While bankruptcy can be a viable solution to overwhelming debt, it comes with costs of its own. Not only will you pay short-term costs to file for bankruptcy and hire an attorney, but you’ll also deal with long-term financial implications. Attorney fees can run from $750 to $4,500, depending on the complexity of the case. Filing fees will add another $300-$340.
Immediate Costs of Bankruptcy
Filing costs for bankruptcy are set by the federal government. You’ll pay a $338 petition fee to file a Chapter 7 bankruptcy and a $313 petition fee to file a Chapter 13 bankruptcy.
Of course, the filing fees don’t include what you’ll pay your attorney. Attorney fees for bankruptcy tend to be higher for Chapter 7. You could pay anywhere from $750 to $4,500 depending on the type of bankruptcy and the complexity of your case.
According to Adrienne Hines, a bankruptcy attorney with Kademenos, Wisehart, Hines, Dolyk, & Wright Co., many jurisdictions limit the amount an attorney can charge for bankruptcy proceedings. “Every jurisdiction also clearly spells out what an attorney is required to do in exchange for a bankruptcy fee, and the U.S. Department of justice randomly audits these fee agreements,” Hines said.
If you file for Chapter 13 bankruptcy, you’ll be able to pay your attorney fees over time as a part of your court-ordered payment plan. So while the total attorney fees are higher than with Chapter 7 bankruptcy, you won’t have to pay them all upfront.
Finally, the federal government requires bankruptcy filers to go through credit counseling. If you file for bankruptcy, you’ll be on the hook for any fees for this counseling. Costs often range from $10 to $50.
Long-Term Costs of Bankruptcy
Perhaps even more important than the upfront costs of bankruptcy are the long-term impacts it can have on your finances.
Chapter 7 bankruptcy stays on your credit report for up to 10 years, while Chapter 13 stays on for up to seven years. The most immediate impact of bankruptcy on your credit report will happen right away.
According to myFICO, you can expect a modest to a huge drop in your credit score. Generally speaking, the higher your score, the more of an impact bankruptcy will have.
The bankruptcy on your credit report could have an impact on your overall financial situation for years. First, you may struggle to qualify for loans and credit cards. If you do qualify, you may be subject to a high interest rate. A good credit score can be the difference of thousands of dollars (and maybe more).
Of course, borrowing money isn’t the only time your credit score matters. Your credit history also impacts your ability to rent an apartment, sign up for insurance, and even get certain jobs.
While bankruptcy will be factored into your credit score for as long as it remains on your credit report, the impact will lessen over time.
Even when your credit score has bounced back, creditors will still be able to see the bankruptcy as long as it remains on your credit report. Despite an improved credit score, you may still find some creditors won’t approve your applications or will charge you higher interest rates.
An Alternative to Bankruptcy: Credit Counseling
Nonprofit credit counseling agencies can help consumers who are struggling with overwhelming debt. Reputable agencies help their clients develop workable budgets and stronger personal finance habits. Most of all, they can help build a debt-management plan that reduces debt without harming client credit scores.
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Types of Bankruptcy
If you’re an individual considering bankruptcy, you may file one of two different types. Generally speaking, the type of bankruptcy you file will have less to do with personal preference and more to do with which is required, given your circumstances.
Chapter 7 bankruptcy is the one with the lowest financial impact on the filer. You may file this type of bankruptcy if you’re unable to make your monthly debt payments. Once you file, your assets are used to pay your creditors what you owe them—or, more likely, only a part of what you owe them.
“Most people don’t realize that Chapter 7 is a liquidation, and depending on the value of your cars, your real estate, your bank accounts, your business interests,” said Hines, “those things could be at risk for liquidation in Chapter 7.”
The good news is that certain assets are exempt from liquidation. Assets and property that are generally exempt from Chapter 7 bankruptcy liquidation include:
- Your 401(k), individual retirement plans (up to $1 million), and pension
- Government benefits, including Social Security, unemployment, disability, and veterans benefits
- Alimony and child support
- Wages you earn after you file
- Some or all of the equity in your primary residence
- Your vehicle
- Household goods, including furniture, clothing, appliances, and more
To qualify for Chapter 7 bankruptcy, you must meet one of the following requirements:
- Your current monthly income is less than your state’s median.
