Official Bankruptcy Secret

15 Nov Official Bankruptcy Secret

Bankruptcy has an official secrets law and it is contained in section 526 of the bankruptcy code. A lawyer can not advise a client to take out a new loan before filing bankruptcy. The Bankruptcy Abuse and Consumer Protection Act of 2005 includes this rule and I am going to break it legally.

Why would someone want to borrow money before filing bankruptcy? There are some obvious reasons. The first reason would be to pay for the bankruptcy itself. The money has to come from somewhere to pay the expenses involved in filing a bankruptcy. Most lawyers charge a fee for their services. While a lawyer may not be absolutely necessary and, under some circumstances the court will waive filing fees, people filing bankruptcy usually have to pay the bankruptcy court its fees and it is generally a good idea to have a lawyer to help with the process. The law forbids me, as a lawyer, to advise you to borrow money to pay for bankruptcy. However, it is legal for me to tell you this as an author.

There is another, less obvious reason to borrow money before filing bankruptcy. A debtor in bankruptcy can deduct payments due on a secured debt when required to take the means test. Because it may be difficult to borrow money to replace an old car after a bankruptcy filing, it may make good sense to do so before filing the bankruptcy.

If you ask a bankruptcy lawyer about borrowing money they will answer carefully. Some lawyers may not tell you when it would be advisable to borrow to buy a new car. You may not get a straight answer if you ask about borrowing money from family to pay legal fees. It is not against the law to borrow money if you intend to pay it back. But it may be against the law for your lawyer to answer your question.

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.
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