Bankruptcy is a scary word that gets even scarier when you realize it’s going to cost you money you don’t have, to get rid of the debts you do have.
The cost of bankruptcy varies by city and state. If you want to succeed, your best chance of winning is to hire a lawyer and that means spending somewhere between $2,000 and $6,000 to get through the process.
But take (some) heart: There are ways to file a low-cost bankruptcy.
The two most common forms of bankruptcy are Chapter 7 and Chapter 13. Between them, they represent 99% of the bankruptcy cases filed in the U.S.
The least-expensive option is filing Chapter 7. If you qualify – and that’s not as easy as you might think – a Chapter 7 bankruptcy could be done in six months and costs you somewhere close to $2,000.
To qualify for Chapter 7, your income needs to be below the median income for your state. The median varies wildly from state-to-state. Hawaii ($75,797) and New Hampshire ($75,432) have the highest; Mississippi ($47,446) and Arkansas ($48,882) have the lowest.
What makes Chapter 7 even more appealing is that you might be able to hold on to most of your assets by claiming them as exempt property. You are not required to sell your home or other necessities like your car, clothes, and tools for work to settle your debts.
The idea behind this approach is to allow consumers a fresh start, without having to completely start their lives over. With allowed exemptions, 95% of filers in the United States are able to protect all of their assets.
Protecting those assets requires filing Schedule C: The Property You Claim as Exempt to the bankruptcy court. The form is vital. If you don’t claim any exemptions, or if you claim the wrong one, the property may not be protected. That means possibly selling the house or car to pay the debts.
Among the property that can be declared exempt:
- Personal property like household goods, furniture and musical instruments
- Health aids
- Real estate used as the home
- Social Security benefits
- Life insurance
- Unemployment benefits and compensation
With a simple Chapter 7 filing, it is conceivable that you could proceed without an attorney, but there is a risk. A survey by the American Bankruptcy Institute says that 99% of Chapter 7 filers with an attorney were successful. Those without an attorney succeeded 67% of the time.
What about a Chapter 13 filing? That is more complex, and in almost all cases require an attorney, which makes it more expensive than Chapter 7. Expect to spend closer to $6,000 for court costs and attorney fees.
And be prepared to hire a lawyer. Consumers who tried to a Chapter 13 case on their own, failed 98% of the time.
Is Chapter 7 a Good Option for Low-Cost Bankruptcy?
Chapter 7 bankruptcy is the cheapest way to file bankruptcy because there are ways to reduce or waive costs. If someone has no tangible assets, their filing fee and/or bankruptcy court fee waived. If the case is obvious and simple, they could attempt to get through it without an attorney, thus saving that fee.
Waived Bankruptcy Filing Fee
Low-income individuals may be able to pay the $338 filing fee in installments, or have the fee waived completely. These individuals are on the path to a low-cost bankruptcy.
To have the fee waived, you must show that your income is below 150% of the poverty level for your family size in your state, and that you cannot pay the fee in installments. Fill out and file Form 103B: Application to Have the Chapter 7 Filing Fee Waived.
If you don’t qualify to have the fee waived, you could apply to have the fee paid in installments, which spreads the cost over as many as four payments. For this approach, file Form 103A, Application to Pay the Filing Fee in Installments. On the application, you must state you cannot pay the entire fee. You then offer a payment plan, but it cannot exceed four payments or extend longer than 120 days after filing.
Not paying the fees on time and in a proper manner will be a serious issue to the bankruptcy trustee, so once the court approves the installment request, be diligent about paying the fees and paying on time.
Waived Bankruptcy Course Fee
Bankruptcy filers are required to take two courses on the subject before their debts are forgiven. A credit counseling course must be completed before filing Chapter 7, and a Debtor Education Course is required once you receive a case number.
The pre-bankruptcy pre-bankruptcy credit counseling course helps determine if bankruptcy is the right step. The debtor education course is a mandatory two-hour course focused on handling personal finances after bankruptcy.
Courses are taken through approved providers, with the cost dependent on which provider you choose. The combined cost of both courses may be as low as $30 and should never be higher than $50.
As in the filing fee, the cost of the courses can be waived if your income is so low that you feel you cannot afford the fee. The request for a waiver is made through the agency or entity that provides the courses.
Taking the courses is serious. If you don’t complete the credit counseling course, your case could be dismissed. If you do not complete debtor education before the deadline, you will not receive a discharge and will owe the debts that brought you to bankruptcy. Take the course requirements seriously.
Filing Chapter 7 Is Less Complicated
The most expensive part of bankruptcy might be the fees charged by attorneys, which should be no surprise.
Lawyers.com put the average attorney’s cost to file Chapter 7 at $1,450. It’s wise to plan for between $1,000 and $3,000 with Chapter 7, more if it’s Chapter 13.
