Bankruptcy Filing Fees Through the Ages

The cost of everything keeps rising, even the cost of going broke. When something costs more, people use less of it. I've been thinking lately about that idea and how it relates to the U.S. bankruptcy filing rate.

The filing fee for a chapter 7 bankruptcy is now $299, which is a 43% increase from the cost just before the 2005 changes to the bankruptcy law took effect. Chapter 13 filing fees are now $274, a 41% increase from 2005. Those increases would help to explain why U.S. bankruptcy filings remain at historically lower levels. For example, I project that there will be slightly over 1.0 million filings in the 2009 calendar year as compared to about 1.6 million filings in the years immediately preceding the 2005 bankruptcy law.

I recently had occasion to compile the rising cost of chapter 7 or 13 filing fees since the Bankruptcy Code's became law in 1979. Sure, attorneys' fees are the big cost of filing bankruptcy, and with one of my great research assistants, Heather Miller, I'm working on a paper that quantifies how the 2005 bankruptcy law changed the total cost of filing. (Heather probably would be more pleased if I worked on the draft instead of blog posts.) As part of that work, I felt compelled to see how one component of the cost of bankruptcy, filing fees, had changed and felt even more compelled to share it with all you.

To understand the chart, keep in mind that it shows the inflation-adjusted cost of filing bankruptcy, stated in June 2008 dollars. Consider that the filing fee for chapter 7 or chapter 13 bankruptcy in October 1979 was $60. Adjusted for inflation (using the CPI-U index from the Bureau of Labor Statistics), $60 in 1979 money would represent $175 in June 2008 money. Because of inflation, the relative cost to file bankruptcy declines over time. By 1986, the filing fee remained a nominal figure of $60, but $60 in 1986 money only represents $119 in 2008 money. In November 1986, the filing fee was raised to $90, which is $173 in 2008 money. Hence, the chart shows sudden increases and then gradual declines as inflation erodes the relative cost of filing.

What we see is that the filing fee for bankruptcy has risen over time. Even on an inflation-adjusted basis, the filing fee for a chapter 7 is now 71% higher than it was in 1979. The inflation-adjusted chapter 13 filing fee is 57% higher than it was 1979. The chart also shows the dates for big increases in the chapter 7 or chapter 13 filing fee, which were identical until January 1995. The biggest spike in filing fees was immediately after the 2005 changes to the bankruptcy law. I'm not claiming the spike in filing fees was alone the explanation for the drop in the filing rate, but it surely is one of the factors. Also, as the inflation-adjusted cost of filing fees has declined it is not surprising that we have seen increases in the number of people filing.

Comments

[Patrick]

After a large filing fee increase and resulting drop in filing rate, does the filing rate then increase steadily as the inflation adjusted cost of filing decreases. And if so, would a higher inflation rate, like that which we are beginning to experience, increase the how quickly the filing rate increases?

[Rafael Pardo]

Professor Lawless,

This is a very interesting post. Here are some random thoughts:

You surmise that increases in filing fees may be negatively correlated with the number of bankruptcy filings. There are, however, provisions in the Judicial Code that seek to mitigate the burden of filing fees. First, individual debtors are permitted to pay the filing fee in installments (28 U.S.C. § 1930(a)). Second, as of 2005, indigent Chapter 7 debtors who cannot pay the filing fee in installments may obtain a waiver of the fee (28 U.S.C. § 1930(f)(1)). This is not to say that, in practice, these provisions will have their intended effect. For example, information regarding the filing fee itself may be more readily available to potential debtors than information regarding installment payment or waiver of fees. If so, the selection effect about which you have hypothesized seems quite plausible. If, however, potential debtors know of and do avail themselves of the mitigating provisions I have mentioned, then the selection effect would not be as pronounced and may even be statistically insignificant. Finally, since Chapter 13 eligibility requires an individual to have regular income, I would not expect a statistically significant association between increases in Chapter 13 filing fees and the number of Chapter 13 filings. Because of their regular income, individuals considering filing for Chapter 13 are likely to have the resources to pay the increased filing fee.

RP

[Patches]

