Bankruptcy is often a very effective means for people in financial distress to obtain relief from their debt burden, but it can involve its own expenses. As ironic as it might seem, some debtors may feel that they must go further into debt in order to pay for their bankruptcy. Obtaining a loan during a bankruptcy proceeding is difficult if not impossible. Taking out a loan shortly prior to bankruptcy, while providing the debtor with much-needed funding, may cause serious problems in the bankruptcy proceeding itself. People considering bankruptcy should consider their options very carefully.
Under current federal law, a bankruptcy case involves costs beyond just the filing fee and attorney’s fees. Among all of a person’s debts, court costs and reasonable attorney’s fees receive high priority for payment out of the bankruptcy estate. This has the benefit of minimizing the impact of these expenses on the debtor. Federal law requires other expenses, such as credit counseling and a debtor education course, which are prerequisites for filing a petition and obtaining a final discharge of debt, respectively. These and other costs may complicate a debtor’s plan for seeking bankruptcy protection.
A debtor who is considering taking out a loan in order to pay bankruptcy-related expenses is, really, considering borrowing money that they might not be able to pay back. The legality of this sort of action depends heavily on the specific circumstances. As to the question of whether it is “right” to borrow money under these circumstances, the answer is probably “no.” In a situation where a debtor is preparing for bankruptcy and needs money, the debtor is most likely to be able to borrow money quickly from a “payday loan” company. These companies loan small amounts of money at very high interest rates, often in the form of “cash advances.” Some companies may even offer to loan money to people intending to file bankruptcy, subject to stringent requirements. Regardless of the circumstances, a debtor must include the loan in the list of debts and creditors submitted to the court. Continue reading