- Your current monthly income minus expenses and secured debt payments over five years is the lesser of: the greater of 25% of your nonpriority unsecured debt or $9,075, or $15,150
You can’t file Chapter 7 bankruptcy if you’ve had a bankruptcy filing dismissed during the past 180 days for failure to appear in court or comply with court orders. You also won’t qualify for Chapter 7 bankruptcy if you’ve received a Chapter 7 discharge within the past eight years or a Chapter 13 discharge within the past six years.
If you don’t qualify for Chapter 7 bankruptcy, then you’ll have the option of filing for Chapter 13 bankruptcy, also known as a “wage earner’s plan.” Rather than liquidating your assets, this type of bankruptcy helps you make a plan to pay them off, in part or in full.
“Chapter 13 is difficult and painful for most people because it is a court-ordered budget,” Hines said. “That feels very difficult for the average individual to live within.”
In Chapter 13 bankruptcy, you’ll be subject to a payment plan ranging from three to five years. Your payment timeline will depend on your income: An income below your state’s median will result in a three-year payment plan, while an income above the median will result in a five-year payment plan.
“For example, if the formula says you have $500 a month left over after paying all of your necessary expenses, then you will pay $500 a month into a Chapter 13 plan for 60 months,” Hines said. “You would pay back $30,000 in that hypothetical. If your debt was only $30,000, then you would be in a 100% payment plan. But if your debt was $100,000, for example, you would be in a 30% plan.”
If you’re behind on your mortgage payments, you’ll want to file for Chapter 13 bankruptcy. A Chapter 7 bankruptcy, although it will put a foreclosure on hold, won’t prevent it. Chapter 13, on the other hand, will help you catch up on payments and keep your home.
Frequently Asked Questions
What Are the Different Types of Bankruptcy?
The two types of bankruptcy available to individuals are Chapter 7 and Chapter 13 bankruptcy. Chapter 7 is a liquidation, while Chapter 13—called a "wage earner’s plan"—helps someone pay off their debts in a series of installments over three to five years.
There are also types of bankruptcy available to organizations. Chapter 11 applies to businesses, while Chapter 9 applies to municipalities. Finally, Chapter 12 applies to family farmers and fishermen.
What Is the Cheapest Type of Bankruptcy?
Chapter 7 bankruptcy is generally the cheapest type of bankruptcy to file. Attorney fees for this type of bankruptcy are usually far lower than those for a Chapter 13 bankruptcy. Additionally, anyone with an income of less than 150% of the federal poverty level can either have their fee waived or can pay their fee in installments.
Not only are the fees of Chapter 7 bankruptcy lower, but you also end up paying less to your creditors. While Chapter 7 only requires that you pay the value of your liquidated assets, a Chapter 13 bankruptcy could result in you paying far more over three to five years.
Can You Represent Yourself in a Bankruptcy Case?
As with most legal proceedings, you can choose to represent yourself in a bankruptcy case instead of hiring an attorney. And for simple cases, representing yourself might make sense for you. However, given the long-term financial and legal impacts that bankruptcy can have, it’s highly recommended that you hire an attorney.
What Is Bankruptcy Credit Counseling?
Credit counseling is an educational program someone goes through when they’re considering filing for bankruptcy. It’s required by the federal government and must be completed within 180 days before filing for bankruptcy.
This counseling comes in two parts. The first counseling session is meant to help someone decide whether bankruptcy is the right choice for them. The second part of counseling—known as debtor education—is completed after someone files for bankruptcy, and helps them learn financial skills and tools that will help them avoid getting into a similar situation in the future.
United States Bankruptcy Court. "Fee Schedule."
United States Courts. "Credit Counseling and Debtor Education Courses."
myFICO. "What Are the Different Types of Bankruptcy and How Is Each Considered by My FICO Score?"
IRS. "Chapter 7 Bankruptcy – Liquidation Under the Bankruptcy Code."
United States Courts. "Chapter 7 - Bankruptcy Basics."
United States Courts. "Chapter 13 - Bankruptcy Basics."