Understanding Bankruptcy Costs

What You Really Pay in Chapter 7 and Chapter 13

Filing for bankruptcy protection is a big decision, and not just emotionally. You will have to pay fees and costs associated with the case, which are amplified when your finances are spiraling. These expenses, however, are usually lower than most people expect and your attorney will disclose exactly what they are and how you can pay them prior to hiring them, usually at a free consultation. Do not let the specter of bankruptcy being unaffordable to you keep you from investigating whether it is the right choice for you.

Ordinary consumers most often (by a wide margin) file for either Chapter 7 or Chapter 13 bankruptcy protection. While similar, the fees and costs for each chapter are different, both in terms of dollar amount and how they are paid, so the following will break them down separately.

Chapter 7

Chapter 7 bankruptcy is often referred to as a “liquidation” bankruptcy and usually only lasts for 4-5 months. You prepare and file your bankruptcy petition, with the assistance of an experienced bankruptcy attorney, a trustee is appointed to the case and the trustee liquidates (sells) any unprotected assets you have for the benefit of your creditors. At the end, a discharge is granted, eliminating most if not all of your remaining debt. In most Chapter 7 cases, there are only three types of fees and costs that you will incur.

The biggest expense in most Chapter 7 cases is your attorney’s fee, which is what you pay your attorney to prepare and prosecute your case. While these fees vary depending on where you live and the complexity of your case, a typical Chapter 7 attorney will charge between $1,500 – $3,000. The key factors in determining the fee will include whether you are filing individually or with a spouse, the amount and nature of your debts and the expected complexities of your case.

This fee may sound imposing, but bankruptcy attorneys have long figured out ways to make it manageable for individuals. Hundreds of thousands of people file for Chapter 7 bankruptcy every year, all facing challenging financial situations. One key challenge exists regarding Chapter 7 attorney’s fees and that is that if they are not paid before the case is filed, the remaining amount owed to the attorney is subject to the bankruptcy discharge and eliminated, turning your attorney into a creditor of yours. Attorneys address this in one of two ways.

First, many attorneys require that their fees be paid in full prior to filing the case. Generally these attorneys will accept and initial down payment (commonly referred to as a retainer), and then work out a reasonable payment plan for you over time to get the fees paid off. They will usually advise that you stop paying all debts that are going to be discharged in the bankruptcy and use the money that you would have sent to the creditors to pay the fees.

A growing number of attorneys are using a legal method called bifurcation to address the challenge of individuals who need the protection of the bankruptcy court sooner rather than later, but cannot afford to pay all of the fees and costs before filing. This is a relatively simple concept. You hire the attorney for an initial fee to take your case from preparation to filing it with the court (thereby obtaining you the protection of the Automatic Stay of Bankruptcy). This fee you pay before the case is filed, often still in installment payments. Then, once the case is filed, you and the attorney enter into a separate agreement for a separate fee to prosecute your case through discharge. This second agreement is not subject to the bankruptcy discharge, as it is entered into after filing, and the attorneys who use this method are generally very reasonable about working out a payment plan with you.

Bifurcation is an excellent method of getting people faster access to the protections of the bankruptcy process that they require and it has been expressly approved by the United States Trustee. The guardrails placed on this process, however, are significant and many attorneys have faced court challenges to their fee structures and pre- and post-filing agreements. Additionally, many courts have expressly held that they will not approve bifurcated fee agreements. Your attorney will, of course, discuss your payment options prior to filing and do not hesitate to ask them if you can bifurcate your fees.

In addition to the attorney fees, you will be required to pay the court’s filing fee. Currently $338, this is the cost the court charges to administer your case. Some of the money goes to pay the trustee for their role in the case, while the rest goes to the courts for overall bankruptcy administration. Normally this fee must be paid at the time of the filing of the case, however the Bankruptcy Code does allow for the payment of the filing fee in installments over time after the case is filed. There is a separate application that must be filed with the petition if this election is made and, if attorney fees are bifurcated, you must pay the court before you are allowed to pay the attorney. In a very limited number of cases, you may be able to get your filing fee waived altogether by filing a motion with the court. These motions are only granted in the most severe cases of financial distress.

These three components, attorney fees, case-specific costs and the filing fee, are elements of every Chapter 7 bankruptcy case. At your initial consultation, your attorney will tell you exactly what these fees and costs are, what they include and how you are able to pay them before you hire them. Fee disclosure is very important in bankruptcy. Your attorney may also advise you of some additional fees and costs based on your specific case. Common ones include:

Motion to Avoid Lien: This is required when a creditor has obtained a judgment against you prior to the bankruptcy filing and placed a lien against your residence. A separate motion is required to remove that lien and subject the debt to the bankruptcy discharge.

Motion to Redeem: Usually reserved for financed vehicles, though it can be used for financed personal property, this motion uses Section 722 of the Bankruptcy Code to allow you to purchase an asset that is worth far less than what is owed on it from the bankruptcy estate, eliminating the rest of the debt. For example, if you owed $50,000 on a car that is only worth $30,000 due to depreciation or damage, a motion to redeem could allow you to purchase the vehicle for its value, eliminating the $20,000 that you are underwater on the loan. Of course you likely will not have the $30,000, but your attorney can guide you to reputable companies who will finance that for you.

Adversary to Discharge Student Loans: Student loan debt is treated differently than other unsecured debts in bankruptcy cases. They are generally excepted from the bankruptcy discharge unless you can prove that they would be an “undue hardship” on you moving forward, which is a higher burden than it might sound. To do this, you must file an adversary proceeding, which is a mini-lawsuit within the bankruptcy, asking the court to find that they are indeed an “undue hardship” and should be discharged. This had been extremely difficult to do in prior years, but recent changes have allowed for tremendous levels of success in student loan discharge adversaries since 2022. If you have student loan debt, absolutely ask your attorney about your ability to discharge them in an adversary proceeding.

