Are You Too Broke to Go Bankrupt?

Why you need a lawyer to file for bankruptcy—and how to get one for free.

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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.

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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."

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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.