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A person files for bankruptcy typically because they can no longer pay for their debts. It does not only mean that they do not have a job. Sometimes, they still have a source of income but it is too small to barely cover their basic necessities, much less their debts. There are also cases wherein they have a high salary but a sudden boost of expense due to medical treatments can also make a person unable to pay for their credit obligations. People who are in a severe financial crisis are more likely to declare themselves bankrupt.
Since filing for bankruptcy is associated with a financial crisis, you can expect that the economy will have an effect on it too. An economic downturn could cause a lot of people to be bankrupt. If there is a good economy, then the filings will decrease. The latter seems to be the case of today because USCourts.gov revealed that the bankruptcy filing in March 2014 went down by 11%. This is measuring all filings for the past 12 months ending in March 2014 (1,038,280) and comparing it with the statistics of the previous period of 12 months ending in March 2013 (1,170,324).
While there is a decline in the people filing for bankruptcy, that does not mean the economy is fully recovered. It is better but the number of people going bankrupt is still very big at more than a million.
When you find yourself in the position to file for bankruptcy, you need to ask yourself first if you can really afford it. After all, you are in a financial crisis. Do you know how much it cost to file for bankruptcy?
Costs involved in the bankruptcy process
An article published on Voxeu.org revealed how the recent housing market crash may have been partly caused by the high bankruptcy fees. When people realized that they cannot have their debts discharged because they cannot afford the high fees of bankruptcy, they were forced to default on their mortgages.
While it may be an exaggeration to blame the housing crash on the high cost to file bankruptcy, there is some truth to the fact. It is quite costly. So if you are filing for bankruptcy to save on your debt payments, you have to be prepared to pay the price. Here are some of the costs that you need to prepare for.
- Attorney fees. This is actually the biggest expense that you will make - between $600 to $5,000. But you should also know that there are lawyers who can help you out for free. You may want to look for pro bono bankruptcy lawyers. But if you are going to hire one that requires payment, the fee will vary depending on the type of case that you will file and where you intend to file your case. Sometimes there are base fees and then other charges are added as you go along. For those who will file Chapter 13 bankruptcy, some lawyers will take their fees from your Chapter 13 repayment plan.
- Bankruptcy petition preparers. For those who wish to forego the expensive fees of an attorney, they can file their case on their own but they need the services of a bankruptcy petition preparer. This will cost you around $100 to $300 - depending on your case.
- Credit counseling fees. Before you can file for bankruptcy, it is a must that you have gone through credit counseling with one of the accredited agencies by the US bankruptcy court. This is one of the prerequisites of filing for bankruptcy so you need to pay up for this counseling service. This will cost you around $50.
- Court filing fees. Of course, you need to pay the court when you file your bankruptcy case. This administration cost will be between $280 to $310 as of May 2014. If your income is less than the 150% of the poverty line, it is possible for you to have this waived when you file for a Chapter 7 bankruptcy.
- Trustee fee. When you opt for Chapter 13 bankruptcy, a trustee is involved to help distribute the payments you will make in your repayment plan. This involves a fee that is usually 9% of the payment. This is usually included in the payment plan and not considered a separate cost.
On an average, you will be spending around $3,000 or so in filing for bankruptcy. If you land a Chapter 13 filing, you need more because of the repayment plan.
There are hidden dangers when filing for bankruptcy and you may want to know about them before you proceed. This is your way of ensuring that this is the right debt solution for your unique financial situation.
What to do if declaring yourself bankrupt is too costly
In case the only way out for you is bankruptcy but you realize that you cannot afford the fees, there are ways that will help you get the funds that you need to finance this debt solution. Before you file for bankruptcy, you may want to secure your payment first so the proceedings will go smoothly.
Here are some sources that you can get funds from.
- Borrow from family or friends. This is also tricky because a family loan does not just put the money on the line - it also puts the relationship in danger. If you have no choice, just make sure that you make it official by documenting the loan. Also, have a payment plan in place so you will not compromise your future payments.
- Stop paying your credit cards. You will try to have them discharged anyway. Save the money for your bankruptcy fees. Just make sure that you have a high chance of qualifying for Chapter 7 bankruptcy. Otherwise, you might end up having your case dismissed and paying your balance plus interest and late payment charges.
- Use any windfall money. These include bonuses, tax refunds and commissions. Put them aside so you have something to use then you are filing for bankruptcy.
- Lower your expenses. This may be tough if you are in a financial crisis because you are probably living with only the bare basic necessities. But there might be something that you can cut back on further. Planning your meals well, carpooling to work and brown bagging your lunch - these are cut backs that you can afford to make for now.
- Earn more money. Get rid of the things in your home that you do not need and sell them. Things that you think have no value may be something that someone is willing to pay a huge amount of money for.
- Get from your existing assets. If you have your 401(k), you may be able to get money from this account. Just make sure that you can put it back.
Filing for bankruptcy is not something that you should take lightly. But if you have to go through with it, make sure that you will practice the right financial management habits to avoid committing the same mistakes again.
Among the things that you should work on immediately is to build up your emergency fund. According to an article published on NerdWallet.com, the main reason that people are filing for bankruptcy is because of medical bills. Since this is one cost that just keeps on rising, you need to be prepared for it.