Chapter 7 vs. Chapter 13 — How Much Does it Cost to File Bankruptcy?

Chapter 7 vs. Chapter 13 — How Much Does it Cost to File Bankruptcy?
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Brittney Mayer
By: Brittney Mayer
Posted: June 15, 2017
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Whether you’re buried under unpaid medical bills, burdened by credit card balances, or bothered by loan default, sometimes your debt can get the better of you. As balances pile up and fees begin compounding, some may suddenly be looking at decades of payments to reach solvency.

In those cases, many turn to bankruptcy as a way to get out from under their debt and end the collection calls. As a last-ditch effort to become debt-free, bankruptcy can eliminate certain unsecured debts and give you some financial relief.

Among the unfortunate realities of filing for bankruptcy, however, is that it isn’t cheap. The various fees associated with bankruptcy can bump the cost of the process into the thousands of dollars — and that still doesn’t guarantee success. Additionally, filing for bankruptcy (even unsuccessfully) can result in significant costs to your overall credit.

Potential Fees | How to Pay | Credit Costs | Avoid Bankruptcy

Fees May Vary By Bankruptcy Type, Company & State

In the world of consumer bankruptcy, two main types exist: Chapter 7 and Chapter 13. The general costs associated with filing for bankruptcy, as well as the manner in which you pay them, will primarily depend upon the type of bankruptcy for which you intend to file. However, as with many other purchases, where and how (DIY vs. with an attorney) you file will also play a part on the cost.

That said, both types of bankruptcy do have some common costs. To start, anyone filing for bankruptcy is legally required to obtain credit counseling. This requirement must be met within the 180 days before filing for bankruptcy.

Additionally, the law also requires those filing for Chapter 7 or Chapter 13 bankruptcy to participate in personal finance management instruction, also called debtor education. This requirement can only be completed after you file and must be met before the bankruptcy can be discharged.

The cost for each service will vary by provider, but expect to pay somewhere in the range of $25 to $100 per service. While you may use the same company for both services, you cannot obtain your credit counseling and debtor education at the same time or in the same session. Counseling must be obtained before filing and debtor education obtained after you file.

Services must be obtained from a US Trustees Program approved credit counseling organization and debtor education provider, excepting in Alabama and North Carolina, which use their own administrators for approval.

Chapter 7 Bankruptcy

Likely the type of bankruptcy called to most minds when the term is mentioned, Chapter 7 bankruptcy — also called liquidation bankruptcy — involves the discharge of many types of unsecured personal debt. This includes, among others, credit card charges (balances and fees), medical bills, personal loans, past due utility bills or lease agreements, and certain types of attorney fees.

Although Chapter 7 bankruptcy is often preferred because it liquidates your unsecured debts, not everyone can qualify for Chapter 7. In particular, if your income is more than the state median, you are required to undergo a means test to ensure you are not abusing Chapter 7 bankruptcy.

“Abuse is presumed if the debtor’s aggregate current monthly income over five years, net of certain statutorily allowed expenses, is more than (i) $12,850, or (ii) 25% of the debtor’s nonpriority unsecured debt, as long as that amount is at least $7,700.” — USCourts.gov Chapter 7

Other than the required counseling and education costs, the other unavoidable expense associated with Chapter 7 bankruptcy is the collective filing fees. Made up of a $245 case filing fee, a $75 miscellaneous administrative fee, and a $15 trustee surcharge, these fees are generally paid to the clerk of courts at the time you file.

If you choose to employ the services of a bankruptcy lawyer, you’ll be expected to pay those fees up front. One study suggests Chapter 7 filers pay an average of $1,450 in attorneys’ fees, though they could range up to $5,000.

Chapter 13 Bankruptcy

In contrast to Chapter 7 bankruptcy, Chapter 13 bankruptcy does not involve the liquidation of debts. Instead, Chapter 13, also called reorganization bankruptcy, is designed to help individuals with regular income develop a plan to repay some or all of their debts.

Individuals may choose to file for Chapter 13 bankruptcy if they do not qualify for Chapter 7 bankruptcy but still need relief from their current debts. Additionally, those who wish to retain possession of certain assets, such as a primary residence, may choose to file Chapter 13, as it offers the opportunity to stop foreclosure proceedings.

Chapter 13 repayment plans generally span from three to five years, with the exact plan based on the individual’s income. Repayment plans can never exceed five years.

“If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period ‘for cause.’ If the debtor’s current monthly income is greater than the applicable state median, the plan generally must be for five years.” — USCourts.gov Chapter 13

As with Chapter 7, all those who file for Chapter 13 bankruptcy will be required to pay the collective filing fees. For Chapter 13, these consist of a $235 case filing fee and a $75 miscellaneous administrative fee, a total of $310, which is usually due at the time of filing. In both Chapter 7 and Chapter 13, a joint filing requires only one set of fees to be paid.

The attorneys’ fees for filing for Chapter 13 bankruptcy will likely be much higher than those for Chapter 7, as completing the process for Chapter 13 takes significantly longer than Chapter 7 and requires more work on the part of the attorney. Expect to pay an average of $3,000 in attorneys’ fees.

