Typically when someone wants to file for Chapter 7 (“liquidation”) bankruptcy, they have to pay the legal fees up front before the case can be filed. The reason for this is because if the legal fees are not paid before the case is filed, then the legal fees are discharged in the bankruptcy along with the other debt.
Coming up with a big lump sum of money to pay an attorney can be a problem for a lot of people, especially when money is already tight.
This is why Chapter 13 can sometimes be a better solution.
Chapter 13 cases can be filed for no money down because the attorney fees and court costs can be rolled into a 3-5 year repayment plan. While you’re at it, you can also wipe away all of your other unsecured debt (credit cards, medical bills, payday loans, old collections, etc.).
Chapter 13 is a “reorganization,” where you consolidate everything into a monthly repayment plan. However, just because you consolidate the debt into a payment plan doesn’t mean you have to actually pay all of the debt back.
A common misconception is that you have to pay all of your creditors back in full in Chapter 13. That is simply not true.
Client A comes to us because she is about to have her wages garnished by a creditor. Suppose she has around $20,000 of medical and credit card debt, and she owes about $6,000 on her car, which she pays $400/month.
Because the creditor is about to garnish her wages, she needs to file bankruptcy quickly to stop the garnishment, but she can’t afford to come up with a big lump sum attorney fee to file for Chapter 7 protection.
She can file for what we call a “0% Chapter 13” immediately for no money down. The “0%” refers to the percentage that will be paid to unsecured creditors (credit cards, medical bills, etc.) – zero!
The only things this client will be paying in her Chapter 13 will be her car ($6,000), the attorney fees ($3,000), and trustee/court costs ($310). The rest of the debt (medical bills, credit cards) will be wiped away. If the client would like to keep the monthly payment as low as possible, she can propose a 5 year plan. In that case, the monthly payment will be around $190/month (down from $400/month that she was paying on her car before bankruptcy). If she doesn’t want the case to go that long, she can propose a 3 year plan, and her payment will be around $305/month (still almost $100 less than what she was paying on her monthly payment before the bankruptcy was filed)