I don't see too many wavers or paying filing fees in installments. Over the 14 years that I have been working consumer bks’, I have seen only a handful. I think they would be more commonplace in pro-bono or pro-se cases, which is where I usually see them. If a debtor in a chapter 7 cannot even pay filing fees, it hard to think they would be able to pay attorneys fees (unless it is a pro bono). Usually, though there is no rush to file a 7. The rush is usually in the context of a 13. It seems more logical to pay in installments in a 13 because most attorneys’ fees are paid thru the plan. Even then an attorney can just ask for $274.00 and get all of his or her attorneys’ fees thru the plan. I think it is a small price to pay for an "automatic stay" in a 13. As far as the correlation between filing rates and the amount of filing fees? It seems to me to be a hard two pieces to tie together. I don’t think the filing fees make much of a difference in that the price is relatively “tiny” when compared to the amount of debt that would be discharged. Not to mention the piece of mind…. quiet dinners….etc… Now the bigger question on how or why the 2005 Bankruptcy Amendment, influenced consumer attorneys fees in Chapter 7?…..Well……… That’s a horse of a different color. I use a simple analogy when I try to explain the difference of before and after. If before the amendment, Chapter 7s’ were easy and 13s were hard, after the amendment, 13s are the easy ones and 7s’ are now the more difficult bankruptcies to deal with, relatively speaking of course. The judge has even mentioned from the bench a few times, that due to the “possibility” of proposing a 0% chapter 13 plan repayment, why would anyone file a chapter 7? Hinting I think to the fact of having to deal with the UST calling the shots from Washington.

[Alex Galyon]

I am also an attorney who represents consumers in bankruptcy filings and I agree with much of what Rafel says. However, I think the rapid increase in the total cost of filing a Chapter 7 does cause debtors to delay or not even file their case. Not only have the filing fees gone up as shown by Professor Lawless, but in addition, the associated fees have also gone up as well. The 2005 Amendments mandated pre-filing credit counseling (ticket in) and post-filing counseling (ticket out), each with a cost of $25.00-$50.00. This was a completely new fee which added $50.00-$100.00 to the cost to file. Because of means testing and other new requirements placed on attorneys, the fees charged also were increased to cover the additional time and liability. Many attorneys increased their fees $200-$300 due to these changes. Overall the cost to file a Chapter 7 went up by $300-$500. In addition, many practioners who filed a limited number of bankruptcies each year simply stopped practicing in this area due to the increased attorney requirements, placing addition upward pricing presure on the remaining practitioners. Frankly, I think this was part of the underlying intent of the drafters (credit cards companies) of this bill. If you make it more difficult to find an attorney to file your bankruptcy, then fewer people will file. At least they will delay their filing for some period of time, during which time many will continue to pay their creditors at least some portion of the money owed. I would find a study of the access to bankruptcy attorneys in rural parts of the country, post BACPA, to be an interesting topic. My feeling is that the number would have declined greatly.

[Benjamin Anosike, Ph.D.]

The post by Prof. Robert Lawless is quite an interesting one. The fundamental issue of the financial COST of exercising the Constitutional right of filing for bankruptcy, is obviously a very important, in deed critical, one for a financially overburdened debtor desperately needing or wanting to file for bankruptcy in today's recession-like economic climate. However, I view this post by Lawless and the information provided, as merely something of an initial or preliminary 'down payment' deposit made towards the prospective retirement of a huge debt.

Quite frankly, whichever way you'd want to slice it, the simple fact of the matter is that when it comes to the issue of the financial cost of bankruptcy, there's just one major KING of the block on that: the LAWYERS' FEES and CHARGES for doing bankruptcy. Nothing even begins to measure up to that, much less coming even close! So, my question is: Why tinker with this minor subject in the cost of bankruptcy, the issue of the official filing fees charged by the court to officially file for bankruptcy? The sum of $299 for chapter 7 bankruptcy, $274 for chapter 13 (or even $1,039 for chapter 11), and what have you? What is that - all still in the lower hundreds of dollars - when compared to charges in the thousands of dollars, (SEVERAL thousands of dollars, actually, in each case), that are charged by lawyers to file for bankruptcy?

From my own preliminary research on this, the average lawyers' fees across the country for filing for chapter 7 bankruptcy is $2,500; and for Chapter 13, it is $4,500. So, what are we talking about here?

Pardon me please, then, if I respectfully choose to await your "second" (your more serious) report on this topic which will bear on the lawyers' fees or costs for bankruptcy. I'm waiting.

Thank you

[Patches]

Alex-

(talking consumer bk attorneys and not the "dark side" of the force)

I so know about that access to bankruptcy attorneys in rural areas you were talking about. There are quite a few "rural areas" where I am. Where I am (approximation on area) there are 5-8 bk attorneys servicing an area, well... roughly 2-3X the size of Rhode Island. AT THE VERY LEAST 2X. Of those 5-8 attorneys 5 do it as their main practice. Three to four if we are talking the ones who will take a 13. 45 min. away there is a city that has its own dedicated judge and services about a good 60-90 miles more like a couple hundred or more if we are talking radius, where there are only 1-2 bankruptcy attorneys there. Roughly half of the people we see have driven more that 30 min.(not in gridlock, going about 70-75 mph. "speed limit") Not much gridlock round these parts, partner. There are a ton of small towns and yes they are small even tiny but it adds up and quick like. I have the same sentiments about the new law driving BK attorneys out of the biz. For sure.