The Cost-Benefit Analysis in Filing for Bankruptcy

May 26, 2020
The Cost-Benefit Analysis in Filing for Bankruptcy

Quick pop quiz:  Have you ever been told there is a minimum amount of debt you need to file for bankruptcy?  Under the Bankruptcy Code, there isn’t, but many people believe there is.  That is likely because most people with small amounts of debt are advised to avoid filing for bankruptcy.  That is usually good advice.

As lawyers who usually file bankruptcies for our clients, we need to know the amount of debt we are looking to eliminate (or restructure) because we are doing a cost-benefit analysis in our heads.  This means we’re comparing the costs of a bankruptcy (roughly $2,000-$3,000 for most Chapter 7s, $4,000+ for Chapter 13 cases) to figure out if a bankruptcy makes sense for our clients.

Sometimes it absolutely makes financial sense to file a bankruptcy.  A married couple discharging (eliminating) $100,000 in unsecured debt is an enormous relief for the fees.  Someone with $5,000 in debt probably should avoid bankruptcy if possible, especially since the debtor wouldn’t be eligible for another discharge of debts in bankruptcy for years following the filing.

However, even if filing for bankruptcy is the sensible solution, there are actions that should or should not be taken within a bankruptcy depending on the costs of pursuing them and the value of the benefits.

We use these analyses when we consider:

(1) Whether to file an adversary (a lawsuit within bankruptcy) to try to discharge student loan debts
(2) Whether to object to a bankruptcy proof of claim.  For the amount of the work we’d do, we need to make sure the objection would be worth it.  We would not, for instance, object to a $75 proof of claim for a debt if it would cost our clients $250+ to file and litigate an objection.
(3) Conducting a hearing for the Bankruptcy Court to rule on the value of secured property like a car, a home, or household items.
(4) Challenging an action to deny the debtor a discharge of debts or the dischargeability of a specific debt

We proudly take aggressive positions for our clients and fight for these issues in court.  Sometimes we prevail, and sometimes we don’t.  But before we establish these positions, we consider the costs of fighting for the relief we are seeking and the costs of doing so.  We are constantly surprised when a divorcing couple spends as much as $100,000+ (each!) in the divorce fight.  Often the assets of the couple total less than the attorney’s fees.  No amount of animosity warrants this type of spending.  This type of outcome often leads to judgments, liens, and a bad opinion about lawyers generally.

Just as we wouldn’t allow a mechanic to spend unlimited money repairing a car without a discussion or a home contractor to agree to huge repairs to a home, we shouldn’t make long-term financial discussions without considering the benefits and consequences.  That is why you deserve and should insist upon a timetable for work and a budget (updated when appropriate) for the costs to make an informed decision about legal work and the best strategies for cost-effectively handling financial issues.

Contact W M Law for a Free Consultation

If you would like to speak with a bankruptcy attorney, W M Law is here to help.  Call us at 913-422-0909 for a free consultation.