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If you were to go into debt in recent years, either because of overspending credit cards or due to unforeseen events such as medical emergencies, it is now especially difficult to get out of this hole high interest rates. And as the costs of essentials like housing, cars, insurance and food continue to rise due to inflation, many people have been struggling to pay their bills. This can also lead to debt and make it difficult to pay off past balances.
As such, some people now find themselves unable to do so pay off your debt in a reasonable amount of time, leading them to explore options like bankruptcy. In 2023, more than 400,000 people filed for bankruptcy in the US, a 15% increase from the previous year, according to data from the Administrative Office of the US Courts.
However, filing for bankruptcy is not a free solution; there are associated costs. So how much exactly does it cost to file for bankruptcy? Here's what the experts say.
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How much does it cost to declare bankruptcy??
There is no set amount that people pay a bankruptcy filing. Ultimately, the total costs of filing for bankruptcy can vary substantially based on a number of factors.
Some of the main factors that affect filing costs include:
The type of bankruptcy
Most people usually file a Chapter 7 or Chapter 13 bankruptcy, which comes with different costs, not only in terms of upfront fees, but also how much you owe on your debt.
“Chapter 13, where a debtor can retain more property and devote available proceeds to paying creditors as part of a multi-year plan, is more expensive and time-consuming than Chapter 7, which usually involves letting the trustee sell the most of the debtor's assets,” explains Nancy Rapoport, professor of bankruptcy law at the University of Nevada, Las Vegas (UNLV).
But while you typically have to sell assets in a Chapter 7 bankruptcy, the upside is that you can pay off your debts “much faster,” Rapoport adds.
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Administrative fees
Bankruptcy filing also includes administrative costs. To file for Chapter 7 bankruptcy, the fee is currently $338, while the price for filing Chapter 13 is $318. You may be able to get your Chapter 7 filing fee waived, but bankruptcy courts may also charge a variety of other administrative fees, such as fees to convert a case to another type of bankruptcy or related fees with the records.
“You also typically have to pay for pre- and post-bankruptcy courses, although the cost of these can range from free to $100,” says David Chami, managing partner of Consumers Attorneys.
However, these administrative fees should not guide your decision alone. For one thing, not everyone is eligible for Chapter 7, as you must pass a means test that proves you cannot reasonably pay your debts. Also, while the administrative fees for Chapter 13 are slightly lower, the total costs can be much higher, especially considering that you have to come up with a repayment plan.
Legal fees
Although you are not required to hire a lawyer to file it bankruptcydoing so can help you qualify for bankruptcy and help you navigate the process.
Going alone “is highly recommended,” says Chami. “Even if bankruptcy is the right or necessary choice for a consumer given their circumstances, it is a serious choice with significant and lasting legal, financial and tax consequences and requires a lot of paperwork, paperwork and work.”
Because of the amount of work involved, legal fees can increase, depending on factors such as your location and the type of bankruptcy.
“Attorney fees for a Chapter 7 bankruptcy will typically range from $1,000 to $2,000, depending on the complexity of your situation. A Chapter 13 will typically range from $3,000 to $5,000 and is usually determined by the complexity of the case. Of course, the lawyer you choose will also play a role in the cost you pay,” says Chami.
Alternatives to filing bankruptcy
Because bankruptcy can cost thousands of dollars to file and can have long-term consequences, such as affecting your credit score for several years, it's also important consider alternatives to manage debt, such as finding a debt relief service.
While a settlement of debts it may not provide as much debt forgiveness as Chapter 7 bankruptcy, for example, may not have as much of a detrimental effect on your credit. You may also find it easier to manage a debt settlement, such as if amount is relatively small.
“If you're already behind on your payments, you might consider trying to settle those debts for pennies on the dollar instead of filing for Chapter 7 bankruptcy, which will stay on your credit for 10 years,” says Chami.
A debt consolidation The loan can also help you convert your existing debts into a more manageable monthly payment, but it's important to understand the risks, such as being tempted to charge more on your credit cards after consolidation.
Another solution, if the debt is just a dispute between two parties, could be to go through litigation or a non-bankruptcy settlement, which is usually cheaper, Rapoport says.
The bottom line
In short, it is important to weigh the total costs, both monetary and non-monetary, related to the different ones debt relief options and compare them to the potential benefits. Some people may be willing to deal with the credit consequences of filing bankruptcy to try to start over after accumulating substantial debt, for example, while others might be better positioned for debt relief services. However, it is important to keep your guard up.
“When you start looking for options, be aware of the sheer volume of scammers looking to take advantage of people in dire financial situations by offering debt settlement services that aren't necessarily helpful or the best option. If something seems too much good to be true, that's probably why legal advice is essential,” says Chami.
