Bankruptcy isn't cheap. In fact, it's expensive. Between filing costs, attorney's fees and mandatory counseling, the tab associated with today's average bankruptcy case is more than $1,500. Such high costs have in recent years made filing completely unaffordable for about 200,000 to as many as one million Americans, according to the National Bureau of Economic Research. But there are ways to minimize the cost of bankruptcy.
To help you strategize, we’ve broken down the various fees as well as credit damage and other penalties associated with bankruptcy in detail below. We’ve also consulted some of the foremost authorities on bankruptcy to give you the best advice about navigating the process.
Bankruptcy Filing Fees
Filing fees are different for each type of bankruptcy and usually are collected by the court clerk at the time of filing. You can find the filing fees associated with each of the major types of bankruptcy listed below. But keep in mind that these fees were expected to rise on June 1, 2014, in accordance with increases in administrative costs. (As of June 12, the new figures have not been released. The graph will be updated as new information becomes available.)
Bankruptcy Filing Fees – Effective Nov. 21, 2012, until May 31, 2014
If you’re filing under Chapter 7, you have a couple of alternative options for paying the filing fee:
- Fee Waiver: If your income is less than 150 percent of the poverty line, you can request a waiver, which is generally granted to Chapter 7 filers. The poverty guidelines for various household sizes, excluding those for U.S. territories, are listed below (calculated at 150 percent). You can also request a copy of the figures from bankruptcy court.
150% of the U.S. Health & Human Services Poverty Guidelines for 2014 (Annual Basis)
Persons in family unit
48 Contiguous States & D.C.
For each additional person, add
- Installments: You can request to pay the bankruptcy filing fee in no more than four consecutive payments by submitting Form 3A: Application and Order to Pay Filing Fee in Installments. You’ll be asked to state on the form that you can afford to pay only by installment and propose a payment schedule. Your last payment cannot be made later than 120 days after filing the form.
If you’re filing under Chapter 13, you must prove to the court that you will have sufficient resources to fund a three- to five-year repayment plan, which should cover filing costs. For that reason, Chapter 13 filers usually don’t qualify for either the fee waiver or installment option.
Bankruptcy Conversion Fee
This fee only applies if you convert from one bankruptcy type to another — for example, from Chapter 13 to Chapter 7 if you can’t keep up with your plan payments, or from 7 to 13 if you want to retain property you initially decided to surrender. That or you may be compelled by the court to convert from Chapter 13 to Chapter 7 — “for cause” — either because you didn’t file Chapter 13 on time or you delayed or failed to make payments to your creditors.
As a debtor, you have a one-time right to convert your case. The court charges $25 for the conversion of a Chapter 13 case to a Chapter 7, but there is no fee for converting from Chapter 7 to Chapter 13. The conversion fee covers the administrative cost of filing a notice to the court. Within a day or two of filing your notice, the court will enter a Conversion Order. However, depending on your lawyer, you may face additional legal fees.
One important detail to note: If your filing fee was initially waived under Chapter 7, and you later convert your filing to Chapter 13, the court will assume that you’ve acquired the resources to cover the filing fee and will reverse the waiver. In such a case, you must pay the filing fee in full or begin making installments within 10 days after the judge orders the conversion.
Bankruptcy Attorney Fees
Most bankruptcy filers hire bankruptcy attorneys. Seeking advice from one isn’t required but is strongly recommended, even though your lawyer’s fees will constitute the bulk of your filing expenses. Hiring an attorney, however, is mandatory for corporations and partnerships.
There are various ways in which attorneys are compensated. Generally, bankruptcy attorneys charge a “flat” fee for preparing the filing. As one would expect, the fee is usually based on their experience, reputation and competitors’ rates, but in some cases, the higher the value of one’s assets and income, the higher the fee will be.
Others work on a retainer, which is similar to a flat fee. The difference is that the attorney can charge additional hourly fees if the cost of filing exceeds the amount of the retainer. This is common when a more complicated case involves litigation, in which case an attorney might need to appear in court. For instance, if your attorney has to dispute the value of certain property in front of a judge, court time may cost you extra, depending on your attorney’s hourly rate.
Here’s what you can expect to pay:
- For Chapter 7, the most common form of bankruptcy, costs typically range between $1,000 and $2,500, depending on the complexity of the case. That fee must be paid in advance.Your other option is to enlist a cosigner, but you’d still need to pay most of the fees ahead of time. Rarely, in the direst cases, some attorneys will reduce or waive their fees entirely.
- For Chapter 13, you can expect to pay $3,000 to $4,500, depending on where you live. In many cases, the attorney will charge a down payment but allow you to include the balance of the fees with your debt repayment plan upon discharge. When you make your monthly plan payments to your bankruptcy trustee, a portion will be paid to your attorney.Some attorneys will waive a certain dollar amount for every sum you pay up front. As an example, for every $300 you owe and pay up front, your lawyer may choose to waive $100.
- For Chapter 11, legal fees start in the neighborhood of $10,000 and $25,000 for small businesses. Medium- to large-sized companies can expect to pay $50,000 to as high as $500,000. As with the previous two types, prices vary by location and complexity.
