Reform has made filing bankruptcy more costly

— -- Bankruptcy is a way to escape from debt, but it doesn't come without a price — and consumers now pay as much as 55% more since the 2005 bankruptcy reform was passed.

The average cost of Chapter 7 bankruptcy cases has jumped from $900 to $1,399, according to a national study released on Dec. 15 by the American Bankruptcy Institute.

The study looks at major changes to the consumer bankruptcy system. Bankruptcy filing costs more and takes much longer because it is more complicated and cumbersome. And because attorney fees typically must be paid upfront, debtors often must hold off on filing until they can first sock away enough cash. Among changes from the bankruptcy reform bill:

More fees. Attorney costs are a major part of the expenses. But there also are filing fees, trustee fees and fees for other new requirements, such as credit counseling and debtor education. "The 2005 amendments to the code altered the bankruptcy system in many large and small ways," says the study's author, Lois R. Lupica, a bankruptcy attorney and a law professor at the University of Maine School of Law in Portland. "It is unnecessarily harder and more expensive to help a consumer debtor navigate through the system."

When Congress passed the bankruptcy reform act its stated goal was to tighten loopholes, eliminate abuses and establish higher eligibility standards. But in the process, the additional work has caused fees to spike, and much of the work that has been undertaken is "extraordinarily pointless," says Henry Hildebrand, Chapter 13 Bankruptcy Trustee in the Middle District of Tennessee.

Increased paperwork. Debtors now must use pay stubs or bank statements and tax returns to provide proof of income for the past six months. "A lot of people filing for bankruptcy don't have the kind of record keeping that the law requires," says Robert Lawless, law professor at University of Illinois. "If you don't have them, the case can be dismissed."

Added steps. Debtors now must go through pre-bankruptcy credit counseling and pre-discharge debtor education. But it's often done over the phone and online for a little amount of help, Lawless says. And although debtors only pay a minimal fee, he says that it is just another hurdle that people have to pass before they file for bankruptcy.

Fewer options. To avoid the cost, debtors could file for bankruptcy without an attorney, or "pro se." But there is greater need to be represented, because the system is too complex to successfully handle alone, Lupica says.

The study included interviews with bankruptcy lawyers to hear about their experiences.

Although the system is less tolerant of mistakes, there are more opportunities for even seasoned attorneys to make errors, the study said. The complexities can create the temptation to cut corners to minimize the time spent on each case.

Bankruptcy is supposed to be a social safety net that gives debtors a second chance. "But the 2005 bankruptcy reform has taken a large part of the safety net away," Lawless says.