When people have dug themselves into a pit of debt, bankruptcy can be a solution to getting a fresh start and becoming productive again. Filing for bankruptcy is not free, however. If you already can’t afford basic living expenses, you might have a tough time coming up with the costs associated with bankruptcy. In this article, you’ll learn how others have approached this concern.
Filing Fees and Administrative Costs
It costs money to go bankrupt. The amount you’ll be charged will likely depend on a number of factors, including the type of bankruptcy you file.
Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy (also called a “no-asset” bankruptcy or a “liquidation” bankruptcy), debtors allow the bankruptcy trustee who oversees the case to sell their nonexempt property(property that isn’t protected in bankruptcy) and pay the money to creditors. In exchange, the debtor gets a “discharge,” a court order stating the debts that get wiped out in bankruptcy. In many Chapter 7 matters, debtors don’t have any nonexempt property, and creditors get paid nothing.
In a Chapter 7 bankruptcy, individuals are usually required to pay attorneys’ fees, administrative costs, and filing fees in full before filing. Chapter 7 bankruptcies are cheaper than Chapter 13 bankruptcies because they are shorter and less complicated.
(For more information, read Chapter 7 Bankruptcy: How Much Does It Cost?)
Chapter 13 Bankruptcy
In a Chapter 13 bankruptcy (also sometimes called the wage earner’s bankruptcy), debtors submit a repayment plan to the court that proposes to pay back some or all of their debt over a period of three to five years. Chapter 13 bankruptcy tends to be popular if you need to catch up on house or car payments, or you want to keep property you’d otherwise lose in a Chapter 7 bankruptcy. Also, some people make too much money to qualify for Chapter 7 bankruptcy and must pay into a Chapter 13 repayment plan instead.
Chapter 13 bankruptcy cases are more expensive than Chapter 7 cases because they last longer and require more work and administration. Some fees—such as attorneys’ fees—can be included in the plan payment and paid after you file the case (assuming that your attorney agrees to do so).
(Learn more in Chapter 13 Bankruptcy: How Much Does It Cost?)
How Filers Get the Money for Fees and Costs
Some people already have bankruptcy fees saved up. Others borrow from a friend or family member. If these approaches aren't feasible, once you’ve made a firm decision to file bankruptcy, you might want to stop paying on unsecured debts that will go away, such as credit card balances, medical bills, and personal loans.
Unsecured debts are often completely written off in bankruptcy or paid at less than their full amount. Therefore, continuing to pay these debts before filing can be a waste of money. Instead, you can set aside the payments you usually make on these debts and use the money for your bankruptcy fees.
Pay Your Bills Until You Speak With a Lawyer
You should always continue to pay your living expenses, such as rent and utilities, student loans, and the payment on any property you wish to keep in bankruptcy, such as a house or a car.
As for your other bills, it’s wise to keep making your payments until you have consulted with an attorney and have made a final decision to file for bankruptcy. If you stop paying your debt and then change your mind—or find out filing is not in your best interest—you’ll likely have a hard time catching up and will be worse off than you were before (especially when you factor in late fees).
What Happens to Debts After Bankruptcy?
In most cases, people file bankruptcy to get a “discharge.” A discharge is a court order stating that you no longer have to pay qualifying debts that get wiped out in bankruptcy. The order also forbids lenders from continuing to pursue you on the discharged debt.
Banks take a loss on debts discharged in bankruptcy. They have some remedies available to make the loss less painful. The primary way lenders compensate for bad debt is by pricing the risk of losing money into the loan. If your credit was bad when you took out the loan, the lender charged you a higher interest to compensate for its possible future loss if you stopped paying. Also, lenders can take a tax deduction for bad debt and pass the loss off to other customers by raising prices.
Questions for Your Attorney
- Which bills should I continue to pay before filing bankruptcy?
- Will any of my debts survive my bankruptcy filing?
- How much will it cost me to file for bankruptcy?