How Much Bankruptcy Costs
Bankruptcy is often something you file when you have no money and can’t afford to pay your bills. It’s considered to be the last resort—something that can clear your debts and wipe the slate clean. But there is a subtle irony to filing for bankruptcy because the process is neither free nor cheap.
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Cost of Filing for Bankruptcy
The cost to file bankruptcy varies depending on which chapter you file and whether you seek professional help or not. Filing fees are the same in every state, but attorney fees can differ greatly.
Filing Fees = $310 to $335 (+ $20)
In the first instance, you are required to pay filing fees, which differ depending on the bankruptcy code. You will pay $310 for Chapter 13 Bankruptcy and $335 for Chapter 7, the latter of which is the most common in the United States. It is also possible to file under one type and then switch to another. If you move from Chapter 7 to Chapter 13, there is no additional cost, while a switch from Chapter 13 to Chapter 7 incurs an additional fee of $25.
You will also need to pay around $20 for a Bankruptcy Trustee.
Credit Counseling = Up To $100
As part of the bankruptcy process, you will be required to apply for credit counseling. This helps you to improve your financial situation, allowing for more control over the process and preventing you from getting into the same mess further down the line.
You will be taught some basics of financial management during a single session, and on completion of this course, you will be given a certificate. This certificate must be presented before you file for bankruptcy and can be included in your bankruptcy petition.
The price you pay depends on where you live, but while it can go as high as $100, there are companies offering to provide this service over the phone or online for as little as $30.
Bankruptcy Attorneys = $1,250 to $3,000
You can file for bankruptcy without an attorney. However, this will greatly reduce your chances of success. In some areas, you are twice as likely to succeed with a bankruptcy filing if you have a legal professional on your side. Attorney fees are not cheap, but if you lack the experience or confidence needed to follow through, they are worth their weight in gold.
Your attorney will probably charge more if the case becomes more complicated and requires additional court time. Such issues are rare and typically run to just a few hundred dollars when they occur, but if there is an adversary proceeding, which occurs when someone objects to a discharge on grounds of concealment or fraud, you could be hit with a 5-figure bill.
Average Cost of Filing = $2,000 to $3,500
Taking the above into account, the average cost of filing for Chapter 13 bankruptcy is $3,500 while the average cost of Chapter 7 is closer to $2,000. This is a lot of money in anyone’s book, especially those struggling with growing credit card debt.
However, when you consider the average debtor has student loans of more than $20,000 and credit card debt of at least $5,700, as well as medical debt and personal loans, it’s a price well worth paying.
Can you Spend Less?
There are bankruptcy clinics and free legal services to help you when you file for bankruptcy. However, if you choose to ignore these or you don’t qualify for them, it’s important not to cut corners with your attorney.
There are certainly some cheaper options out there and it’s possible to get a bankruptcy attorney who will offer you a cut-price filing, but this isn’t a simple cookie-cutter process. As with every other aspect of financial law, if you want the best results you need the most experienced attorney. The hassle and money that a good bankruptcy attorney can save you is well worth the extra cost and the additional time it takes to shop around.
How to Pay for Bankruptcy Fees
It should go without saying, but you can’t pay attorney fees on credit with Chapter 7 bankruptcy. They’re hiring you for a process that will liquidate your assets and help you escape your creditors—the last thing they want is to become one of those creditors. You need to pay attorney fees up front, with the average being $1,250. However, because Chapter 13 focuses on restructuring and repayment plans, you can pay these attorney fees (typically around $3,000) after filing.
If you need some help finding these fees, there are a few things you can do.
- Raise money by budgeting, asking friends and family, or through other means;
- Pay court fees and filing fees with financial assistance;
- Go pro bono.
How to Raise the Filing Fees Yourself
If you’re filing for bankruptcy, there’s a good chance you’ve already read more guides on budgeting then you care to remember. However, things are different now. Bankruptcy is just around the corner, which means you can afford to take a few more liberties:
- Stop Paying Your Debts: If you’re still repaying credit card debt, medical debt, and other unsecured debts then you’re throwing money down the drain. You’re already planning to file, at which point these debts will either be wiped clean or restructured, so keep your money and stop making those payments. Your credit score might suffer a little, but bankruptcy will hit much harder than a few missed payments anyway.
- Sell Up: If you have any valuable assets, including collectibles and jewelry, now may be a good time to sell. If not, then take stock elsewhere—the average American household has stacks of unwanted clothes, electronics, media, ornaments, and more, all just gathering dust.
- Ask Around: Friends and family will no doubt be happy to help you in your time of need, especially if they know they’re not simply creating a short-term fix and are actually doing something that will help you for years to come.
You shouldn’t take out a loan to cover the cost of filing for bankruptcy. It may seem like a sensible thing to do when you consider the loan will be discharged during bankruptcy, however, this is a process designed to help individuals who have exhausted all possibilities and simply can’t repay their debts.
Not only is this highly immoral and potentially illegal, but it could cause you more problems than it’s worth. A creditor has the right to challenge a debtor and if it’s determined that you acquired the loan just to cover the bankruptcy fees, there’s a good chance they’ll win their case. What’s more, all debts accumulated 90 days before the filing cannot be discharged. The same rule applies to all cash advances accumulated 70 days before filing.
Remember, you’re dealing with highly experienced debtors, trustees, and attorneys who have seen everything and know every trick in the book.
What Kind of Financial Assistance is Available?
Some attorneys offer to create payment plans that allow you to spread the cost of Chapter 13 bankruptcy. Such an offer is rare for Chapter 7, as you’re under no obligation to repay this debt once you have filed, however, there are still ways that your attorney can help.
