Ballpark Estimate: $300 for filing fee; $1,500 to $3,500+ for lawyers fee
No one wants to file for bankruptcy, but sometimes things go wrong. For many Americans, health problems and medical bills are the cause of financial ruin. Maybe your business fails, you lose your job, or your bills just pile up faster than you can pay them. Slowly but surely, the creditors start pounding at your door, and you’re afraid to answer the phone for fear that another collection agency will be demanding money.
If you’re feeling desperate about your financial situation, and considering filing for bankruptcy, here are some steps to consider before, during, and after the process, and we’ll tell you what it costs—because even declaring bankruptcy will cost you money.
First, Consider The Alternatives
Renegotiate Your Loans
Talk directly with your creditors, explaining your situation. Try to renegotiate your loans for better terms: a longer payback time, smaller monthly payments, or a lower interest rate.
Consolidate Your Loans
Loan consolidation agencies have special arrangements with all the major creditors and are able to offer lower loan interest rates than are usually available to the public. They will ask you to destroy all credit cards involved in the debt consolidation. They will be responsible for paying your creditors, while you pay one low monthly payment to them. Your new low-interest loan will be payable over 4 to 8 years. These companies are particularly good for people with a lot of high-interest credit card debt. Carefully research these companies before taking the plunge.
Debt Negotiation Company
A company representative will approach your creditors on your behalf, and try to work out some kind of deal. Creditors will usually agree to a new plan, since they know that once you declare bankruptcy, they may not get paid at all.
Low Interest-Rate Home Equity Loan
If you have substantial equity in your home, you can consolidate all your debts into one monthly payment. Home loans typically have lower interest rates and longer repayment periods than unsecured debts and loans. Your monthly payment will be smaller, giving you the opportunity to regroup, create a budget, and hopefully get back on your financial feet.
When Bankruptcy Is Your Only Recourse
Bankruptcy Abuse Prevention And Consumer Protection Act
For a while, Americans were actually overusing bankruptcy, as an “easy” way to get out of paying their debts. In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act which makes declaring bankruptcy more difficult for debtors and helps creditors receive greater compensation. The BAPCPA is very long and complicated, but here are a few of the key points that affect individuals:
- Filing fees have gone up in price
- Prior to filing, individuals must take credit counseling classes from an approved provider
- Eligibility for Chapter 7 bankruptcy (where you lose much of your property but are free of debt) is now more difficult to achieve, due to the Means Test (see below)
- You are required to take follow-up classes after you have declared bankruptcy
Do Your Homework!
It is essential that you enter into this process well-informed. There are some good websites that will teach you the basics and help you learn what to expect, what will be expected of you, how filing for bankruptcy will help you, and what it will do to your life.
- The Bankruptcy Site is one of the best bankruptcy websites, with information specific to the state in which you live, as well as practical and helpful articles about all aspects of the experience.
- U.S Courts resources has links to a long list of resources, including all the pertinent forms, fees, information about the Means test, and many helpful articles.
- U.S Courts forms has links to the Official Bankruptcy Forms Manual (with instructions), and other information.
- Bankruptcy Action application is a worksheet to help you gather your personal and financial information.
After you have learned the basic information, a good first step would be to fill out Form B22A, the Means Test Calculation, to discover if you do, indeed, qualify for a Chapter 7 bankruptcy. If you don’t, you may choose to file for a Chapter 13 bankruptcy.
- Find form at U.S. Courts Form B22A
Two Kinds Of Bankruptcy For Individuals
Chapter 7 Bankruptcy
This is also known as “straight” or “liquidation” bankruptcy. Your first step is to take a mandatory consumer counseling course. You will then gather all your financial records in order to let the court know exactly what your financial situation is (income, assets, and debts). Cost To File For BankruptcyThat information is subject to a Means Test which determines your eligibility for Chapter 7 bankruptcy. If you qualify, you (or your lawyer) will fill out forms and file for bankruptcy in your nearest federal court. The court will then issue an “automatic stay,” which means that your creditors can no longer contact you about your debts. A court-appointed Trustee will decide which of your assets are exempt or non-exempt. Visit The Bankruptcy Site for a state-by-state description of bankruptcy exemptions. Once the court accepts your petition for bankruptcy, the Trustee liquidates (sells) all your non-exempt assets, and uses the funds to pay off as much of your debt as possible. You are officially released from your debts, at this point, and can start rebuilding your credit rating and your life.