Cost of DIY vs. Hiring a Professional

Many things in life can be accomplished adequately with some research and a little DIY, as evidenced by the myriad videos, blogs, and television shows teaching us how to tackle tasks ourselves. Unlike bedazzled lampshades, subway tile backsplashes, or recycled tire planters, however, filing for bankruptcy is not recommended as a DIY project.

Central District Court of California Discharged Cases Graph

Alright, yes, filing bankruptcy yourself (or “pro se” in legalese) will likely be at least $1,000 cheaper, depending on which type of bankruptcy for which you file, but that extra cost will likely be well worth it in the end.

Even the simplest bankruptcy can be a relatively complex process, and any mistakes you make along the way could get your bankruptcy filing dismissed entirely.

In fact, a study by the Central District Court of California found that bankruptcies filed with an attorney have a significantly higher discharge rate — about 40% higher, to be more precise. Of all the cases closed in 2014, the study determined 82.1% of attorney-represented filers obtained a bankruptcy discharge, while only 48.2% of pro se filers were able to obtain a discharge.

If nothing else, consulting with an attorney will help you confirm whether bankruptcy is even the correct option. Before plunking down even so much as the filing fees, you should determine not only if bankruptcy is actually a viable option, but also if it will actually accomplish what you hope it will in terms of your finances. Many agencies and/or attorneys will offer a low cost or free consultation to help you learn about your options.

  • Free consultations with a local bankruptcy attorney
  • Work with a nationwide network of sponsoring bankruptcy lawyers
  • Attorneys inform you of the bankruptcy laws that may help you eliminate debt
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  • Free, online live chat to get answers quickly
  • Outlines how your filing will affect your debt and your future
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4.8

Overall Rating

Better Business Bureau In Business Since Free Consultation? Reputation Score
A+ 2005 Yes 9.0/10
  • Eliminate credit card and medical bills
  • Keep your home, car, wages and furniture
  • Automatic stay freezes collections immediately
  • A Chapter 7 case may be completed in as little as 4-5 months
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4.5

Overall Rating

Better Business Bureau In Business Since Free Consultation? Reputation Score
n/a 1939 Yes 8.5/10

The exact fees your attorney charges will vary based on the complexity of your bankruptcy and, to a lesser extent, your location (city vs. county). And, of course, the prestige and experience of your attorney will also contribute to the amount you are charged for his or her services.

How to Pay Bankruptcy Fees

By the time most consumers are considering bankruptcy, chances are good they’re a little low on disposable funds, making the four-figure cost of bankruptcy disheartening, to say the least. Fortunately, prospective low-income filers have a number of options to help make the process more affordable.

To start, those who cannot afford the pre-filing credit counseling and post-filing debtor education courses may be provided a free or discounted rate.

“Fee waiver policies may vary by agency. At a minimum, however, a client whose household income is less than 150% of the poverty level is presumptively entitled to a fee waiver or fee reduction.” — Justice Department

In addition, many portions of your bankruptcy expenses can be segmented via payment plans. For instance, the required filing fees can be paid to the court in installments with the court’s permission. Fee payments can be broken into as many as four installments but must be paid entirely no later than 120 days after filing the petition.

Your attorney may also offer a payment or installment plan to cover his or her fees, the structure of which will vary with the type of bankruptcy. For Chapter 7 bankruptcy, you’ll be expected to complete your payment plan before filing; this is so your lawyer can ensure he or she gets paid before your debts disappear.

For Chapter 13 bankruptcy, you may be asked to make a down payment before filing, including the mandatory filing fees. The remainder of your legal fees can be built into your bankruptcy repayment plan.

Stop Paying Debts You Plan to Discharge

One way to boost your pre-bankruptcy funds and help cover the associated fees is to stop making payments on debt you intend to discharge during bankruptcy, particularly Chapter 7. For example, if you are filing bankruptcy to get out from under overwhelming medical bills or credit card balances, giving money to those creditors right before filing bankruptcy is essentially wasting money you could put toward your fees.

Non-Dischargeable Debts Chart

That said, don’t simply stop meeting all of your financial obligations. Secured debts, such as your mortgages or auto loan, cannot be discharged through Chapter 7 bankruptcy and may be foreclosed or repossessed (respectively) if you stop paying. You’ll also want to continue paying necessary utilities to prevent them from being shut off.

Furthermore, any alimony or child support payments must also continue, as they cannot be discharged through bankruptcy. There may also be legal repercussions if you stop making payments, including stiff penalties or even jail time.

You May Qualify for Free or Discounted Legal Help

In cases where the individual demonstrates extreme need — typically by having an income less than 150% of the poverty line — and is unable to afford a payment plan, he or she may qualify for free or discounted legal help. Also called “pro bono,” free legal services can be obtained through both public-sponsored and private sector agencies.

The best place to start will likely be visiting the Legal Services Corporation (LSC) website to search for legal aid in your area. Keep in mind that the list for legal aid may be long, so try to get on the list as soon as possible if you know you will need pro bono help.

Another option could be to contact the state chapter of the American Bar Association (ABA), the governing body for lawyers in the US. The ABA encourages its members to complete at least 50 hours of pro bono work each year and many private attorneys will take some pro bono cases as a way to give back to their communities.

