Are You Too Broke to Go Bankrupt?

A number of cash-strapped Americans, overloaded with debt, will not  be able to afford to file for bankruptcy this year. Anywhere between  200,000 and 1 million consumers are estimated to be unable to front the  $1,500 average cost to pay for the filing and lawyer fees for a Chapter 7  bankruptcy protection, according to recent research submitted to the  National Bureau of Economic Research.

Chapter  7, the most common form of consumer bankruptcy in the United States,  wasn’t always this hard to attain. With Chapter 7 bankruptcy, your assets that are non-exempt are turned over to a trustee, who then allocates funds to your creditors, in turn wiping out all or most of your debts. But bankruptcy laws changed  in 2005, resulting in bankruptcy filings becoming more expensive and  more difficult to execute. The United States Government Accountability  Office estimated that the average attorney fee for a Chapter 7 case  increased from $712 in February and March 2005 to $1,078 in February and  March 2007, a 51 percent increase.

Under the  2005 laws, debtors have to go for credit counseling before filing a  bankruptcy petition. Consumers are also subjected to a means test, to  determine which type of bankruptcy to file. In a Chapter 13 bankruptcy,  the filer undergoes a financial reorganization overseen by the court and  develops a plan to pay off his debts in an effort to protect certain  assets, such as an estate. And as of 2005, the debtor must take a debt  management course and file a certificate of completion with the court.

While  claiming bankruptcy is more difficult than it was in the past, the need  for it is perhaps even greater during these tough economic times.  “There are a lot of people in this country who for many  reasons—unemployment, skyrocketing medical bills—can’t afford to pay  their bills,” says Andrea Fisher, an attorney with Squire Sanders in New  York City who specializes in bankruptcy. “They legitimately need to  file Chapter 7 to get the breathing space they need to get a fresh  start.”

Filing for bankruptcy without  consulting a lawyer is an option, but most experts don’t recommend it.  “If you truly need to file bankruptcy, you truly need to hire an  attorney,” Fisher says. “The bankruptcy code is filled with procedures  and rules. Just filling out the petition, which is the forms you file to  start the bankruptcy process, is very complicated.”

Without  the guidance of an attorney, you can make a number of harmful mistakes  that can ultimately lead to your case being dismissed by the court.  Gerri Detweiler, director of consumer education at Credit.com, advises  against using a bankruptcy preparation service in lieu of hiring an  attorney. “These services are really only designed to fill out the  forms, but they are not allowed to give legal advice,” she says.

To  prepare to file for bankruptcy, Fisher advises getting all of your  paperwork together, since you’re going to have to list all of your  assets, debts, and any litigations you’re involved in. “You want to be  able to have a complete picture of what your financial condition is,”  she says. Fisher also cautions people against transferring any assets  before talking to a lawyer, since many asset transfers are subject to  avoidance laws and can result in your case being dismissed. Detweiler  adds that even if you sell an asset to pay off a debt before bankruptcy,  that action could be looked at as preferring one creditor over another  and could damage your case.

Today, the Chapter 7  filing fee by itself, without attorney fees, is $306 and $281 for a  Chapter 13, according to the United States Bankruptcy Court. You can,  however, get the fee waived if your household income is less than 150  percent of the income poverty line.

In terms of  affording the lawyer fees, experts recommend seeking out pro bono  attorneys. You can do this by contacting your local legal-aid society,  which should be able to refer you to a low-cost or free service in your  area. You can also use the American Bankruptcy Institute’s Pro Bono  Locator to find free bankruptcy attorneys near you.

Through  ABI, you’ll find lawyers like John Hargrave, who provides pro bono  bankruptcy counseling through the Rutgers Law School Bankruptcy Pro Bono  Project. “I’ve always regarded the practice of law as having an  obligation to give something back to the community,” Hargrave says.  Through the project, Hargrave advises people who are living off Social  Security, unemployment, disability, or are earning very little in the  way of minimum-wage jobs.

When  consulting a lawyer, Robert Lawless, a law professor at the University  of Illinois who specializes in bankruptcy, says it’s important to find  an attorney who will not only help you file for bankruptcy but also try  to solve your debt problems. He says, “The attorney should talk about  your goals and look at what all your options are.” Another low-cost  resource is the National Foundation for Credit Counseling, which  provides affordable financial services to help people manage their debt.

Daniel Bortz

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