Cost for Chapter 7 bankruptcy filing fees are $300 to $325.
You will still be responsible for:
- Child support
- Student loans
- Certain taxes
- Debts incurred as the result of drunk driving
- Civil and/or criminal restitution
Chapter 13 Bankruptcy
This is sometimes referred to as “debt adjustment” or “wage earner’s” bankruptcy, and is for individuals with a regular income, who don’t qualify for Chapter 7 bankruptcy. Chapter 13 allows employed but financially distressed people to repay their debts under court supervision, according to a predetermined repayment plan, over the course of 3 to 5 years. You are required to list all your creditors with amounts owed and type of claim, any other debts, any and all income and assets, and a detailed list of your monthly living expenses (including food, clothing, home, utilities, taxes, etc.). A court-appointed Trustee will serve as a disbursing agent, collecting money from you and paying it out to your creditors. Once you file a Chapter 13, you will receive an “automatic stay,” which prohibits your creditors from contacting you in any way.
Cost for Chapter 13 bankruptcy filing fees are $250 to $300.
Should You Hire A Lawyer?
You are not required to have a lawyer when filing for bankruptcy, but it is highly recommended. The forms, dates and deadlines, requirements, Means test, meeting with creditors (341 meeting), terms, and decisions are often complicated and confusing. A bankruptcy lawyer who knows the ropes will help you through this difficult time of your life, and hopefully get you to the point of best possible outcome.
Some lawyers charge a flat fee, some base their fee on your amount of debt, and some charge an hourly rate. A flat fee is usually your best bet, although you should read your contract carefully and be aware that if your case becomes complicated, additional fees may be added.
- Initial consultation are free for some law firms, but you must itemize your assets and debts ahead of time and have the information on hand. Initial consultations are often by telephone.
- Lawyer fees range from $1200 to $5,000, depending on where you live and the complexity of your case.
- If you can’t afford a lawyer, you may qualify for free (“pro bono”) legal services.
Most lawyers will ask you to either pay your entire fee up front, or pay a down payment followed by an installment plan. If you are filing Chapter 7 bankruptcy, the lawyer must be paid in full before your case is filed. Any unpaid fees after you have declared Chapter 7 bankruptcy are uncollectible by law. Since Chapter 13 bankruptcy helps you set up a 3 to 5 year payment plan for your debts, your lawyers fees may be incorporated into that.
Should You Go It Alone (“pro se”)?
If you choose to represent yourself in bankruptcy court, be forewarned that it is a difficult job. The rules you will need to know and follow are highly technical, and the process includes penalties if certain forms, requirements, or deadlines are not met. If you plan to do this yourself, you should become familiar with the U.S. Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, the laws and fees specific to your state, and the rules of your local court.
- U.S. Courts is a good place to learn more about filing without an attorney.
There are some excellent books on the market, but there are some outdated and inaccurate books as well. Do some research, read reviews, and check copyright dates to be sure you’re getting current information. Cost: $12 to $30
These often include a long and “impressive” selection of forms, all of which you can get for free on the U.S. Courts website. If you go this route, be sure the software is up-to-date, at least post-2005. Many software ads tout that their technical help is “standing by.” However, this tech help is for running the software; they will offer no legal advice at all. Cost: $50 to $200
Online Preparation Services
These companies go out of their way to tell you how difficult the filing process is, and then tell you they can do it for you in 24 hours or less. They make it sound simple, but the real work, of course, is gathering your information and making sure you’ve included everything. What you don’t include “isn’t their responsibility.” Cost: $87 to $1500
Document Preparation Services, Typing Services, Paralegal Services
For a fee, these companies will prepare your bankruptcy forms for you. They are not qualified to give you any legal advice, and you are ultimately responsible for the completeness and accuracy of your forms and information. Cost: $150+
How Bankruptcy Affects Your Life
- Depending on your credit rating before you declared bankruptcy, your rating post-bankruptcy will either be damaged or destroyed
- Your bankruptcy filing will be on your credit report for the next 10 years.
- Your bankruptcy will be a matter of public record, so any interested party (landlord, future employer) can look it up if they want to. Since credit and background checks are common these days, when applying for a job or looking for a place to live, it’s best to be honest and up front about your situation right away. Explain that the experience is part of your past, and that your future is on a more successful track.
- It is against the law for your employer to discriminate against you because you filed for bankruptcy.
- It is against the law for a company to refuse to hire you because you filed for bankruptcy.