruptcy cases, but it does occur. Check with local legal services that specialize in aiding low-income individuals; they may know of attorneys who will take your case for free or at reduced cost. Also check with attorneys who serve on your bankruptcy court's advisory committee.

Negotiate a lower fee. See if there are some filing tasks that require a time investment and that you can handle. Your attorney may be willing to reduce (or eliminate) his usual charges for these duties if you take care of them.

Pay for court fees on the installment plan. There are provisions in the bankruptcy code for this, says Mitchell. This won't free up a lot of cash, but it will help you finance the hiring of an attorney.

Ask for help from family and friends. They may be willing to co-sign a loan or loan you the money. Just make sure they understand your circumstances and realize it may be some time before you can pay them.

Tap your retirement funds. This really should be a last-resort move because you could take a triple hit: a penalty for early withdrawal, taxes due on untaxed contributions and earnings and a reduction (or elimination) of your retirement nest egg.

Jenny C. McCune is a contributing editor based in Montana.

Bankrate.com's corrections policy
-- Updated: Oct. 15, 2005
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