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Considering bankruptcy? It could cost more than you think

Man with empty wallet
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Filing for bankruptcy can help you restructure or discharge your debts and give you more time to repay the debts that you still owe. While many people think of bankruptcy as a sort of reset button, you’ll still owe some money. Filing for bankruptcy comes with a cost of its own.

How much it costs will depend partly on what type of bankruptcy you choose and if you hire an attorney, which most people should. However, you should consider long-term costs as well.

Immediate costs of bankruptcy

Filing for bankruptcy can be expensive, which is one of the reasons it’s difficult to get out of your debts.

The filing fee, which is about $240 is just the start. You also have to pay for:

  • Credit counseling: Available free from non-profits, but $79+ elsewhere
  • Attorney fees: $700 to $2,000+
  • Court fees

Chapter 7

Chapter 7 bankruptcy, also known as liquidation bankruptcy, involves selling your assets to repay your debts. Chapter 7 is generally for people with an income below the median for their state, or who meet a somewhat complicated “means test.” The basic filing fee is $245.

Even if you don’t have enough in cash or assets to pay them in full, your unsecured debts are discharged during this process. If you have secured debts, like a mortgage or auto loan, chapter 7 bankruptcy won’t stop your lender from foreclosing and repossessing those assets.

Neither type of bankruptcy will get you out of tax and other government debts, child support and alimony payments, or student loan debt.

Chapter 13

Chapter 13 bankruptcy is the more expensive form of bankruptcy, with a filing fee of $245. Unlike chapter 7, which involves selling off most of your belongings, chapter 13 reorganizes your financial life and debts, giving you a chance to keep certain property.

Chapter 13 lets people keep assets such as a house and extends the time they have to repay creditors, usually to a period of three to five years. The basic filing fee is $235.To be eligible, you can’t have more than $419,275 in unsecured debt and $1,257,850 in secured debt.

When you file, the court will help you come up with a payment plan that lasts between three and five years. If you make all of the payments on this plan your unsecured debts are discharged. As part of the payment plan, you’ll work with an appointed trustee to manage the payments to your creditors. The trustee often takes a commission of up to 10%, adding to the cost of this form of bankruptcy.

The long-term costs of bankruptcy

Beyond the immediate cost of bankruptcy, filing can have a long-term impact on your financial life. The most obvious effect is that your credit score will drop by a huge amount. Your bankruptcy will stay on your credit report for seven to ten years.

While the bankruptcy is on your credit report, you’ll likely struggle to qualify for new loans. Even if a lender does offer you a loan, you’ll have to pay a higher interest rate than someone with good credit. Higher interests can significantly increase the cost of your loans. It can mean paying more to buy a home or a car or even finding yourself unable to make large purchases due to a lack of willing lenders.

Some landlords and even employers may check your credit as part of your application to rent an apartment or get a new job. A bankruptcy on your credit report could hurt your chances there as well.

How to minimize bankruptcy costs and effects

There are some things you can do to save money when filing for bankruptcy.

It’s possible to file without an attorney, but experts warn that it can lead to mistakes that prompt the court to dismiss the case. Bankruptcy judges and other court employees are prohibited from offering legal advice, as are services that prepare bankruptcy petitions for a fee.

One option for reining in how much it costs to file for bankruptcy is seeking a pro bono attorney who’ll forgo fees as a public service. There are a number of places to look for one, including state bar associations and local and regional free legal clinics.

Once you file, you’ll want to do your best to start rebuilding your credit as soon as possible. Applying for a secured credit card and making sure you make all of your loan payments could help you recover more quickly.

Bottom line

If you’ve fallen into inescapable debt, bankruptcy gives you a chance to take back control of your financial life. However, bankruptcy isn’t free. You can expect to pay a few hundred to thousands of dollars to cover court fees and attorney costs. There are also long-term impacts on your finances that you’ll want to prepare for.

Written by
TJ Porter
Contributing writer
TJ Porter is a contributing writer for Bankrate. TJ writes about a range of subjects, from budgeting tips to bank account reviews.
Edited by
Loans Editor, Former Insurance Editor