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Pew Law Center Blog
December 21, 2011 Lawrence 'D' Pew

The Rising Costs of Bankruptcy

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, commonly called BAPCPA. The act made sweeping changes to bankruptcy law that were intended to lower the number of all filings, especially Chapter 7 cases, while simultaneously preventing abuse of the system by those who viewed bankruptcy as an easy solution to their debt problems. The best way to meet those goals, Congress decided, was to make it harder to qualify for bankruptcy by requiring more steps and additional documentation. One result of BAPCPA can be seen in the rising costs of bankruptcy, particularly in the area of fees charged by bankruptcy attorneys.

Attorneys have nothing to sell besides their time. When BAPCPA went into effect, lawyers were suddenly required to devote additional time to each case. Not only was additional paperwork required, the lawyer was also subject to new regulations that required spending more time fact-checking the information provided by the client and providing counseling sessions on the legal aspects involved. It may also be necessary to hire additional support staff to handle some of the chores.

If a case requires more time or overhead, then the per-case fee must also increase if the attorney is to make a profit. It is the same principle that is seen whenever new government regulations make it more expensive for auto manufacturers to produce a car. The increased costs are passed on to the consumer, whether the commodity is a new car or a bankruptcy procedure.

Since BAPCPA became law, the average fee charged by attorneys for representing clients in a Chapter 13 cases has increased by approximately 24 percent nationwide. In some states, the increase has been even more dramatic. For example, average fees increased 87 percent in Kentucky and Maryland, and they rose by 115 percent in Idaho.

Fees for Chapter 7 representation have risen 30 percent in asset cases and 48 percent in no-asset cases that reach discharge. Montana attorney fees averaged 90 percent higher after BAPCPA, and the average increase in Virginia was 87 percent. Four other states, Oregon, Mississippi, Tennessee and Utah, saw average increases of 80 to 85 percent.

Increases in other costs have contributed to rising legal fees as well. Attorneys must purchase insurance, pay salaries and payroll taxes, pay higher fuel costs and remain abreast of ever-changing statutes. Bankruptcy attorneys typically have another major expense that some other lawyers do not, at least to the same degree – advertising. After all, clients are likely to provide only one case, and because even repeat customers will only return after the seven years between filings has expired, it is necessary to attract a constant stream of new clients.

Unfortunately for debtors, the rising costs of bankruptcy encompass more than just higher attorney fees. BAPCPA added requirements for attending counseling sessions before filing and again before the bankruptcy is discharged. The debtor is responsible for paying these fees. Filing fees increased almost $100 in 2011 as well. Added to increased legal fees, these additional costs mean that, ironically, consumers who need the protection offered by bankruptcy the most may be unable to afford to file.

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