How Much Does Chapter 13 Bankruptcy in Colorado Cost?

March 17, 2011

By: David M. Serafin

Debtors in Colorado typically file for chapter 13 bankruptcy for the following reasons: the majority have disposable income under the Means Test is too high (gross income as compared to household size and monthly expenses), while others face foreclosure or repossession, are able to strip off a second mortgage, have sizable equity in a small business, owe a large amount of non-dischargeable tax debt, or have filed for chapter 7 within the past 8 years.

Hiring an attorney to file for chapter 13 will almost always cost more than a chapter 7 in Colorado simply because chapter 13 practice requires significantly more work and expertise. But, a properly filed chapter 13 will still save you thousands of dollars as opposed to not filing bankruptcy at all. But, a reasonable question to ask is how much does chapter 13 cost?

Unlike a chapter 7 which involves a quick liquidation of most types of unsecured debt, chapter 13 serves as a reorganization to pay back secured and/or unsecured creditors over 3 to 5 years. All attorneys fees due (plus the court filing fee) are typically paid before achapter 7 is filed. But, chapter 13 practice allows for most of the attorney’s fees earned to be paid back through reimbursements from Plan payments. (Without a provision allowing for a majority of a bankruptcy attorney’s fees to be paid back over time through Plan payments, there likely would not be many attorneys willing to handle chapter 13 cases.)

Chapter 13 of the Bankruptcy Code outlines different priorities of creditors of a bankruptcy debtor. Class I creditors include those owed debts for non-dischargeable taxes, child support/alimony and attorneys fees. Class II creditors are those owe a past due arrears for a mortgage or car loan. Class III third creditors are for crammed down car loans and secured IRS debts. And Class IV creditors are the remaining unsecured creditors, such as credit card and pay day loan companies, medical providers, and mortgage or auto lenders owed for a deficiency resulting from a previous foreclosure or repossession (now unsecured debt because the collateral has already been seized).

Here’s the point I want clients at my initial consultation (and throughout the bankruptcy process) to understand: how much you pay in attorney’s fees and whether my request for reimbursement from plan payments costs you anything extra (e.g. out-of-pocket) really depends on why the chapter 13 bankruptcy was initially filed. With the overwhelming majority of chapter 13 cases, particularly those filed because the debtor’s income is too high and does not pass the Means Test, the answer is that my request for additional attorney’s fees earned (again for the fruits of my labor – by fending off the bankruptcy trustee and creditors – and expertise involved) WILL NOT cost you anything in addition to the modest and competitive fee you pay up front.

Here’s why: any fees earned by a bankruptcy lawyer in Colorado are higher in priority than the debt owed to most unsecured creditors. So, any reimbursement of additional fees incurred in chapter 13 serves merely to redistribute monies that would otherwise be paid to a lower class or the unsecured creditors. In other words, any fees I earn (in most cases) WILL NOT have any bearing on the Plan payment you’re otherwise obligated to make anyways to the chapter 13 trustee.