Sense & Centsibility Blog

Am I Too Broke to File Bankruptcy?

Exit sign saying BankruptcyAs a bankruptcy counselor, I often speak with clients who are knee-deep in debt, and running in crisis mode. They are considering filing bankruptcy, but are frustrated at the cost to retain an attorney, file a bankruptcy case, and complete the counseling and education requirements. “How can I pay for all of this when I have no money?” A very pertinent question under the circumstances! Unfortunately, it is very common for people to struggle with debts for so long, they have no money left to file bankruptcy. The most common type of bankruptcy is a Chapter 7 which can cost around $1500. A Chapter 13 bankruptcy can cost twice that much.

Should you file bankruptcy on your own?

I would never recommend filing for bankruptcy protection on your own. Doing so is risky for a couple reasons. First, if your case is not filed properly, it can be dismissed and you will get no relief from your creditors. Second, you risk losing property or assets that may have been protected if you had good legal help from the beginning. Some clients tell me they are using a document preparation service. I warn clients that by law such services cannot give legal advice, even though they do. Also, they may not be familiar with your local bankruptcy laws, court rules, exemption amounts, etc. and therefore, may get the paperwork wrong! If bankruptcy protection is your best option, is it worth wasting more money on a document preparation service when other options may be available?

Are you "judgment proof"?

The first thing to consider is whether a creditor can garnish your wages or bank accounts to collect on a debt. If a creditor cannot collect, you are considered to be “judgment proof.” In Minnesota, where I live and work, a creditor must typically sue and get a judgment before garnishment proceedings begin. There are some exceptions to this such as tax debts and government student loans. If you do not live in Minnesota, be aware that laws vary state to state about when a creditor can garnish.

If you do not own much property and have a small income, you may be judgment proof. Also, disability or Social Security benefits are generally protected from creditors. That means you may not have to file bankruptcy because a creditor cannot collect. However, a creditor may still contact you by phone or mail to ask for payment. They can also sue you to try to get a judgment.

You may want to contact a bankruptcy attorney for a free consultation to see if you are judgment proof. Or, see how much it would cost to have this discussion with an attorney. If you are judgment proof, you can send letters to creditors explaining you are “exempt” and hope they stop harassing you over the debts.

Man with empty pocketsCan you come up with the money to pay for your bankruptcy?

Sometimes you can pull together the cash by cancelling pay TV, expensive cell phone plans, or cutting back on other items. It may take a few months to come up with all the money you need, but the temporary sacrifice will be well worth it. Another option may be to stop paying the debts for a few months. This assumes you still have the cash flow to pay your credit card bills or other debts. Another possibility is to borrow the money from someone you know, like a friend or family member. This is considered a personal loan. Although the legal obligation to repay the loan can be discharged in bankruptcy, when the bankruptcy process is over, you are free to voluntarily repay that debt, or any other debts you choose. I’m sure your friend or relative would appreciate that!

Still another option is to cash out part of your retirement fund or take out a 401(k) loan to cover the costs of a bankruptcy filing. Although retirement funds are typically protected in a bankruptcy, using some of that money may be well worth the relief a bankruptcy can offer. Keep in mind that if you take a withdrawal, you may owe a 10% penalty plus income taxes on the amount taken. If you take out a 401(k) loan, you typically repay the loan over several months, with payments automatically withheld from your paychecks. So think of it as another monthly payment that you'll be taking on.

Consider other low cost options

Some legal aid services may offer bankruptcy representation. This is a long shot due to funding cuts for such programs. Even if your local legal aid service does bankruptcies, you must still qualify for their help. Contact your local courthouse for contact information. If legal aid can’t help, ask for referrals to free or low-cost programs you can explore. Another option may be pro se clinics designed to help those who choose to file bankruptcy without an attorney. Contact your local bankruptcy court to see if it offers such services. Such programs may be scarce but worth looking into.

Whether you're trying to decide about filing bankruptcy or set up a Debt Management Plan, it's better to know all of your options before making a decision. Not sure if filing bankruptcy is right for you? Call LSS at 888.577.2227 to talk to a Financial Counselor. They will help you determine realistic options to take action and manage your debt. Want to get started right now? Great! Just go our website to begin online financial counseling. It's free, confidential, and just as effective as phone or in-person counseling.

Author Barbara Miller is a Certified Financial Counselor with LSS Financial Counseling and she specializes in Bankruptcy Education and Counseling.