Who Pays for Bankruptcies and How Are Costs Covered?
Discover how bankruptcy costs are managed, who bears the financial burden, and how different fees and expenses are covered throughout the process.
When a person or business files for bankruptcy, the costs don’t just disappear. Legal fees, administrative expenses, and losses for creditors must be addressed in the process. Understanding who ultimately covers these costs provides insight into how bankruptcies function and their broader financial impact.
Some expenses are covered by the debtor’s remaining assets, while others may fall on creditors or, in rare cases, taxpayers.
Court Filing Fees
Filing for bankruptcy requires court fees, which vary by type. As of 2024, the U.S. Bankruptcy Court charges $338 for Chapter 7, $1,738 for Chapter 11, and $313 for Chapter 13. These fees, set by the Judicial Conference of the United States, must be paid in full before the case proceeds. Installment payments are possible, but failure to complete payment can result in case dismissal.
Individuals with low income may qualify for fee waivers if their income is below 150% of the federal poverty guidelines and they can prove they cannot pay in installments. Courts review requests individually, and approval is not guaranteed.
Businesses filing for Chapter 11 face additional costs, including quarterly U.S. Trustee fees based on disbursements. A company with $1 million in quarterly disbursements, for example, would owe $6,500 per quarter in 2024. These fees continue until the case is closed or converted.
Attorney and Counseling Fees
Legal representation is one of the largest expenses in bankruptcy. Chapter 7 attorneys typically charge flat fees between $1,500 and $3,500, depending on location and case complexity. Chapter 13 cases, which involve ongoing legal work, usually cost between $3,000 and $5,000. Chapter 11 cases are the most expensive, with attorney fees frequently exceeding $15,000 and, in large corporate bankruptcies, reaching millions.
Bankruptcy attorneys must obtain court approval for their fees. Courts evaluate the time spent, case complexity, and standard rates for similar legal services. If a debtor cannot afford an attorney, pro bono services may be available, though they are limited. Some attorneys allow payment plans, particularly in Chapter 13 cases, where fees can be incorporated into the repayment structure.
Debtors must also complete credit counseling and debtor education courses, as required by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. These courses, provided by U.S. Trustee-approved agencies, typically cost between $25 and $50 each. Failure to complete them can result in case dismissal or denial of discharge.
Trustee Expenses
Bankruptcy trustees oversee cases, ensuring legal compliance and distributing available funds. Their compensation depends on the type of bankruptcy. In Chapter 7, trustees receive a portion of recovered funds, collecting 25% of the first $5,000 disbursed, 10% of amounts between $5,000 and $50,000, and smaller percentages for higher amounts. If no assets are available for liquidation, they receive a fixed administrative fee, currently $60 per case.
In Chapter 13, trustees manage repayment plans and receive a percentage of debtor payments, typically 5% to 10%, depending on the district. These fees cover account management, debtor compliance verification, and payment distribution. Unlike Chapter 7 trustees, they do not rely on asset liquidation but instead on ongoing payments.
Chapter 11 trustees are appointed in cases involving fraud, mismanagement, or failure to meet obligations. They are compensated based on hourly rates or negotiated fees, subject to court approval. The U.S. Trustee’s Office also collects quarterly fees from businesses based on disbursements, ranging from a few hundred dollars to over $250,000 per quarter for large corporations.
Distribution of Assets
When assets are liquidated in bankruptcy, payments follow a strict priority system. Secured creditors, such as mortgage lenders and auto loan providers, are paid first. If an asset has equity beyond the secured amount, the trustee may sell it, pay off the lien, and use any remaining funds for other obligations. If the asset is worth less than the secured debt, the creditor may repossess it or receive a portion of the proceeds.
After secured claims, administrative expenses—including trustee fees and court-approved professional services—are paid. Next in line are priority unsecured claims, such as unpaid wages (capped at $16,150 per employee as of 2024), certain tax debts, and domestic support obligations. These must be fully satisfied before general unsecured creditors, such as credit card companies and medical providers, receive anything. Since these creditors lack collateral, they often recover only a fraction of what they are owed, if anything.
Payment Plans in Reorganization
Unlike liquidation bankruptcies, Chapter 11 and Chapter 13 allow debtors to retain assets while repaying creditors through structured plans. These plans must be court-approved and demonstrate feasibility, ensuring the debtor has enough income to meet obligations. Chapter 13 repayment periods last three to five years, while Chapter 11 plans can extend longer, depending on the case’s complexity.
In Chapter 13, payments are based on disposable income after allowable living expenses. The plan must fully repay priority debts, such as certain taxes and child support, while unsecured creditors receive payments based on available funds. Chapter 11, often used by businesses, allows for more flexibility in restructuring debt, renegotiating loan terms, modifying leases, and selling assets. Creditors vote on the proposed plan, and court approval requires meeting the “best interests of creditors” test, ensuring they receive at least as much as they would in a liquidation.
Non-Dischargeable Debts
Some debts remain enforceable even after bankruptcy. Most tax debts, student loans, and domestic support obligations cannot be discharged. Some tax liabilities may be forgiven if they are at least three years old and properly filed, but recent or fraudulent tax debts remain due.
Student loans are generally non-dischargeable unless the debtor proves “undue hardship,” a high standard requiring evidence that repayment would cause extreme financial distress. Courts apply different tests, such as the Brunner test, which examines income, expenses, and repayment efforts. Domestic support obligations, including child and spousal support, are also exempt from discharge, ensuring recipients continue receiving financial assistance. Creditors holding these debts can resume collection efforts immediately after the bankruptcy case concludes.