The epidemic of bankruptcies in the past few years has slowed somewhat, as fewer people are filing for Chapter 7 or Chapter 11 protection. However, a lot of people are not filing for bankruptcy because they can’t afford to do so.
The meltdown of the financial system and housing industry along with the subsequent rise in unemployment between 2006 and 2008 led to a large number of people filing for personal bankruptcy. In 2008, according to the Deseret News, national bankruptcy filings increased 33 percent over 2007, which increased another 32 percent from 2008 to 2009.
Fortunately, the national rate of bankruptcy increased much less from 2009 to 2010, when the 1.55 million filings for Chapters 11 and 7 marked an increase of only 8 percent. In 2011, according to the New York Times, the number of nationwide bankruptcies fell 12 percent, to 1.4 million.
The declining number of bankruptcies is encouraging. However, the counterpart to the data is, according to CNN, that a lot more people would file for bankruptcy if they could afford it.
Too bankrupt to declare it
The National Bureau of Economic Research found in a recent report that the average cost of filing for Chapter 7 bankruptcy is at least $1,500, which is estimated to put the cost of declaring bankruptcy out of reach for anywhere from 200,000 to 1 million people nationwide. The report’s authors believe that tax returns are often used to file for Chapter 7, the most common form of bankrupty.
The bulk of the cost goes to bankruptcy attorneys. Of the $1,500 total, $300 is the mandatory federal court fee for filing to declare bankruptcy. When people file for bankruptcy, they are mandated to take debtor’s education courses and receive pre-bankruptcy counseling, the fees for which add up to about $85 in most cases. That still leaves more than $1,000, most of which will go to a lawyer.
Ways around it
Part of the expense involved is incurred by additional hoops to jump through and paperwork mandated by the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, which has made filing for bankruptcy more difficult to do. Inexorably, that involves more legal work and thus more in legal fees. The law was passed in order to reduce unnecessary or frivolous filings, but critics have contended the law puts bankruptcy further out of reach for the poor.
However, some attorneys are willing to work pro bono, or without being paid. There are pro bono associations through which one can find an attorney who may be willing to take a case. Some judges will also waive filing fees if a person’s income is 150 percent or less of the federal poverty level.