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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.

A major risk that a debtor faces from borrowing money for bankruptcy expenses is that the debt will not be dischargeable. Federal bankruptcy law presumes that any debt incurred during the ninety-day period prior to the petition’s filing date is not dischargeable. A debt that results from a cash advance is presumed to be nondischargeable if it takes place seventy or fewer days before the petition is filed. A creditor may challenge the dischargeability of a debt by showing that the debtor obtained the loan through fraud or false pretenses. A debtor who obtains a loan in order to pay bankruptcy expenses may have a difficult time rebutting these presumptions or overcoming a creditor’s objections.

When individuals find that their income is not enough to service their debts, Chapter 7 or Chapter 13 bankruptcy may offer them a fresh start. Bankruptcy attorney Devin Sawdayi has represented clients in the Los Angeles area in personal bankruptcy cases since 1997, providing legal services with dignity and respect. We help our clients through the bankruptcy process, which might involve liquidating assets to make payments or creating a more manageable payment schedule. To schedule a free and confidential consultation, please contact us today online or at (310) 475-9399.

More Blog Posts:

With Interest Rates on Many Loans Set to Double Soon, The Dischargeability of Student Loans in Bankruptcy is a Crucial Issue for Future College Students, Los Angeles Bankruptcy Lawyer Blawg, September 23, 2013

California Bankruptcy Court Rules on Discharge of Debt Allegedly Incurred Through Fraud, Los Angeles Bankruptcy Lawyer Blawg, September 7, 2013

Do Debt Collectors Push The Legal And Moral Envelope Beyond The Limit? Los Angeles Bankruptcy Lawyer Blawg, August 21, 2013