How Much Does It Cost to File for Bankruptcy (2024)?
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Summary:
Most individuals who have to file bankruptcy will have to pay for either Chapter 7, Chapter 11, or Chapter 13 bankruptcy, and each comes with a different cost. Generally speaking, Chapter 11 is the most complicated and, therefore, will cost more than Chapter 7 or Chapter 13. You will have to pay for court costs and attorney fees, which could run from $1,000 to $10,000 or more.
The cost of education, real estate, childcare, and more have become so expensive that many people have found themselves overwhelmed with debt. Bankruptcy offers the opportunity for a clean slate, or at least a significant improvement. It may hurt your credit and ability to get favorable loan terms, at least in the short term, but sometimes bankruptcy is the best or only option.
If you decide to file for bankruptcy, you’ll have to determine which type of bankruptcy is the best way to discharge your debt while keeping most of your assets. You’ll also have to find a way to pay for administrative and attorney fees, which we break down for you below.
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Bankruptcy case study: Dave Ramsey Show, Caller 1
Dave Ramsey is an American business and personal finance coach that hosts a popular radio show. A while back, he received a call from an unidentified person who had close to a million-dollar debt between her (age 29) and her husband (age 32). In reality, their debt added up to $760,000, and they jointly make about $230,000 a year in gross income. Although this might sound out of this world, getting to this level of debt is surprisingly common for a typical American professional with a post-graduate degree and, therefore, a lot of student debt. Here is Caller 1’s breakdown of their debt.
| Type of debt | Amount |
|---|---|
| Student loans | $335,000 |
| Mortgage | $210,000 |
| Auto loans | $35,000 |
| Credit card debt | $136,000 |
| Personal loans | $44,000 |
| Total owed | $760,000 |
As you can see, over half of the debt consists of student loans and the Mortgage. The rest is made up of personal loans and credit cards. Caller 1 says she doesn’t want to file bankruptcy, but taking a look at the debt and income of Caller 1 and her husband, they might have no choice. Should they file for bankruptcy, and which type of bankruptcy should they file? Let’s review the different bankruptcy types and their costs and revisit this case at the end of the article.
Types of bankruptcy and costs
According to the United States court system, six different types of bankruptcy are available for individuals, businesses, and municipalities. As most readers will utilize a personal bankruptcy filing, the most applicable bankruptcies will be Chapter 7, Chapter 11, and Chapter 13. The average costs and bankruptcy fees include administrative costs such as court filing fees and attorney’s fees.
The fees bankruptcy attorneys charge can be brutal, according to Adrienne Hines, an attorney in Ohio who specializes in bankruptcy and worker’s comp cases. “Actually paying a bankruptcy lawyer is usually the biggest shocker for most people who are exploring their options under the federal bankruptcy system,” she says. “But once people understand the tremendous benefit they might experience, they borrow from friends or family, use tax refunds and bonuses, and sell things they own to file.”
Actually paying a bankruptcy lawyer is usually the biggest shocker for most people who are exploring their options under the federal bankruptcy system. - attorney Adrienne HinesClick to Tweet
So, how much does it cost to file for bankruptcy? What are the different types and why do they differ in price? Let’s take a look below.
Chapter 7: Liquidation
Court admin costs: $335
Bankruptcy attorney fees: $750-$5,000
Total expected cost: $1,085-$5,335
Bankruptcy attorney fees: $750-$5,000
Total expected cost: $1,085-$5,335
Pro Tip
According to the bankruptcy code, if a debtor’s income is 150% less than the poverty level and they are unable to pay the fees, even in installments, the fees can be waived. This is important to note if the initial filing fees make you think twice about filing for bankruptcy and getting a fresh start.
Bankruptcy filing requirements:
- Average income must be less than your state’s median income.
- Your income minus your expenses must be greater than 25% of your unsecured debt.
In a Chapter 7 bankruptcy, the bankruptcy trustee finds and distributes (sells) a debtor’s non-exempt assets. They use the proceeds from the assets to pay creditors for at least part of the outstanding debt. Unlike other bankruptcy filings, Chapter 7 does not require a repayment plant or any long-term plan at all. The assets are sold off, the creditors get what they can from the asset sales, and the debtor is able to discharge their debts and start again.