They can also split the filing fees into more manageable payments, providing you can prove you’re experiencing financial hardship and can’t pay the full amount in one go.
How Often do Attorneys Take Pro Bono Bankruptcy Cases?
If you can’t make the payments by yourself or find an affordable attorney, you may qualify for pro bono. A pro bono law firm will work on your case free of charge, but they are in short supply and you need to be in severe financial hardship to qualify.
What’s more, the clinics providing these services are massively underfunded and there’s no guarantee they’ll help you even if you do qualify for legal aid.
Contact your local bankruptcy court or use the National Association of Consumer Bankruptcy Attorneys website to find information about legal aid. It has been said that attorneys take on pro bono cases about 10% of the time, but they’re under no obligation to do so.
Cheaper Alternatives to Filing for Bankruptcy
If you can’t afford the attorney fees and don’t qualify for a fee waiver, bankruptcy might be out of the question. It’s also a major step for any debtor to take and one that will leave its mark on their credit report for 7 to 10 years.
But it’s not the only form of debt relief that can help you pay your debt and attain financial freedom. So, before you pay those filing fees and attorney fees, consider these other forms of debt relief:
Debt settlement, like bankruptcy, is a last resort option. It actually works better for debtors with low credit scores and lots of derogatory marks. The debt settlement process entails negotiating with your creditors to arrive at a settlement, preferably one that is a fraction of the current balance.
This process typically begins with a debt settlement company requesting that you stop making payments on your debts, giving you more money to put towards the settlements and giving your creditors more incentive to settle. The debt specialist will then contact creditors on your behalf and offer them a settlement sum, often reducing the original debt by an average of 50%.
They only charge their fees after all debts have been settled and these fees are based on a percentage of the total debt or a percentage of the money saved. This process ensures that all your debts are cleared for considerably less than you would otherwise pay, but in doing so it leaves a lot of derogatory marks on your credit report. It may take several years to recover from these derogatory marks, but that recovery period may be quicker than it is with bankruptcy.
You can settle accounts yourself to save some money, but you will typically save a lot more if you work with a debt settlement company and you’ll also save yourself the stress of having to deal with creditors.
Debt consolidation uses a single loan to pay off multiple smaller loans. You can do this yourself by acquiring a low-interest personal loan, but in the vast majority of cases, debt consolidation is performed by a specialist company.
They will ensure that you have enough money to clear your debt (including credit card debt and personal loans) and will offer you a lower monthly payment in return. The interest rate may also be lower, but you’ll typically pay much more in the long-term.
Debt consolidation loans work by giving you a manageable monthly payment but extending your term. You pay less interest on paper, but the loan has more time to gain interest, so you pay much over the term.
Debt management is a form of debt consolidation offered to debtors experiencing financial hardship. This service is provided by credit counseling agencies and credit unions and in most cases, you need to meet certain criteria before you qualify.
Debt management is generally more favorable than debt consolidation as the company will negotiate reduced payments with your creditors, agreeing to terms that keep your monthly payments low without significantly increasing the total balance or term. However, they will also request that you cancel all but one credit card (only to be used in emergencies) and if you miss a single payment your creditors may cancel the agreement and revert to the original terms.
Debt management is highly beneficial for those in need and it’s much cheaper—there are no attorney fees or legal fees to worry about—but it’s something you need to commit to otherwise it could get messy and expensive.
If you have your own home, you can consider an equity loan. These loans come in several formats, from refinancing to reverse mortgages, HELOCs, and home equity loans. The general idea is that you sell a share of your home or use it as collateral to acquire a cash sum. You can then use this sum to pay off your debts.
The problem is, you then have a secured loan to repay and if you fail to do so you could lose your home. Generally, these loans offer very favorable interest rates and can save you a fortune if you use them to pay off credit card debts, but they come with an increased risk.
Can You Avoid Bankruptcy by Waiting or Moving?
If you believe the credit card companies and debt collectors, debt is unavoidable. They will chase you to the ends of the earth and may even hassle your loved ones if you pass away. However, what they probably won’t tell you is that unsecured debt (credit cards, medical debt) has a statute of limitations and once this expires, you’re no longer legally obligated to pay.
The statute of limitations changes from state to state, but it averages between 6 and 7 years, with the lowest being 4 and the highest 10. If this period passes and the debt has not been collected, you can’t be sued for it. You will still be contacted, and they may insist that you have a moral obligation to pay.
That’s debatable, but you definitely don’t have a legal obligation.
It’s a similar story if you move to another country. Creditors can chase you while you’re in the United States; they can hassle you if you ever return, and if you leave assets they can file for a judgment and seize them. But they won’t follow you to another country and they can’t claim assets you own in that country.
Does that mean you should move to a new country or wait for the statute of limitations to pass? Probably not. Your credit score can suffer immensely in that time, you’ll struggle to get the money and credit you need to live comfortably, and you’ll constantly be looking over your shoulder.
However, if you’ve already missed a lot of payments on debts that are several years old and you’ve been led to believe that bankruptcy is your only escape, you may be better off waiting for the storm to pass.
Summary: Is Bankruptcy Right for You?
Bankruptcy can be expensive. It can cripple your credit report and your finances. In certain situations, it’s the best option; in others, it is the only option. But it’s not a “get out of jail free” card; it’s not a simple solution to a big problem, and it’s definitely not without its issues.
Make sure you understand the complications and the costs, check the alternatives, speak with family, friends, and financial experts, and when you’re absolutely sure that it’s right for you, file for bankruptcy.