How Much Does It Cost To File Bankruptcy?
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Thinking about filing for bankruptcy? Not being able to repay your debts can be a stressful situation. People find themselves in financial trouble for a variety of reasons, and while there are many ways to cope with having too much debt, those who have nowhere else to turn may find themselves considering bankruptcy.
“Bankruptcy is a big decision,” said bankruptcy attorney John Colwell, president of the National Association of Consumer Bankruptcy Attorneys. “You just don’t do it for the fun of it.”
John Rao, an attorney with the National Consumer Law Center, agrees that most of his clients leave bankruptcy as a last resort, almost to the point of waiting too long.
“It just gets to a point where the pressure is too great and they start thinking about alternatives,” Rao said.
To help you better understand bankruptcy and its costs, we have provided a breakdown of the differences between two common forms of bankruptcy and their respective costs.
Chapter 7 and Chapter 13 bankruptcy: Key differences
In a Chapter 7 bankruptcy, all the debtor’s nonexempt assets are sold and the proceeds are used to pay creditors. Before an individual can file for Chapter 7, they must first pass a means test to ensure that a court granting them Chapter 7 would not be an abuse of bankruptcy.
If the debtor’s current monthly income is more than the state median, the means test is applied. Abuse is determined if the debtor’s monthly income over five years is more than $12,850, or 25% of the debtor’s nonpriority unsecured debt of at least $7,700. A debtor may rebut the finding of abuse only by demonstrating special circumstances that justify additional adjustments of monthly income.
A Chapter 7 bankruptcy can’t stop a foreclosure on a home or a repossession of a car. Those actions require the more complicated, and often more expensive, Chapter 13 bankruptcy.
A Chapter 13 bankruptcy is called a “wage earner plan.” This type of bankruptcy allows individuals with regular income to pay back all or part of their debts by developing a repayment plan. The plans are designed to last between three and five years. During the length of the repayment plan, creditors may not start or continue collection efforts. Chapter 13 bankruptcy does allow people to potentially save their homes from foreclosure.
An individual is eligible for Chapter 13 relief as long as their unsecured debts are less than $394,725 and secured debts are less than $1,184,200. Unsecured debt is a debt not backed by an asset such as a car, residence or property. For example, medical bills and credit card debt are unsecured. With secured debt, a lender is allowed to seize the asset if the borrower defaults on the loan.
The individual makes the plan payments to a Chapter 13 trustee, who is then responsible for distributing payment to creditors. Debtors have no direct contact with creditors under Chapter 13 bankruptcy.
Cost of Chapter 7 and Chapter 13 bankruptcy
|Chapter 7 & 13 Bankruptcy Cost|
|Chapter 7 cost||Chapter 13 cost|
|Credit counseling courses||$50-$100||$50-$100|
Costs are accurate as of the date of publish
While costs such as attorney fees and credit counseling courses will vary based on region and market demand, the filing fee is set by the federal government. These are standard fees across all bankruptcy filings. Some people may be eligible for a waiver for the fee. If you think you’re eligible for a waiver, talk to your attorney.
You qualify for a waiver based on a variety of factors including income and family size. You may also qualify for a filing fee waiver even if you have already agreed or have paid attorney fees.
Credit counseling fees
Whether you are opting for Chapter 7 or Chapter 13 bankruptcy, you’ll be required to take certain courses before and after filing. These courses, which cover basic money management techniques and budgeting, are the same regardless of which type of bankruptcy you filed.
The course you take before you file for bankruptcy is designed to help you better understand your finances to determine whether the bankruptcy process is right for you. The material covers budgeting and is designed to counsel the individual to some extent on their options for managing debt.
The course that follows filing for bankruptcy gives you basic information on credit and financial management. Colwell described the class as “kind of like drivers school,” where the material goes over the basics of home loans and interest rates.
Taking the classes is a mandatory part of filing for bankruptcy, so not participating could render your bankruptcy void, Colwell said. If you are using an attorney, they will likely already have a relationship with a company that offers these courses.
Attorney fees are where the differences between a Chapter 7 and Chapter 13 bankruptcy come into play.
“Chapter 7 is what we call the straight bankruptcy,” Colwell said. “It’s faster, it’s cleaner, it’s cheaper.”
Attorney fees for a Chapter 7 bankruptcy are heavily market-based, Colwell said. The geographical location of where you file, when you’re filing and the nature of your debt will all influence your costs for working with a lawyer, he said. The more complicated your debt or the more creditors you have may mean filing for Chapter 7 bankruptcy will cost you more because it will be more work for the attorney.
“There’s going to be regional differences in the approach and the price,” Colwell said.
Rao cautioned that consumers should be “skeptical” of any attorney saying they can file a Chapter 7 bankruptcy for less than $1,000 in attorney fees.
According to Colwell, a Chapter 13 bankruptcy will cost you on average twice as much as a Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, debtors’ repayments are structured so that they will pay off their debts for somewhere between three and five years. One reason Chapter 13 is more costly is that it’s a longer process for the attorney.
There are also more moving parts in a Chapter 13 bankruptcy, Colwell said, such as setting up a repayment plan for all the debts. The complication of the debt structure may also determine the cost of Chapter 13 bankruptcy. For example, Chapter 13 tends to deal with more complex secured debts that are tied to liens or collateral such as home mortgages or car loans. Chapter 7 more often deals with unsecured debt such as credit cards, medical debt or back rent.
There are two ways that Chapter 13 bankruptcies can be priced. The first is no-look fees, which are set by the court based on region. For example, the no-look fee in Wisconsin is $4,500, which doesn’t include a filing fee, but includes paperwork, meetings and hearings, and responses to motions. The attorney agrees to take your case for a flat rate. Attorneys can charge above that no-look fee, but then they’ll have to go through the court process of having their fees reviewed and approved.
The second is an hourly attorney rate, which may cost more or less than a no-look fee, Colwell said, depending on the complexity of the bankruptcy.
How Chapter 7 and Chapter 13 can legally be repaid also complicates the fees.
“The way the law is structured now, the consumer really needs to come up with all the cost of filing a Chapter 7 before they file,” Rao said.
In a Chapter 13 filing, the attorney may roll their fee into the debt that needs to be repaid by the client, allowing them to space out that payment of attorney fees for their bankruptcy between the three and five years that the bankruptcy lasts.
“There are just so many ways to screw it up,” he said. Most initial consultations with a bankruptcy attorney are free, Colwell said, and that’s a good first step to take for someone who is considering bankruptcy.
How to pay for bankruptcy
If you are planning to file a Chapter 7 bankruptcy, you’ll need to be prepared with the money to pay for an attorney upfront. If you intend to file a Chapter 13 bankruptcy, you can work with your attorney to schedule those fees into your debt repayment plan.
Here are some considerations for finding the money you’ll need to file for bankruptcy:
- Borrow the money from family or friends to keep it off your books.
- Be strategic about the bills you are paying in the short term because those debts will either be repaid on a plan or wiped out in the bankruptcy.
- Put yourself on a strict budget until you can come up with the money. Colwell said some attorneys will offer a payment plan before filing a Chapter 7 bankruptcy that may make paying before filing easier.
Rao pointed out that one issue with bankruptcy is that “there are some consumers that are too broke to file.” “It sounds crazy in a way,” he added.
For those cases, Rao suggested looking for attorneys who will handle a bankruptcy pro bono, although he said they are likely few and far between.
Bankruptcy is not to be entered into lightly, but it may be the best option for people who find themselves with considerable debt. Before deciding for or against the path, consult with a reputable attorney to get a sense of all your options and what bankruptcy would mean for your financial situation and future credit.