In Chapter 7, all assets are on the table except for those deemed exempt. Below is a breakdown of what is considered exempt and non-exempt.
| Exempt | Non-exempt |
|---|---|
| Your main vehicle | Additional home or residential property that is not your primary residence |
| Your home | Investments that are not part of your retirement accounts |
| Personal, everyday items | An expensive vehicle(s) not covered by bankruptcy exemptions |
| Retirement accounts, pensions, and 401(k) plans | High-priced collectibles |
| Federal benefit programs | Luxury items |
| Health aids | Expensive clothing and jewelry |
| Household goods | |
| Life insurance policies | |
| Social Security & unemployment | |
| Tools of the trade for small businesses & self-employed individuals |
As the administrative costs, such as the filing fee, are quite low, the main costs associated with Chapter 7 are the lawyer’s fees. The more complicated your case or the better lawyer you get, the fees will vary. However, expect to spend around $5,000 in a worst-case scenario to file Chapter 7. Chapter 7 is geared more toward low-income earners with the requirement that the salary is 150% below the state’s median income.
Chapter 13: Individual debt adjustment
Court admin costs: $235
Bankruptcy attorney fees: $3,000-$4,000
Total expected cost: $3,235-$4,000
Bankruptcy attorney fees: $3,000-$4,000
Total expected cost: $3,235-$4,000
Chapter 13 bankruptcy costs are slightly lower than Chapter 7 bankruptcy costs. Expect to pay less in both admin fees and lawyer fees, but the difference is not huge. You will be looking more at the $4,000 mark towards the top end of a Chapter 11 filing.
Bankruptcy filing requirements:
- Stable income
- You have not filed for Chapter 13 bankruptcy at least two years prior or Chapter 7 four years prior
- Your total debt (unsecured and secured) does not exceed $2,750,000
Chapter 13 is also referred to as a “wage earner’s plan,” at least according to the U.S. courts. This means you have income and plan on paying back your debt; you just need more time. Chapter 13 allows you to keep all of your property, regardless of the exempt vs. non-exempt status you find in Chapter 7.
With Chapter 13, you will work with a trustee to develop a payment plan, typically over three to five years. After the court ruling, the debtor must make payment plans to the trustee by sending them money directly or having their wages garnished.
The debtor is also not allowed to take on any new debt unless they clear it before with their trustee. With a Chapter 11 filing, the debtor’s debts are split into “priority” and “non-priority.” Priority debts are debts in which the consequences are higher for failing to pay them. Most Chapter 13 filers will be required to pay the priority debts, but not always the non-priority debts.
Chapter 11: Reorganization
Court admin costs: $1,738
Bankruptcy attorney fees: $10,000+
Total expected cost: $11,738+
Bankruptcy attorney fees: $10,000+
Total expected cost: $11,738+
Chapter 11 bankruptcy is known as a reorganization bankruptcy. In most cases, businesses, corporations, and partnerships utilize this form of bankruptcy. However, individuals with a lot of debt can also opt for Chapter 11. Just like Chapter 13, Chapter 11 is not a selling-off of assets and discharging of debt like Chapter 7. Instead, it’s restructuring and reorganization of debt via a payment plan. The main difference between Chapter 11 and Chapter 13 is the repayment plan time frame, as well as certain debt exemptions.
Bankruptcy filing requirements:
.With Chapter 13, the debtor will most likely have three to five years to pay back the debt. With a Chapter 11 bankruptcy filing, the debt repayment can be extended, in most cases, another five years. A Chapter 13 filer will also be required to pay “priority debts” over their allotted time frame. The other unsecured creditors who are not “priority” might not receive any money at all during the period.
In a Chapter 11 case, something called the Absolute Priority Rule is applied. This means that if the debtor wants to remain in possession and control of their assets, they need to pay 100% of the creditors, not just the non-priority ones.
As Chapter 11 is usually meant for individuals or companies with a lot of debts and assets, it’s significantly more complicated. Expect to pay a minimum of $10,000 in lawyers’ fees, but $20k, $30k, or $40k is not at all out of the question.