Adversary from Creditors or Defending U.S. Trustee Actions: Creditors and the United States Trustee have the right to file their own adversary proceedings against you, seeking either that their specific debt be excepted from discharge or that your discharge be denied in its entirety. These cases are rare, but if one is filed, defending them is usually outside of the scope of your initial attorney retention contract and additional fees will be charged. As with all fees in bankruptcy, these will be fully disclosed to you in the event you face this situation.

There can be other case-specific actions that will require additional attorneys fees, but they are edge cases that do not arise with frequency. Most Chapter 7 bankruptcies are filed without needing any of these actions and the only fees and costs incurred by you are for the basic Chapter 7 case preparation and prosecution.

Chapter 13

Chapter 13, often referred to as a “wage-earner’s plan”, puts you into a repayment plan for three to five years, during which you pay back as much of your debt as you can afford to. At the end of the plan, any remaining debts are discharged. As Chapter 13 cases are more complicated to prepare, more difficult to prosecute and have more variations, fees are generally higher than those of Chapter 7 bankruptcy cases. That said, since the entire concept is that you are entering into a payment plan, most of the attorneys fees are usually placed inside the payment plan, requiring you to pay only a small portion before you file.

There are three ways that bankruptcy attorneys and courts have evolved to ensure that attorneys fees are fair, reasonable and affordable.

The “cradle to grave” presumptively reasonable fee. Many jurisdictions have adopted a flat fee that they believe is reasonable to compensate the attorneys in their jurisdictions for representing debtors in Chapter 13 cases. Most range from $2,500 to $5,5500, depending on where you live, and cover all aspects of the attorney fees. In these cases, the attorney will usually require that you pay a small portion of these fees in advance, often none, with the remainder of the fees being included in the Chapter 13 plan.

The “to confirmation” presumptively reasonable fee. Other jurisdictions have adopted a flat fee that they believe is reasonable to compensate the attorneys in their jurisdiction representing debtors in Chapter 13 cases through the point where the case is confirmed (approved) by the court. These fees are generally lower than the “cradle to grave” fees. After the case is confirmed, there is often a standard schedule of fees (often called “menu fees”) for specific post-confirmation actions that may be required in the case. Again, the attorney will usually only require a small amount of the fees, if any, to be paid before filing, with the bulk of fees being included in the Chapter 13 plan. Any post-confirmation fees would be added into the plan. A simple example would be that the attorney is allowed a $2,500 presumptively reasonable fee through confirmation, which you pay $500 to get the case filed and the remaining $2,000 is included in the plan. After confirmation, if you require the plan to be modified, the attorney may be awarded another $300 in fees for performing this work, all of which would go into the plan.

Hourly billing. Some, though few, attorneys will simply track their time put into the case and bill you at a fixed hourly rate. The rate and expected total fee will be disclosed to you prior to hiring the attorney. Most attorneys do not elect to use this method, as it requires meticulous timekeeping and getting their fees approved by the court on a motion that details their time spent. Simply put, it is too much work and the presumptively reasonable fee in the jurisdiction is usually sufficient.

There are exceptions, of course. If your case involves the filing of an adversary proceeding, such as one seeking determination that your student loan debt should be discharged, additional fees above the presumptively reasonable fee can be allowed. These, again, are required to be fully disclosed to you and approved by the court.

In addition to the attorney fees, you will be required to pay the court’s filing fee. Currently $313, this is the cost the court charges to administer your case. These funds go to the courts for overall bankruptcy administration. Normally this fee must be paid at the time of the filing of the case, however the Bankruptcy Code does allow for the payment of the filing fee in installments over time after the case is filed. There is a separate application that must be filed with the petition if this election is made. A few jurisdictions allow you to include the filing fee in your Chapter 13 repayment plan.

You will also incur some case-specific costs. You will have to pay for your Consumer Credit Counseling and Personal Financial Management courses, either through your attorney or directly to the providers. These costs vary with the provider, but on average run $15 – $30 each. Married couples filing together can take the course together and only incur one cost. Your attorney may also require some additional costs, often to order and process a multi-bureau merged credit report. This generally costs $30 – $60 and goes a long way in proving that you made a good faith effort to include all of your creditors in your bankruptcy case. In Chapter 13 cases specifically, often times you will be required to send notices and copies of documents to all parties in the case. The court may allow for your attorney to recover the costs of document production and noticing as a case-specific expense, usually added to your repayment plan. A few jurisdictions allow for the attorney to recover a presumptively reasonable expense amount for these expenses.

Chapter 13 is different from Chapter 7 in another key way, how the trustee is paid. In a Chapter 7 case, the trustee simply receives a portion of the filing fee and, if an asset is liquidated, a portion of the funds recovered for the bankruptcy estate. In a Chapter 13, the trustee takes a portion of every payment made to them to cover the expenses of administering cases. Usually this runs from 5-10% of your monthly payment and is calculated into your payment plan, but make no mistake, you are paying the trustee in your case and they get paid before any of your creditors.

Filing for bankruptcy is not free and these fees and costs may seem daunting, but again, hundreds of thousands of people file for bankruptcy under Chapter 7 and Chapter 13 every year in the U.S., all facing their own financial challenges. It may seem that a lot can be saved by not hiring a bankruptcy attorney and handling the case “pro se” (representing yourself). Keep in mind that bankruptcy is a complex and very specialized process. One mistake can cost you far more than an experienced bankruptcy attorney would. A good bankruptcy attorney will work with you to ensure that you can afford proper representation that will result in the proper result of your case, achieving a discharge and the financial fresh start that includes.