Bankruptcy is a procedure designed to give relief to individuals or businesses that owe their creditors money. The goal of bankruptcy is to 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 clean slate to someone struggling to meet their debt obligations, bankruptcy can be an expensive and long process with many different payment variables. Below is a detailed explanation of this process and the fees and costs associated with it.
What Factors Cause Bankruptcy Costs to Vary?
Before filing for bankruptcy, it is important to know how much attorneys charge to file for bankruptcy. Listed below is the typical cost of Chapter 13 bankruptcy, Chapter 11, and Chapter 7 bankruptcy. Before understanding how much each bankruptcy costs, it is important to understand the differences between the types of bankruptcy.
Chapter 7- Chapter 7 bankruptcy allows a debtor to remove all the debt that is legally capable of being discharged. However, there are certain Chapter 7 bankruptcy rules which determine who qualifies, how to file for bankruptcy, and what type of debt is eligible to be discharged. Much of bankruptcy is figuring out whether the debtor is eligible. A potential filer will be required to take something called a “means test”. Under the means test, filers who have the ability to repay creditors cannot file for Chapter 7 bankruptcy. The means test determines how much the debtor can repay the creditors based on their income and other assets.
On certain occasions if the debtor has extra income a month after paying creditors, the filer will fail the means test and will not qualify for a chapter 7 bankruptcy. If a debtor is not eligible for a chapter 7 bankruptcy a debtor can file a chapter 13 bankruptcy, which restructures the debt into a payment plan. Below is a more detailed explanation of chapter 13 bankruptcy.
Chapter 13- Chapter 13 bankruptcy is the restructured or reorganization form of bankruptcy. This option is typically for people who have higher incomes, or are not eligible for chapter 7 bankruptcy. In most cases, chapter 13 bankruptcy is for those that have certain assets they want protected from creditors.
Chapter 13 allows the debtor to restructure the debt and make payments they can afford. Some debts may be fully discharged through this process while others are required to be paid in full within the timeframe of the bankruptcy payment plan. A payment plan means the debtor will pay off a certain amount of debt each month depending on how much the assets are worth and what the court decides.
There are different factors that can impact how the debt is reorganized or restructured. These include:
- The kind of debt you want included. Some debts like student loan debt cannot be discharged even after filing for bankruptcy
- The past relationship you have with the creditor owed money to
- How much time it takes you to pay off the debt
Various Types of Fees
1) Filing Fee- The typical filing fee for the type of bankruptcy depends on the type of bankruptcy filed. A bankruptcy can either be a Chapter 7, Chapter 11, or Chapter 13. The average cost of a filing fee for bankruptcy is:
- Chapter 7: $335
- Chapter 11: $1,717
- Chapter 13: $310
2) Trustee & Consumer Credit Counseling Fees- A trustee is responsible for managing the assets of the debtor. Below are the listed fees associated with a trustee in a bankruptcy:
- 25 percent on the first $5,000 or less;
- 10 percent on any amount in the excess of $5,000 but not more then $50,000;
- 5 percent on any amount in excess of $50,000 but not more then $1,000,000;
- 3 percent in excess of $1,000,000 total
Consumer credit counselors are organizations that help individuals negotiate more favorable fees and interest rates and help with financial literacy. They do not cost much, however monthly fees may add up over time, and these services should be budgeted for.
3) Attorney’s Fees- Because bankruptcy is a large and complex topic, attorney’s fees in a bankruptcy have a wide range and come down to many factors. How much an attorney charges for attorneys fees, depends on the jurisdiction the bankruptcy is filed and the attorneys preference to how much they wish to charge. Before you file 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.
How are Bankruptcy Lawyer Fees Calculated?
There are several factors that can influence how much an attorney will charge to represent a client in a bankruptcy proceeding:
- How complex the bankruptcy is depending on the amount of assets and other facts of the case
- How much the client makes in monthly income, compared to the amount of debt they owe.
- What type of bankruptcy is being filed
- What jurisdiction the bankruptcy is being filed in. Some larger urban law firms may charge more based on the average rate for other bankruptcy cases in that same area.
Because of the difference in application and subject matter whether a client files for a Chapter 7 bankruptcy or a Chapter 13 bankruptcy may affect the fee structure. Below is an explanation of the way fees are structured based on whether the client files for a Chapter 13 bankruptcy or a Chapter 7 bankruptcy.
- Chapter 7: Chapter 7 lawyer fees tend to base their fee on how much time and effort will go into preparing the papers. This is in contrast to Chapter 13 Bankruptcy where the courts limit the permissible fees, the cost for Chapter 7 is left up to the lawyer preparing the case.
- Chapter 13: Under Chapter 13, bankruptcy courts will limit how much an attorney can charge for their services, and if an attorney must justify why their rate should be increased. Finally, the entire fee will not be required upfront.
Why Would Lawyers Charge an Hourly Fee?
Most bankruptcy lawyers will charge on an hourly fee basis. This will provide clients facing substantial financial burdens with a level of certainty of the cost of the process. However in some circumstances bankruptcy lawyers still work off a traditional hourly rate.
Hourly rates are subject to change, depending on the locale and relative experience of the lawyer. You should expect to pay anywhere around $100-$400 an hour for a lawyer’s time depending on the factors already listed above. To conclude, 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.
Should I Hire an Attorney if I File for Bankruptcy?
Filing for bankruptcy is a complicated and complex process and often occurs when a person is financially and emotionally unsure of their next move. That’s why 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.