bankruptcy

Should I take out loan to file bankruptcy?

Justin HarelikDear Bankruptcy Adviser,
I am trying to file bankruptcy and have talked to a lawyer. Unfortunately, I do not have the money to file without making my financial situation even more delicate. I have thought of getting a small personal loan just to cover the expenses of the lawyer so I can file. I know that is not the right way to do things, but I see no other option. Is it possible to do that and still have that debt eliminated as well? Or would I just be creating a bigger hole for myself?
-- Douglas

Dear Douglas,
I know you are not writing in to say that you want to do something illegal and to get away with it. You are broke, you want to file for bankruptcy protection and you don't have access to cash.

That being said, you can borrow money from a creditor and use that money to pay for the services of a bankruptcy attorney, though you are obligated to list this company as one of your creditors. But is it right to borrow money knowing you have no intention of paying it back? Probably not.

Bankruptcy should be for eliminating debts that you cannot pay back after you have exhausted all attempts to do so. No one should eliminate debt without having the intention to make a good-faith effort to pay back the debt.

In your question, it seems you have no intention of paying back this loan. Consider these other options first.

  1. Many bankruptcy attorneys allow for monthly payments and will let you send creditor calls to them while you are making fee payments.
  2. Try borrowing money from a 401(k) or retirement account.
  3. See if a few friends can give you a little bit of money to help out with the fees, or borrow some money from family.
  4. Even a part-time, temporary job could help you earn the few hundred dollars needed to file.

If you must borrow the money, know that the creditor may challenge your right to eliminate that loan in the bankruptcy and require you to pay it back. In fact, there is a provision in the bankruptcy code that says any charges incurred in the 90 days prior to filing your case are presumed nondischargeable. There is the same presumption for cash advances in the 70 days prior to filing.

A presumption means the court initially would side with the creditor if the creditor claimed you had no intentions of paying back those charges or cash advances made within those time periods. You would need to provide evidence that you did intend to pay back those charges or cash advances.

Even outside of that particular provision, creditors can look further back to challenge your right to discharge a debt. Creditors review your account when receiving the bankruptcy notation and look for unreasonable or uncharacteristic charges. For example, you had a $20,000 limit on your card but never used it, then over a two-month period, you ran up $10,000 in charges and filed bankruptcy six months or a year later. The creditor can challenge your right to eliminate the entire balance even if the charges occurred outside the 90-day presumption period.

Creditors can go back years, if they want. The further back you made the charges or advances, the less likely the creditor is to challenge it, but the creditor still has that right.

If borrowing is the only way you see fit to file, work with the creditor to negotiate and pay back a portion of or the entire loan to set yourself on the right footing for bankruptcy recovery.

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