When consumers find themselves in a situation where they’re overwhelmed by debt, they often begin to wonder if declaring bankruptcy is a possible solution to their debt problems. And often, the first question they ask is “How much does bankruptcy cost?” And the answer to that question is “it depends on a number of factors”. You can prepare and file the paperwork on your own–often for less than a few hundred dollars, or even free. Or you can pay thousands of dollars for a specialized bankruptcy attorney. The decision shouldn’t be based on cost alone. But by considering your alternatives, you can find the most cost-effective alternative and eliminate overwhelming debt.
Types of Bankruptcy
For most individual consumers, there are two types of bankruptcy from which to choose: Chapter 7 or Chapter 13. A Chapter 7 takes about 90 days, and eliminates all unsecured debt. A Chapter 13 bankruptcy can take up to 5 years, and debts are repaid according to a schedule set by the Court. In some cases, the Court may find that a consumer has sufficient assets or income to pay creditors, and may require a Chapter 7 filing to be converted to Chapter 13.
Types of Debt Problem
Some types of debts cannot generally be discharged by bankruptcy. These include child support, IRS, and student loans. Declaring a Chapter 7 bankruptcy won’t resolve those issues. However, there are options which may help relieve these types of crises. For example, a Chapter 13 filing can release an IRS freeze on bank accounts and buy time to resolve the problem. If one has these types of problems, it’s best to consult a qualified attorney.
Most consumer debt discharged in a Chapter 7 bankruptcy is a combination or credit card debt, medical debt, and loans. These generally fall into one of two categories: secured and unsecured. “Secured” debt means that the creditor retains a “security interest” in the merchandise until it is fully paid for. Home mortgages and vehicle loans are the most common secured debts, but some high-ticket items purchased with a credit card may also trigger a security interest. Declaring a Chapter 7 bankruptcy won’t eliminate secured obligations, but you will have the option to return the merchandise or reaffirm (keep) the debt, and may delay repossession or foreclosure.
Do-it-yourself bankruptcy forms and instructions are available online or at office supply stores. While this appears to be the cheapest alternative, it may be frustrating to deal with the paperwork, and a mistake, such as forgetting to list a debt, may lead to more problems in the long run. Expect to pay about $300 in filing fees for a Chapter 7 and about $250 for a Chapter 13. You may apply to pay that fee in installments, allowing you to begin the proceeding with very little out-of-pocket expense.
In some cases, low-income debtors may qualify for a fee waiver. This is not automatic; there is a special form required to request waiver of fees. If total household income is less than 150% of Federal poverty guidelines (available online), the filing fee may not be required.
Hiring a Document Preparation Service for Bankruptcy
In some areas, document preparation services advertise low-cost bankruptcy filing. These services are familiar with procedural requirements, and can prepare the paperwork. However, the advertised price does not include filing fees, and the preparer cannot address special problems or provide legal advice or services.
Hiring an Attorney for Bankruptcy
Some attorneys take all types of cases; others specialize. The biggest advantage of hiring an attorney to declare bankruptcy is having an advocate to help deal with “situations” that arise and to accompany the debtor to Court hearings. An attorney will also be able to answer questions and suggest other options that may be available, such as negotiating with creditors for partial or lump-sum payments. Your attorney can also steer you away from costly mistakes, such as charging high-ticket items such as furs or jewelry immediately before declaring bankruptcy, or filing for a large tax refund while your bankruptcy is pending.
From a cost standpoint, the bankruptcy specialist may charge a higher fee than the general practitioner. Again, depending on circumstances, the expertise may be worth the higher fee.
You can also consult an attorney with your bankruptcy questions without retaining the attorney to do the actual bankruptcy. If expense is a critical factor, this may be the most cost-effective alternative.
Choosing the Best Bankruptcy Option
Bankruptcy can offer a fresh start and eliminate overwhelming debt. The decision to declare bankruptcy involves more than initial cost–special circumstances may mean that hiring a qualified bankruptcy attorney can be most cost-effective in the long run.