Finance

Cost to File Chapter 7 Bankruptcy

Cost of Going Bankrupt

For many, filing bankruptcy is a last resort is a series of steps taken to try and deal with accruing debt.  Often the decision comes down to a risk/reward analysis, having to weigh the costs of taking such a drastic step against the costs of continuing down a seemingly endless road of missed payments and mounting interest.  So just what are those costs?  Are they strictly financial or are there other equally serious, but non-financial, consequences?

Type of Bankruptcy

There are several types of bankruptcy that individuals and businesses can file for under the United States Bankruptcy Code. The most common types are:

1. Chapter 7 Bankruptcy: Also known as a “liquidation bankruptcy,” this type of bankruptcy involves selling off non-exempt assets to pay off debts. Once the assets have been liquidated, most remaining debts are discharged.
2. Chapter 11 Bankruptcy: This type of bankruptcy is primarily used by businesses, but can also be used by individuals with significant debt. Chapter 11 allows the debtor to reorganize their finances while continuing to operate their business or personal affairs.
3. Chapter 12 Bankruptcy: This type of bankruptcy is specifically designed for family farmers and fishermen, allowing them to reorganize their debts and keep their operations running.
4. Chapter 13 Bankruptcy: Also known as a “wage earner’s plan,” this type of bankruptcy involves creating a repayment plan over a period of three to five years to pay off debts.

The cost of filing for bankruptcy can vary depending on the type of bankruptcy being filed and the complexity of the case. Additionally, there may be additional fees for court appearances, credit counseling, and legal representation. It’s important to consult with a bankruptcy attorney to understand the specific costs and requirements for filing bankruptcy in your jurisdiction.

Attorney costs

In either case, while it is possible to file without an attorney, or “pro se”, it is highly discouraged.  While your odds of success when filing “pro se” in a Chapter 7 are just slightly less than 50%, they are less than 5% in a Chapter 13.  In those situations, your case is thrown out and you are saddled permanently with your debt.   Nationally, the costs of retaining an attorney for a Chapter 7 are around $1250.  For Chapter 13, where the process is more complex and a person is trying to hold on to certain properties, the average costs is around $3000 for attorney assistance.

Additional costs

Time is another cost.  Aside from time spent in the courtroom during the proceedings, any successful petitioner for bankruptcy will be required to take various money and credit management classes, at your own expense.  These vary from case to case.

Additionally, your credit rating will reflect your bankruptcy for 10 years.  While this technically costs you nothing and does not bar you from receiving loans or credit cards, it is pretty much guaranteed that you will pay considerably higher interest rates, a different financial cost, for years to come.  This factor, though, should be weighed against the damage you are likely doing to your credit already if you have acquired more debt than you are capable of handling.

On a smaller scale, there is the social stigma that accompanies bankruptcy.  All bankruptcy filings, unless specifically sealed by a judge, are a matter of public record.  While this may not be an issue for many, the stress and embarrassment associated with bankruptcy filings might be a deterrent for some.

So while the steps that could lead one to consider personal bankruptcy are usually significant enough that any costs are worth the relief one might feel in their life, it is always important to consider the various costs and how non-financial factors might weigh in your decision.