Most individuals should not file for Chapter 11 bankruptcy because, even though they are legally eligible, the cost is prohibitive. Even most small businesses should look to Chapter 11 as a last resort because of the excessive cost.
The reason a Chapter 11 bankruptcy is so expensive is because it involves two separate elements: a reorganization plan and a debt repayment plan. The reorganization plan has to convince the court and your creditors that you can turn a profit fairly soon. This plan must be detailed and supported by reliable research. Then, you have to show a type of budget where you outline how you can repay your creditors over the next several years. Undoubtedly, you will have to negotiate terms of the plan with the court and with your creditors.
At a minimum, if you have inexpensive attorneys and no disputes over your reorganization plan, you will probably pay at least $15,000 in total fees. However, it is much more likely that total costs and attorney fees for a Chapter 11 bankruptcy will exceed $100,000. Again, this amount can vary greatly depending on the attorney's hourly rate and the number of disputes filed by creditors.
Minimizing the Cost
There is an approach you can try in an effort to minimize the cost of a Chapter 11 bankruptcy, but it doesn't work in most cases. You can try working with an attorney on an "unbundled" fee agreement, which basically means that you do most of the paperwork preparation, planning and filing, and you simply pay your attorney to act as a sort of legal coach whenever you have questions or need forms. Many attorneys will not accept this type of payment arrangement because of the complexity of Chapter 11 plans. The malpractice risk is too great for attorneys to not be intimately and regularly involved in the case.
The success rate in Chapter 11 bankruptcies is extremely low, meaning that a very low percentage of reorganization plans actually obtain court approval. Without court approval, your plan is worthless. There is a high chance that you will spend a lot of money putting together a plan, negotiating with creditors, and attempting to persuade the court, but fail. This means you will probably end up in Chapter 7 bankruptcy, which can be a much less expensive form of bankruptcy.
- Nolo's The New Bankruptcy: Will it Work for You?; Stephen Elias; 2009