The True Cost of Bankruptcy is to Your Credit

For some people, bankruptcy seems like an ideal situation, the perfect way to eliminate their debt and start over new. Unfortunately, that idea is a fallacy; bankruptcy should always be considered the last, extreme option after all others have been explored. When you declare bankruptcy, you’re also declaring to creditors, past and future, that you are unable to meet your obligations — and that has repercussions.

Chart of FICO Score Impacts from Negative Accounts

Indeed, regardless of the total financial cost of filing for bankruptcy, the biggest cost is often to your credit, rather than your pocketbook. Having a bankruptcy on your credit report can be worse than missed payments or even defaulted obligations, acting as a big, flashing warning sign to potential lenders that you can’t handle your debts.

This means many creditors will consider you high risk and be reluctant to offer you new lines of credit. You’ll likely be limited to loans and credit cards for bad credit applicants, complete with the high interest rates and fees that accompany them.

That bankruptcy isn’t going to be just a short-term problem, either. Chapter 7 bankruptcies stay on your credit report for a full 10 years, showing up on every background check and credit pull you undergo for a decade.

VantageScore Graph of Credit Score Recovery from Negative Event

Chapter 13 bankruptcies only stick around for seven years — but that countdown starts when your bankruptcy has cleared. While the amount the bankruptcy influences your credit will lessen over time, the only way to remove the effects entirely is to wait out its shelf life.

Debt Relief May Help You Avoid Bankruptcy

Depending on the state of your finances — and your credit — you may be able to avoid bankruptcy altogether with the right help. In particular, a qualified debt relief program may help you restructure your existing financial obligations to make your payments more affordable and get you back on track for repayment.

Types of Debt Relief

The actual methods suggested by your debt relief company to handle your debts will depend on your personal situation. In general, debt relief plans will likely include one of, or some combination of, debt consolidation, debt management, and debt settlement.

Perhaps the simplest of the options, debt consolidation is the best option for those who have not yet fallen far behind on their payments. Consolidation relies on your ability to qualify for a personal loan at a lower interest rate than your current debts. This new loan is then used to pay off your existing obligations, consolidating your debts into one loan and a single — hopefully lower — monthly payment.

Those who cannot qualify for a consolidation loan may rely on debt management to get their obligations under control. An experienced debt management company will work directly with your creditors to help establish individual payment plans, often obtaining lower interest rates or extending payment terms to make payments more manageable.

The only form of debt relief that can reduce how much you must repay, short of bankruptcy, is debt settlement. The debt settlement process will involve negotiations with your creditors to pay off your debt in one lump sum.

The amount will generally be less than you owe, but more than the creditor could likely profit by selling your debt to someone else. Of the various types of debt relief, debt settlement can have the most negative impact on your credit.

How to Select a Company

No matter which type of debt relief you pursue, choose the company you work with carefully. An inexperienced or dishonest debt relief company could do more harm than good.

Specifically, be sure to research the company’s reputation with monitoring organizations, such as the Better Business Bureau (BBB), and look for consumer reviews. Take a look at the services offered by each company, as well; not every company will offer every type of debt relief. Some companies may specialize in consolidation or management, while others will be more experienced with debt settlement.

You’ll also want to compare the rates and fees of several organizations to get an idea of what to expect. Nonprofit debt relief agencies will usually offer more affordable services than their for-profit counterparts.

  • Requires $10,000 or more in credit card debt
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  • Specializes in credit card and medical debt
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  • Does not handle IRS, utility, federal student loans or mortgage debt
  • Long-term program to relieve debt over 24-48 month period
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★★★★★

4.9

Overall Rating

Better Business Bureau In Business Since Free Consultation? Reputation Score
A+ 2009 Yes 9.5/10
  • 100% confidential, no-obligation consultation
  • Specializes in credit card and loan debt over $10,000
  • In business since 2000
  • Options for debt settlement, consolidation, bankruptcy, and tax debt
  • Get a 100% free, personalized savings estimate from a debt professional
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★★★★

4.0

Overall Rating

Better Business Bureau In Business Since Free Consultation? Reputation Score
(No Grade) 2000 Yes 9.0/10

Don’t forget to look into what types of credit counseling or education services and/or resources the debt relief company offers. Part of getting your debt under control is learning better financial management behaviors so you can make smarter financial decisions.

Bankruptcy Should Always Remain the Last Resort

Few things can be as debilitating as being buried in debt and feeling as though you’ll never break free. If you’re burdened by unmanageable medical bills, credit card debt, or unsecured loans, and feel as though you’ve exhausted all of your other options, bankruptcy may be your only way out.

If you choose to go the pro se filing route, your average bankruptcy will cost you between $100 and $200 for your mandatory courses, then $335 in Chapter 7 filing fees or $310 in Chapter 13 filing fees. You’ll also have less than 2-1 odds of being successful.

Those who choose to employ the services of an attorney will have a significantly better success rate, but will pay a price on top of their mandatory filing and course fees for that expertise. Expect attorneys’ fees averaging $1,000 for Chapter 7 cases and $3,000 for Chapter 13 cases.