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Legal Costs Create Bar to Bankruptcy for Nation’s Poorest

It’s that time of year again when many Americans receive their federal tax rebates in the mail, but an estimated 200,000 will be breathing a sigh of relief for a quite unexpected reason – their tax rebate will provide them with enough money to file for bankruptcy. A recent joint study from the University of Chicago and Columbia University reported a dramatic spike in bankruptcy filings in previous years right after people received their tax returns. According to CNN Money, the average cost of a Chapter 7 proceeding is over $1500; a price that many individuals, couples and businesses cannot afford.

To file the necessary paperwork for a bankruptcy proceeding in federal court, the flat fee is $300. Other expenses include the cost of mandatory credit counseling and a pre-discharge debtor education course for about $85. The rest of the “necessary” fees are paid to bankruptcy attorneys. Although the court fee of $300 can be waived in exceptional circumstances (you must show your income is 150% less than the poverty level), recent changes to bankruptcy proceedings have left many attorneys arguing their fees can’t be lowered.

In an effort to reduce the sheer number of bankruptcies the Bankruptcy Abuse Prevention and Consumer Protection Act was passed in 2005, adding more requirements to the filing process such as additional paperwork and debtor education. As a result, the bankruptcy rate has dropped only slightly, from 1.4% in 2004 to 1.3% last year, while the authors of one academic study believe that many individuals have been “priced out” due to the additional hurdles.

A member of the National Association of Consumer Bankruptcy Attorneys, Billy Brewer, argues that it is these additional bureaucratic measures that make it impossible for attorneys to charge less for Chapter 7 filings. “We can’t afford to do it for free,” said Brewer, adding “Congress decided to make the process much more difficult and there’s much more paperwork involved, so attorneys are spending double the time they used to just to help someone file.” Unfortunately, very few people who need to file for bankruptcy can afford legal assistance, and pro bono help is hard to come by. Attempting to file by oneself is strongly discouraged (and made difficult by the new regulations), but the poor are also warned not to seek out those “low-cost document preparation services” which fool people into believing they are receiving legal advice.

The nationwide estimate is that anywhere from 200,000 to one million people will not be able to afford to file for bankruptcy in the U.S. this year. In tough economic times such as these, with interest rates mounting, the legal cost of compliance is too much to bear. Often left with little in the way of a solution, the poor are turning to family, friends, and their federal tax returns to supplement the growing cost of absolving their debt. Offers Brewer, “[i]f the need is crucial enough, consumers usually find a way to come up with the money.”

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