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Most likely you are receiving a 500 internal server error because the host will not allow files with a permission level of 777 to run, or will not allow a directory with a permission level of 777.
If the server is running as "nobody", or a user different than your ftp user, the file you are writing TO will most likely need to be 777. If your scripts execute as your ftp user, using suPHP etc.., a permission level of 755 will allow script to write to your files, and in a sense claim them as its own.
Ultimately it depends on your server setup, you may want to contact your hosting provider.
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