Bankruptcy is often a tool of last resort for individuals or business that are struggling to meet their financial obligations. Bankruptcy provisions potentially allow debtors to restructure their debt agreements, reduce the amount they are owed, or in some cases eliminate part or all their debt altogether. However, while bankruptcy can represent a fresh financial start to someone struggling to meet their debt obligations, it is important to note that the bankruptcy process itself has a number of expenses that cannot be discharged.
Before filing for bankruptcy, it is important to know about all of the potential costs associated with the bankruptcy process since these obligations will remain even if the bankruptcy proceeding discharges all other debts.
1) Filing Fee – The cost of the filing fees depends on the type or bankruptcy proceeding:
- Chapter 7: $335
- Chapter 11: $1,717
- Chapter 13: $310
2) Trustee & Consumer Credit Counseling Fees – A trustee is an appointed individual who oversees the bankruptcy case. By federal law, these individuals can only collect compensation under Chapter 7, and cannot collect more than:
- 25 percent on the first $5,000 or less;
- 10 percent on any amount in excess of $5,000 but not in excess of $50,000;
- 5 percent on any amount in excess of $50,000 but not in excess of $1,000,000; and
- 3 percent in excess of $1,000,000.
Similarly, consumer credit counselors are organizations that help individuals negotiate more favorable fees and interest rates. They may not cost much, however monthly fees may add up over time, and their services should be budgeted for.
3) Attorney’s Fees – Unfortunately, due to the demographics of the various districts these lawyers serve, there is no single answer that can accurately determine exactly how much a bankruptcy lawyer will charge.
Several factors can influence how much an attorney will charge to represent a client in a bankruptcy proceeding:
- Complexity of the case (e.g. cases involving a lot of property or other assets will generally be more complicated and cost more);
- Income of client;
- Whether filed under Chapter 7 or Chapter 13;
- Experience of the attorney or firm;
- Geographical region (e.g. lawyers in New York City are likely to charge more than lawyers in Fargo, North Dakota);
Bankruptcy lawyers typically charge on a flat fee or hourly basis. Naturally, the more complicated the case, the more the lawyer will charge (except for Chapter 13). Moreover, if a client has a steady income, they should expect to pay more than an unemployed individual with little or no assets. Finally, Chapter 7 and 13 follow very different guidelines regarding how much a lawyer can charge.
- Chapter 7: Under Chapter 7, attorneys tend to base their fee on how much time and effort will go into preparing the papers. Unlike Chapter 13, where the courts limit the permissible fees, the cost for Chapter 7 is left up to the lawyer preparing the case. Expect to pay anywhere between $500-$4,000.
- Chapter 13: Under Chapter 13, bankruptcy courts limit how much an attorney can charge for their services, and if an attorney must justify why their rate should be increased (e.g., additional work needs to be done). Moreover, the entire fee will not be required upfront. Typically, the cost for a Chapter 13 bankruptcy will range anywhere between $2,000-$6,000.
Most bankruptcy lawyers will charge on a flat rate basis. This provides clients facing substantial financial burdens with a level of certainty of the cost of the process. However, some bankruptcy lawyers still work off a traditional hourly rate. Hourly rates vary greatly, depending on the locale and relative ability of the lawyer. Expect to pay anywhere $75-$400 an hour for a lawyer’s time depending on the factors listed above. In addition, lawyers that charge a flat rate for the initial filing of the case may then charge an hourly rate if the client asks for help with further proceedings, such as modifying a repayment plan.
Filing for bankruptcy is a complicated process and often occurs when a person is financially and emotionally stretched beyond their means. Hiring an experienced bankruptcy lawyer to oversee the process is the best way to secure a legitimate fresh financial start while also protecting your assets from creditors.