Disclosure of Fees
In any case, it’s important for you to know that attorneys’ fees are public record and must be approved by the bankruptcy court. Attorneys are required by law to disclose their fees on a form called the Statement of Financial Affairs, which summarizes a history of your recent financial transactions, including legal representation costs.
Most courts set “presumptively reasonable” or “no-look” guideline fees that your attorney cannot exceed unless extraordinary circumstances justify higher rates. This is common for Chapter 13 cases but can apply also to Chapter 7, depending on the district. Courts must review and approve an attorney’s fees unless they are “presumptively reasonable” or “no-look,” meaning they are equal to or less than the guideline fee, in which case a review isn’t necessary. Each judicial district dictates its own guideline fees. If a court determines that your attorney’s fees are excessive or unreasonable, all or a fraction of it will be refunded to you. That’s one way to keep your bankruptcy attorney in check.
Bankruptcy On the Cheap
If you’re looking for “free bankruptcy,” you’ll need to meet the requirement for a fee waiver, and your situation must be sufficiently dire to qualify you for free, or “pro bono,” legal assistance. You can consult your local legal aid office or local bar association for pro bono attorneys and to determine your eligibility. Alternatively, many law schools operate legal clinics that offer legal services at no charge.
If free legal help isn’t available, you may wish to consider the following options:
- Credit Counseling: In your state, you can find credit counselors that are nonprofit and offer free services, so take advantage of them if you qualify. Credit counseling programs are available at many universities, military bases, credit unions, housing authorities and branches of the U.S. Cooperative Extension Service. The U.S. Trustee Program also maintains a database of government-approved credit counseling providers. Keep in mind that a nonprofit credit counselor can still charge you, so make sure you discuss possible costs and your inability to pay before you agree to receive services.
- “Express” Bankruptcy: Search online and you’ll find advertisements for “low cost bankruptcy” and “cheap bankruptcy” preparation. If that’s what you seek, you’re in for disappointment. Self-proclaimed preparers often are not licensed bankruptcy attorneys. Customers find themselves paying for work that was done incorrectly or, worse, never even performed. Don’t fall into that trap. Phony bankruptcy “experts” cannot, and should not, offer you legal advice. We strongly advise against this alternative and recommend retaining competent legal counsel instead. Bankruptcy lawyers cost serious scratch, but the outcome likely will turn out in your favor.
Some consumers filing Chapter 7 bankruptcy represent themselves, or “pro se,” in court if they can’t afford an attorney or if their cases are simple. Many Chapter 13 filers attempt this as well. It is possible to represent oneself successfully, but because of the very technical nature of bankruptcy rules, we strongly advise against the practice. Courts themselves also discourage filers from pursuing this option. You can save money this way, but the cost can be much greater if you aren’t adequately prepared.
If you decide to go it alone, not only must you learn the rules of the local court where you are filing, but also familiarize yourself with the United States Bankruptcy Code and Federal Rules of Bankruptcy Procedure. You’re looking at weeks, maybe months, of reading and memorizing, let alone figuring out which rules and codes apply to your case.
We cannot stress enough that court procedures must be followed to a T. The consequences of doing otherwise can be unpleasant and irrevocable — a simple error such as filing under Chapter 7 instead of Chapter 13 could cost you valuable property that you might have been able to keep. Such mistakes are quite common in self-representation. For that reason, the success rate of bankruptcies filed pro se is much lower compared to a high percentage when represented by an attorney in many areas around the country.
In California’s central district, for instance, the success rate for pro se Chapter 7 cases is about 55.1 percent compared to 82.4 percent for attorney-assisted victories. And of the total Chapter 13 self-represented cases filed, only 24, or 0.2 percent, reached confirmation compared to 2,852 non-pro-se cases that did.
An experienced lawyer is familiar with court procedures and rules. He or she will make sure to file the right forms on time and submit them to the right place. Apart from such administrative tasks, your attorney also could help you retain more of your property and respond to court motions appropriately if creditors object to your discharge. You’ll save time and additional costs that could result from missteps through self-representation.
Costs of Credit Counseling
Part of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act added requirements such as mandatory credit counseling and pre-discharge education to the process. Filers are required by law to participate in and complete both either by phone, online or in person with a government-approved credit counseling agency or debtor education provider. Below is a breakdown of the costs you can expect to pay for counseling and education:
- Pre-filing bankruptcy counseling: Under Chapters 7 and 13, credit counseling is mandatory and must be completed six months prior to filing. In most cases, it’s free. Otherwise, you can expect to pay between $20 and $50. The law requires you to pay whether or not you can, so be sure to inform your agency or counseling provider beforehand if you can’t cover the cost.
- Pre-discharge education: Filers must participate in this personal financial management course prior to bankruptcy discharge. The course typically costs between $11 and $50, which can be waived or reduced.
Damage to Your Credit Score
One of the key costs you’ll incur as a result of filing for bankruptcy is the detrimental impact on your credit score and the correspondingly higher costs you will have to pay on all sorts of things for years to come — ranging from more expensive loans to higher car insurance premiums. Bankruptcy is one of the most damaging entries on a person’s credit report and should be considered as a last resort.
