Eliminating Credit Card Debt Advice

One of the indignities of going broke is that filing for relief is expensive and getting more so. Here are six ways to scrape up the cash.

By Liz Pulliam Weston

Dee was a single working mother with two young children, no health insurance and an ex-husband who paid child support only when he had a job, which was sporadically.

By the time she was ready to consider filing bankruptcy, Dee had more than $22,000 in personal and medical debts -- bills that totaled more than her annual income.

There was a problem, though: Dee struggled with her debts for so long that she was out of cash and didn't know how she would pay the $200 fee for filing Chapter 7 liquidation, let alone $600 more for attorney costs.

· Filings tend to spike after hurricanes. Hurricanes Katrina and Rita, which wiped out jobs as well as homes, are expected to add significantly to the number of filings. Bankruptcy filings typically rise 50% faster in areas hit by hurricanes, according to research by University of Nevada professor Robert Lawless, with the bulk of the cases filed 12 to 36 months after the event. The long gap between the event and the filings, Lawless said, reflects borrowers' desire to find alternatives to bankruptcy. But the delay often means they run through all their cash and credit, said bankruptcy attorney Henry J. Sommer in Philadelphia, leaving them with little money to file.

· Bankruptcy filings will cost more. Attorneys are widely expected to raise their fees when the bankruptcy reform law takes effect Oct. 17, thanks to more complicated paperwork and a higher liability standard, which may increase their malpractice premiums. Currently, attorneys' fees typically range from $500 to $1,500 for a typical Chapter 7 liquidation.

The increases "will vary depending on the complexity, from a few hundred dollars more for the simplest cases to another couple of thousand dollars for the complicated ones," said Sommer, president of the National Association of Consumer Bankruptcy Attorneys. "With the cost of bankruptcy going up, we're going to see a lot more people that don't have the money" to file.

6 places to look for cash

If you think a filing might be in your future, you can research your options using MSN Money's Bankruptcy Guide. If you know you're going to file but don't know where the money will come from, bankruptcy attorneys recommend the following:

· Stop paying some of your bills. "Some borrowers keep trying to stay current on their bills right until the day their case is filed," said Baton Rouge bankruptcy attorney John C. Anderson. "But it often doesn't make sense to keep paying debts that you plan to wipe out in bankruptcy court, such as credit card balances or medical bills."

"In some cases," Anderson said, "borrowers have racked up so much credit card debt that not paying the minimums for a month or two will generate the money they need to pay their attorneys."

You want to be careful which bills you forgo, however. The new law makes it easier for landlords to evict tenants who file bankruptcy, while mortgage lenders may start foreclosure proceedings after missed payments. Auto lenders can repossess a car if a payment is even a day late.

You'd be wise to consult an experienced bankruptcy attorney about which bills you can put off, Sommer said. Fortunately, many offer a free initial consultation and some have "layaway" plans that allow clients to pay for their services in installments, in advance of a filing.

· Sell non-exempt property. You're allowed to keep certain property when you file for bankruptcy, but what kinds of property and how much varies enormously depending on which state you live in. In some states, for example, you're allowed to keep only $1,000 to $2,000 of equity in a car; if you have more than that, you could sell the car, pay off any loans and use the excess to pay your lawyer. Consult your attorney to find out which property you're likely to forfeit in a filing and consider selling that to raise funds.

· Hit up family or friends. That's how Dee ultimately came up with the cash to file. In her case, a sister made a gift of the money.

A loan can be a bit trickier. Under the old bankruptcy law, debtors were not allowed to erase loans or cash advances of more than $1,225 taken out 60 days or less before a filing. The new law ratchets the amount down to $750 and covers loans or cash advances made within 70 days of a filing.

Given the state of your finances, you probably don't want to take on another obligation you might not be able to repay anyway. But there's nothing to keep you from repaying a gift or a loan after your case is discharged, Anderson said, if your finances improve.

· Seek a waiver. The new bankruptcy law does allow cash-strapped borrowers to apply for a waiver that would save them court filing fees, which are about $200 for a Chapter 7 filing. The waiver doesn't apply to attorney's fees, but could free up more cash to pay a lawyer. The bankruptcy court in your area should have the appropriate forms available after Oct. 17.

· Tap a retirement fund. You want to leave your retirement money alone if at all possible, since it’s one of the few assets protected from creditors. But if an IRA or 401(k) is your only savings, you may be able to tap it without penalty if you’re a Hurricane Katrina victim. New legislation allows people whose principal home was in the area affected by Katrina, and who suffered an economic loss, to withdraw or borrow up to $100,000 from their retirement funds without penalty, according to CCH Inc., a tax research firm. You would still have to pay regular income tax on the withdrawal, unless you repaid the money within three years.

· Look for cheaper alternatives. Trying to file bankruptcy on the cheap was fraught with peril even before bankruptcy reform came along, as I wrote in "Beware cut-rate bankruptcy advice." The new law demands much more paperwork while providing numerous opportunities for borrowers to make mistakes and have their filings automatically dismissed.

You might be tempted to turn to document preparation or paralegal services, which often advertise fees of $199 or so. But remember that these services are prohibited from offering legal advice.

Unfortunately, many legal aid societies that provide free consultations for other matters won't touch bankruptcy cases, Sommer said. Still, you may be able to find an attorney willing to handle your case for free or find a "pro bono" service like Consumer Bankruptcy Assistance Project in Philadelphia, where Sommer is supervising attorney. Your local bar association may be able to provide referrals.

Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.