What Does it Cost to File Bankruptcy?

“What does it cost to file bankruptcy?”  This is perhaps the most consistent question I have been asked as a bankruptcy attorney and rightly so.  Individuals and families considering bankruptcy as an option to get out of debt are struggling financially and cost is a concern.

I truly believe that the cost to file bankruptcy is a bargain and an investment in future financial freedom.  When compared to the fees charged by debt settlement companies or monthly interest on accumulated debt, we are sometimes talking a fraction of the cost.

With that said, there are some generalizations for those looking for information on the cost of consumer bankruptcy.

CHAPTER 7 VS. CHAPTER 13

There are two types of consumer bankruptcy: 1. Chapter 7 Bankruptcy, and 2. Chapter 13 Bankruptcy.  I will not get into detail on the functional differences between the two but more information can be found here.

There is a pretty significant difference in cost and I would estimate that a Chapter 13 will typically cost two to three times more than your average Chapter 7.  For those that don’t qualify for Chapter 7 or want to retain control of their assets in bankruptcy, the financial barrier to entry for Chapter 13 can be steep.

On the other hand, Chapter 13 is typically more flexible in that attorney fees can be paid over time through the court ordered Bankruptcy Plan.  In some cases, the up front cost to file Chapter 13 could be less than the up front cost to file Chapter 7.  

ACTUAL COSTS

So what are the actual costs one can expect when filing bankruptcy.  According to Credit Karma, the average Chapter 7 fee ranges between $500 and $3500.  I realize that is not very helpful so I will say that my average Chapter 7 fee ranges between $1,200 and $2,200 with a large majority of my cases falling in the lower end of that spectrum.  

Chapter 13 fees are typically capped by the Court in the jurisdiction where the case is filed.  Again, according to Credit Karma, the average Chapter 13 fee ranges between $2,500 and $6,000.  For clarity, my average Chapter 13 fee ranges between $3,500 and $4,500 with the large majority again falling on the lower end of that spectrum.  Of course, there is more flexibility in how Chapter 13 fees are paid and in many cases the up front cost will be less than Chapter 7.

In addition to attorney fees, there are court filing fees and credit counseling fees that must be paid.  The court filing fee for a chapter 7 is $335 and $310 for chapter 13.  In some cases, depending on financial need, this filing fee can be waived or broken up into monthly payments to ease the financial burden of filing.

COST VS. INVESTMENT

While it is entirely possible to file a consumer bankruptcy case without an attorney, I believe the attorney’s job is to provide predictability and peace of mind.

With an experienced bankruptcy attorney, your case will most likely be decided after the initial consultation.  Without an attorney, you are basically jumping without a parachute and hoping for a positive outcome.

I can usually give a debtor a clear picture of how their case will progress after the initial consultation so there will be no surprises.    

A bankruptcy case should proceed with little to no conflict and be a stress free process.  It should resemble a yoga session rather than a wrestling match.  Your attorney is the yogi guiding you through the process and providing predictability.  

Your bankruptcy attorney helps minimize the adversarial aspect of bankruptcy.  

So while attorneys do charge a fee, it is impossible to place a value on this.  

Paying an attorney to guide you through the bankruptcy process is an investment in your sanity, peace of mind, case harmony and most importantly, your financial future.   

Life in the "Sweatbox"

Image courtesy of cookie101babe.

This past month I was able to attend the annual Bankruptcy Section Continuing Legal Education seminar in Butte, Montana.  This year’s seminar saw a talented, diverse and interesting group of presenters and I walked away with actionable information and knowledge.  I truly feel that attendance at this event made me a better advocate for the clients I serve.

Perhaps the most interesting and apropos speaker at the seminar was Pamela Foohey, Associate Professor at Indiana University, Maurer School of Law. Ms. Foohey’s presentation focused on a recent paper published by the Consumer Bankruptcy Project titled, “Life in the Sweatbox.”  The “Sweatbox” refers to the period of time prior to a bankruptcy filing when individuals and families suffer and struggle to make ends meet.  The article focuses on misconceptions about who files bankruptcy, what characterizes a debtor in the “Sweatbox” and the experiences of those individuals and families who have spent time in the “Sweatbox.”

Ms. Foohey’s presentation and the article really hit home with me as the information presented is exactly what I see in my day-to-day practice.     

SPENDING TIME IN THE SWEATBOX

So what actually happens in this “Sweatbox” and why is it so damaging?  The research presented in the article, dating back to the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) shows that people are spending significantly more time in the sweatbox prior to filing bankruptcy than they have in the past.  Two-thirds of those surveyed reported spending two or more years struggling with debt prior to filing bankruptcy. The article labels these individuals and families as “long-strugglers.”  

The consequences of being a “long-struggler” can be catastrophic and in many cases, offset the benefits of filing bankruptcy.  Akin to what I see in my practice, there is a stigma surrounding bankruptcy and often times, people will literally do anything to avoid filing.  I have seen people sacrifice their homes, food, health care and retirement to try to get out of debt and avoid bankruptcy. During this time, people must withstand the constant harassment from bill collectors, increasing interest rates, bank liens and ultimately, wage garnishment.  

Unfortunately, this depletion of assets and day-to-day suffering often prevents people from achieving the “fresh start” provided by filing bankruptcy.

SO WHY STAY IN THE SWEATBOX?

Perhaps the most interesting part of the research used in the article is the information pertaining to who these “long-strugglers” are.  The most notable demographic difference between “long-strugglers” and other debtors is education. According to statistics presented in the article, bankruptcy filers have achieved a higher level of education than the average population.  More interestingly, “long-filers” are more “educated” than your average bankruptcy filer. While 62% of debtors with a high school degree reported struggling for two or more years, 71% of debtors with at least a four year college degree reported struggling for that same period of time.

So why does higher education correlate to a longer period of time spent in the “Sweatbox?”  It is speculative but perhaps these individuals feel they are more equipped to handle their creditors.  Perhaps they fear the stigma of bankruptcy more due to future career mobility. More likely, these people experience a much higher level of shame associated with their financial struggles and the ultimate decision to file bankruptcy.  According to the research, the “long-strugglers” were much more likely to feel shame than those who struggled for less than two years (71% to 62%).

Whatever the reason, I routinely see the tragic result of waiting too long to file bankruptcy.  Ms. Foohey’s presentation and this incredible study connected many dots for me. I know who I have helped to file bankruptcy and have written on my own intra-firm study on these demographics in the past.  It is clear that the people who file bankruptcy are you and I.  These are middle-class, educated individuals and families who suffered a financial setback due to a medical emergency, loss of employment, divorce or some other life altering event.  

I truly hope that this information reaches those who need it.  People need to hear a voice that normalizes the bankruptcy process and the solution it presents.  There is no shame in a financial reset or a fresh start and bankruptcy is many times a noble and courageous way to avoid the “Sweatbox.”