What are the Costs of Bankruptcy?

Bankruptcy in the United States is permitted by the United States Constitution (Article 1, Section 8, Clause 4) which authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States." As such, Constitutional recognition of bankruptcy law is amongst the oldest in the United States, predating even the bill of rights. Even 223 years ago, the Founding Fathers and the draftsmen of this Country’s earliest laws recognized that sometimes people got in over their heads as a result of insufficient planning or factors beyond their control. They understood that it was in the best interests of both debtors and the economy as a whole to provide people with a fresh start in the event someone found themselves with debts they were unable to pay.

Despite the fact that the Constitution specifically permits Congress to enact bankruptcy legislation, there is still a significant cost, both economic and emotional, to seeking the protection of the Bankruptcy Court. So, if you or someone you know is considering bankruptcy, let’s take a look at the undocumented costs of bankruptcy.

First, the most obvious: Court Fees.

Court filing fees (the fee for filing your petition) for bankruptcy vary depending on the chapter you are filing under, but initially plan on $274.00 for Chapter 13 and $299.00 for Chapter 7. If you need to change your petition after it is a filed, there is an additional $26.00 filing fee.

In addition to court fees, there will be Legal Fees, i.e. what you pay to your Bankruptcy Attorney to analyze your case, review your purchase history to avoid nondischargability issues (meaning you still owe money to a creditor after bankruptcy), make recommendations regarding when you should file and under which chapter, preparing your petition, schedules and disclosures, and representing you at the §341(a) Creditor’s Meeting. Each attorney offers slightly different services, and charges different amounts. You should speak with your attorney to understand his or her fee structure, and always get the fee agreement in writing.

Rebuilding Credit: Assuming your bankruptcy goes to discharge without objection and you receive your Order Discharging Debtor, debtors now finds themselves with the daunting task of rebuilding their credit, post-bankruptcy. The costs here are more difficult to identify specifically. Because bankruptcy negatively impacts your credit, borrowing money may be more difficult, and when possible, may be more expensive.

For example, assume that the debtor has an old car and would like to trade it in for a new car, post-bankruptcy. The debtor may find themselves unable to qualify for a car loan for some time after discharge, thereby incurring the increased maintenance costs and fuel costs of an old, inefficient vehicle for longer than originally anticipated. When the debtor does qualify for a new car loan, the increased interest rate assessed to borrowers with negative marks on their credit score will cost the borrower more in interest over the term of the loan. Similarly, a borrower seeking to obtain a home loan may be required to pay “points” in addition to a higher interest rate, adding thousands of dollars in closing costs.

However, there are potential savings and benefits to a bankruptcy filing. The costs of bankruptcy should be weighed against the benefits. First, bankruptcy offers a debtor a fresh start, and a responsible debtor can begin repairing their credit immediately after discharge, and may qualify for a prime rate mortgage in as little as 3 years after filing. Since the debtor’s previous debts were discharged, the debtor no longer has the burden of making monthly installment payments on consumer credit cards or other non-retained property.

Finally, potential bankruptcy petitioners should be aware of the noneconomic costs of bankruptcy: A bankruptcy filing remains on your credit report for 10 years, and individual debts discharged in bankruptcy for 7 years following your discharge. Therefore, whenever you apply for credit, a new loan, and more frequently, a job or undergo a background check, a previous bankruptcy will be visible to the loan officer, hiring manager or credit card company. While many debtors are encouraged by a “light at the end of the tunnel” or feel as though a weight has been lifted from their shoulders upon discharge in bankruptcy, there may be the lingering feeling of personal failure or shame in filing for bankruptcy. To that, I recommend the debtor consider my opening remarks in this post, and make a decision about what is best for them and their family in the long term.

If you need help weighing your options and if bankruptcy can help you if you are in over your head, contact Attorney Matthew Trask at 508.655.5980 to schedule a one-hour consultation.