Yes, anyone can file without an attorney, otherwise called filing “pro se.” Needed forms are available online, and if your case is relatively simple it can be done pro se. Remember that you will have to represent yourself in front of the trustee, and answer all questions.
Why Chapter 13 Is More Expensive
Chapter 13 is a legitimate and effective way to file bankruptcy, but in almost all cases it will be more expensive than Chapter 7. That is because Chapter 13’s complexities require hiring a lawyer. A Chapter 13 attorney typically can cost $3,000 and perhaps up to $4,000 or even $5,000 (or more) in extreme cases.
Chapter 13 means you and the court come to an agreement on a payment plan to pay down debts. Creditors can object to the plan, but only before the court approves it; once the court OKs the approach, you and creditors are bound by the terms. Typically, the monthly payment is based on what you, the filer, can afford.
Because creditors receive some money in Chapter 13, filers automatically can keep most, if not all, of their possessions.
Chapter 13 is best if you are behind on the mortgage, if you have debts that cannot be discharged, if you have a loan with a high interest rate or if you have more than one house. The cost of the attorney is a significant expense.
At the same time, it’s necessary to have an attorney because those who file Chapter 13 without a lawyer typically fail; navigating the system is that complex.
Filing Bankruptcy on Your Own
Almost everyone involved in the bankruptcy process recommends using an attorney. That does not mean you have to. The process can be complicated and is intimidating, but filing without an attorney may save you $1,000, or more.
Your case could be simple enough to file pro se if you do not have:
- A car or home loan.
- A personal business.
- Property other than necessary items like clothes or household items
- Non-dischargeable debts like child support, student loans or unpaid taxes; these debts are not wiped out in a Chapter 7 filing.
It’s important to remember, though, that bankruptcy laws are complex. Bankruptcy is managed in local jurisdictions, and rules may vary from locale to locale.
Consider if you need a bankruptcy attorney. A lawyer who understands the ins and outs of the procedure can help. Yes, it may cost money, but if you do not handle your case properly it may cost you far more than an attorney would.
The first consultation with a bankruptcy attorney typically is free. That consultation could give you more information that should help you decide if it’s in your best interests to hire the attorney. Even if you do not have property or assets and even if you think you have the simplest case in the history of bankruptcy, it’s probably wise to seek the free first consultation.
Jon Lieberman, a bankruptcy attorney with the law firm Sottile & Barile in Loveland, Ohio, says that anyone considering filing pro se should first go to the website for the bankruptcy court in the local area and learn the local rules and requirements.
“The courts will discourage individual, pro se, non-attorney filings,” Lieberman said. “But if people are going to do to it on their own, they may as well do it the best they can.”
What If I Can’t Afford a Bankruptcy Attorney?
If you are at a low-income level and can’t afford an attorney, there are still options for getting help filing your bankruptcy case.
Here are three choices worth researching for help filing a bankruptcy.
- Legal Aid Society
- Legal Clinics
- Pro Bono Legal Services
Generally speaking, there are income limits based on the poverty line that you must satisfy to receive free help. Most of the free legal service organizations expect your income to be less than 200% of the poverty line for a household your size.
For example, the poverty line for a single person in 2022 was $13,590, meaning to qualify for free legal assistance, the household income would have to be less than $27,180 (13,590 x 2 = 27,180).
A 2-person household has a poverty line of $18,310, which makes the qualifying standard for free legal services, household income of less than $36,620 (18,310 x 2 = 36,620).
Add $4,720 for each additional person in the household to determine the poverty line, then multiply that number by 2 to see if you qualify for free assistance.
About The Author
Max Fay has been writing about personal finance for Debt.org for the past five years. His expertise is in student loans, credit cards and mortgages. Max inherited a genetic predisposition to being tight with his money and free with financial advice. He was published in every major newspaper in Florida while working his way through Florida State University. He can be reached at [email protected].
- N.A. (ND) Census Bureau Median Family Income by Family Size. Retrieved from https://www.justice.gov/ust/eo/bapcpa/20220401/bci_data/median_income_table.htm
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- Wimmer, A. (2021, January 5) Using A Fee Waiver For Free Bankruptcy Credit Counseling. Retrieved from https://upsolve.org/learn/using-a-fee-waiver-for-free-bankruptcy-credit-counseling/
- O’Neill, C. (2020, December 11) Bankruptcy Filing Fees and Costs. Retrieved from: https://www.nolo.com/legal-encyclopedia/bankruptcy-filing-fees-costs.html
- Petts, J. (2020, November 3) Low Cost Bankruptcy: Do Good Options Exist? Retrieved from: https://upsolve.org/learn/low-cost-bankruptcy-good-options/