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How To Pay For Bankruptcy When You’re Flat Broke

By Cathy Moran

paying for bankruptcy

One of the cosmic ironies of our legal system is that it costs money to file bankruptcy. Bankruptcy gets you out of debt only if you have the money to file.

The costs of bankruptcy include the filing fee collected by the court; the required credit counseling; and, if you’re smart, an experienced lawyer to make sure it’s done right.

I have not recommended people represent themselves in bankruptcy since Congress “reformed” bankruptcy 15 years ago. The express intent of that law was to discourage consumers from getting relief from their debts. With “reform”, bankruptcy law acquired pitfalls, traps, and requirements that invited mistake.

But a malicious Congress left untouched one of the shining features of bankruptcy, the ability to pay your bankruptcy attorney after you file Chapter 13.

Chapter 13 pays attorneys fees

Chapter 13 is a repayment plan for individuals. You make a monthly payment to a Chapter 13 trustee for the life of the plan. Those plan payments can pay the lawyer who helped you file the plan and get a bankruptcy discharge.

By contrast, to file Chapter 7, the most common alternative to Chapter 13, your attorneys fees usually need to be paid in full, before you file. Paying for Chapter 7 then becomes a challenge unto itself.

In Chapter 13, the debtor’s attorney has an administrative claim in the case for whatever part of the total fee wasn’t paid before the case was filed. Administrative claims have a priority for payment under bankruptcy law.

Choosing Chapter 13

The ability to effectively finance the attorneys fees to file bankruptcy can be a godsend when you face the need for an immediate bankruptcy filing. That need can be as concrete as the need to save your house or your paycheck. Or it can be as ephemeral as the need to stop the stress of being in debt.

Chapter 13 comes with some features that aren’t as appealing as Chapter 7. The biggest downside is that the discharge doesn’t come until you complete the plan payments, which can run from 36 months to 60 months.

The duration of the plan risks that intervening events, like job loss or health issues may compromise your ability to make the plan payment.

But usually, if your situation was so bleak that you couldn’t pay for a Chapter 7, the Chapter 13 plan payment may be as little as $50 to $100 a month.

And, if it develops that you can’t make the Chapter 13 payments, you have the absolute right to convert your case at any point to Chapter 7.

All in all, that’s why I love Chapter 13.

More

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Filed Under: How bankruptcy works

About Cathy Moran

I'm a veteran bankruptcy lawyer and consumer advocate in California's Silicon Valley. I write, teach, and speak in the hopes of expanding understanding of how bankruptcy can make life better in a family's future.

Bankruptcy Basics

About The Soapbox

You’ve arrived at the Bankruptcy Soapbox, a resource of bankruptcy information and consumer law.

Soapbox is a companion site to Bankruptcy in Brief, where I try to be largely explanatory and even handed (Note I said “try”).

Here, I allow myself to tell stories and express strong opinions. We dig deeper into how to consider bankruptcy and navigate a bankruptcy case.

Moran Law Group
Bankruptcy specialists for individuals and small businesses in the San Francisco Bay Area

How Bankruptcy Works

What Happens To Your Bank Account in Chapter 13

Those considering filing a Chapter 13 bankruptcy worry about "what happens to my bank account?" Will the trustee take all the money? How do I pay my living expenses after I file? The short answer is: nothing changes. The account remains yours and available for all the expenses of day to day living. Because, … Read more

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