Long-term costs of bankruptcy
The long-term costs of bankruptcy will be related to your credit report and credit history. A Chapter 13 bankruptcy will only stay on your credit report for seven years, whereas Chapter 7 and Chapter 11 will stay on your credit report for 10 years. That being said, a previous bankruptcy will always be on your past credit history, which lenders can find quite easily. Remember, lenders can approve or not approve anyone they want, and they choose the interest rate to offer. This means even if the bankruptcy leaves your credit report, it can still cause unwanted hiccups in the future.
Pro Tip
All of these bankruptcy filings require mandatory credit counseling. This includes those with primary business debts and not just personal. In most cases, this must be done 180 days before filing.
What about alternatives to bankruptcy, like debt consolidation?
Debt consolidation can be an option, but you must make sure it applies to your situation. Kendall Meade, a financial planner at SOFI, says there are pros and cons. “The most common way I see people use personal loans to better their financial situation is by using them to consolidate credit card debt,” she says. “This can be helpful because you may be able to get a lower interest rate and also because you are now on a fixed payment schedule to pay the debt off, whereas with a credit card, you may just be covering interest with your minimum payments. Also, you are locking in a fixed rate, whereas credit card rates are variable, meaning your interest rate and, therefore, payments may increase.”
Again, it might be worth exploring a debt consolidation loan before you dive into bankruptcy, but of course this depends on each individual’s personal situation.
Caller 1 case revisited
So now that we know about the three major bankruptcy filings for individuals, we can better understand the situation of Caller 1 on the Dave Ramsay Show. Also note:
- There is $210,000 in mortgage debt on a property we assume they would like to continue to live in
- The $335,000 in student loans is NOT DISCHARGEABLE in bankruptcy. Student loans, unfortunately, stick with you until death.
So now we know that the student debt is there to stay and the house where they live would be considered an exempt asset. If they could file Chapter 7, they could stay in their house, wipe away all the debt, and have a fresh start, right? Not so fast. Remember, to file for Chapter 7, their income must be less than the median household income in the state. As Caller 1 and her husband make $230,000 combined, this is well over the median for all states in the U.S. This means that based on their total debt and assets, plus the costs associated with each filing, a Chapter 13 bankruptcy filing will be the best fit for Caller 1.
FAQ
How long does bankruptcy stay on your credit report?
Chapter 7 and Chapter 11 bankruptcies will stay on your credit report for 10 years, whereas a Chapter 13 bankruptcy will stay on your credit report for seven years. These time frames are all drawn from the date you filed in bankruptcy court.
What is included in the costs of bankruptcy?
The main costs are twofold; administrative and court costs, such as filing fees, and the legal fees associated with a bankruptcy lawyer or attorney. Other tangential fees might include the costs of travel and missed work due to court dates. The long-term costs of bankruptcy are much more consequential and can shut you out of the credit market for years.
Does bankruptcy ruin your credit score?
In the short term, yes, but ruin is a bit of an extreme word. It can cause a drop of 130-150 points in the short term. However, you always have the option of building it back up.
What is a Chapter 11 filing?
Chapter 11 filing is also called a “reorganization” filing. Chapter 11 is not a selling-off of assets and discharging of debt like Chapter 7. Instead, it’s restructuring and reorganization of debt via a payment plan. It’s primarily used for companies and high-net-worth individuals.
Who bears the cost of bankruptcy?
Both creditors and debtors bear the costs of bankruptcy. The creditors lose out on money they are owed, and debtors lose out in the form of damaged credit. If you want to look at it with a more macro view, everyone has the potential to lose via the effect of multiple bankruptcies in the overall economy.
Key takeaways
- Although there are multiple ways to file bankruptcy if you are an individual, business, farm, or municipality, most individuals will file Chapter 7, Chapter 11, or Chapter 13.
- With each filing, you will have to pay administrative court costs and attorney’s fees, which could add up to $5,000-$10,000 or more.
- Chapter 7 bankruptcy will result in a discharge of certain debts. Chapter 11 is a debt restructuring in which the debt is not discharged but rather reorganized so that the debtor may repay the debt in what is termed a “debt adjustment.”
- Chapter 11 bankruptcy is a method used primarily by companies and some high-net-worth individuals. It restructures the debt with portions discharged for certain “debt exemptions.”
- If you do not want to file for bankruptcy, you might consider a debt consolidation loan instead.
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