In every case, bankruptcy sends a consumer back to the beginning of the credit-building process. And the glaring red flag of bankruptcy on a credit report makes it more difficult for people coming out of bankruptcy to rebuild credit than someone establishing credit for the first time.
Another reason why bankruptcy is so significant is due to the fact that it is stays on your credit report for up to 10 years, serving as a warning to future lenders.
Declaring bankruptcy doesn’t mean you’ll never achieve satisfactory credit again. In fact, you can begin rebuilding your credit right after you’re discharged from a bankruptcy by applying for a secured credit card, which will also be an effective method for limiting your spending. Your deposit will be equivalent to your credit limit. Consistently making timely payments and adding to your deposit will raise your credit score. However, keep in mind not all lenders will approve you for a secured credit card right away.
One of the most painful costs of bankruptcy is losing many of your non-exempt assets. Both “exempt” and “non-exempt” assets vary depending on the state and federal exemption laws applicable to your case. A few examples of non-exempt assets are a cash-value life insurance policy, a boat or a second residence. Some exempt assets include your automobile, your principal residence if it has equity or your wedding ring, among others.
State & Federal Exemption Laws
Exemption laws exist at both the state and federal levels and dictate how much property you can exempt (or get to keep). Exemption amounts vary by state, and some states even have unlimited homestead exemption amounts to let you keep your house. In some states, the debtor can choose between state and federal exemptions but not a combination of both.
Here’s how exemptions apply: For instance, if your state’s motor vehicle exemption is $5,000, then as long as the equity on your car is less than that amount, you can keep the car. Otherwise, if the equity is more than $5,000, your trustee will sell your car, pay you $5,000 and pay the difference to your creditors.
Reaffirming a Debt
In a Chapter 7 bankruptcy, a debt secured by property you wish to retain such as your car can be “reaffirmed.” That’s one way to keep your vehicle. By voluntarily signing and filing what’s called a Reaffirmation Agreement, you and your creditor can agree on an alternative repayment schedule, and you can continue to make payments on your car loan. In return, your creditor will agree not to repossess your property so long as you do not default on your payments according to the agreed-upon schedule. Reaffirmation Agreements are not required by law. You must enter this contract only if you are confident that you will be able to make the payments. Otherwise, not only will the property be repossessed or foreclosed, the lender also may sue you for breaching your agreement.
Tips and Other Pitfalls to Avoid
- Cheap is Expensive: If you try to cut corners with your bankruptcy case, scrimping in the wrong places could really hurt you. Here are some examples:
- Bankruptcy fraud penalties: Be completely honest about your financial situation. Do not conceal any of your assets, or you’ll instead be uncovering a $500,000 court fine in addition to a $10,000 legal bill. Committing fraud or making a false statement in court are punishable by law — you could be imprisoned up to five years — and could disqualify you from bankruptcy protection. And if you or your bankruptcy attorney fail to follow strictly all bankruptcy procedures and rules, the court reserves the right not to discharge even your dischargeable debts.
- Self-representation: Many people who file for bankruptcy forgo legal assistance, which is ill advised. Some filers might represent themselves when they didn’t need to file for bankruptcy in the first place. A better approach is consulting a credit counselor to assess one’s financial situation and explore less abrasive options. Other common pro-se mistakes are filing under the wrong chapter or submitting incomplete documents. Such simple missteps can lead to serious consequences such as immediate dismissal of your bankruptcy petition.
- Hiring a cheap attorney: It’s important for you to speak with and compare different bankruptcy attorneys. You might find an attorney who offers a competitive rate but has less experience in your particular bankruptcy type whereas another might charge higher rates but has an excellent track record with more complicated cases. Also, keep in mind that your consultation should be with an attorney, not a paralegal, who can perform much of the work on Chapter 7 but should not offer you legal advice.
- Beware of “low rate” ads: An attorney might quote a low price then unnecessarily charge more — on various grounds such as filing jointly with a spouse, having an unusually high debt load or surpassing a predetermined number of creditors, which rarely complicate a Chapter 7 case — when filing begins. Such deceptive advertising is a sign of an unscrupulous attorney and should be avoided.
- Getting a second job: Make sure you check with your attorney before taking on additional employment. There’s a catch-22 if you decide to take on a second job to cover your legal fees — the additional income could disqualify you from bankruptcy protection.
- Speak Up: When you consult an attorney, the conversation shouldn’t be one-sided. You should ask about your attorney’s background and experience in order to find someone who is worth the money.
- Ask for references: Talk to a staff member at a bank or an accountant who’s worked with your attorney. Ask about the nature of their business and what it was like to work together.
- Paying for legal services: You should ask how your attorney will be compensated — flat fee, retainer, hourly or some combination of those?
- Convert with Caution: There are costs — monetary or otherwise — associated with converting your case from one chapter to another:
- From Chapter 13 to 7: You could lose certain property that your bankruptcy trustee could sell to pay your creditors.
- From Chapter 7 to 13: You’ll need to pay your filing fee in full and possibly file new forms. If your fee waiver was initially approved, it will be reversed, and you’ll need to pay the full amount or begin making installments within 10 days of the conversion.