Getting paid in a consumer bankruptcy practice can feel like nighttime in Westeros: dark and
full of terrors. [1]
Debtors typically see bankruptcy as a last resort and often don’t contact an attorney until they
are out of time and money, usually while facing existential issues with strict timelines.
Depending on your jurisdiction, stopping certain actions can be all but impossible without
filing for bankruptcy. Yet, the retention and compensation of a bankruptcy attorney is subject
to serious complexities. Often, the choice of chapter is made by what the client can afford to
do now, not what’s best.
The complications of compensation in chapter 7 are an amalgamation of legislative intent,
judicial interpretation and quasi-regulation from overseeing bodies. [2] Consider the client’s
expectation, based on a common client/attorney relationship. A divorce client will contact an
attorney to assist and protect them throughout the process. The two will discuss the case, and
the attorney will typically quote a retainer to be billed hourly or a flat fee. The client has every
legal means available to them to pay for the representation, and the parties can work out
complications that arise. The fee is agreed to by the parties and no one else really looks at it.
The method of payment of the fee is irrelevant so long as it is legal tender and doesn’t breachrules of professional conduct. The parties can structure the representation as they see fit.
Lastly, if the client fails to pay or perform, the attorney can generally withdraw.
In contrast, the attorney/client relationship for a consumer bankruptcy attorney is restricted.
The process still starts with the client making initial contact, but everything else will be
subject to scrutiny. In a Chapter 7 case, the attorney generally cannot quote something other
than a flat-fee arrangement. This is because the Bankruptcy Code prohibits post-petition
payments of attorney fees arising from pre-petition retention agreements. [3] This makes
sense, because the case is meant to discharge debt. But ultimately, the outcome is severe due
to precedent that classifies debtor attorney compensation as nonpriority dischargeable
debt. [4] That means that the client–who typically has little or no disposable funds–must come up with the full fees for the attorney to take the case from start to finish. That’s unusual for
consumer clients. These clients often must file their case quickly to avoid devastating financial
consequences. There’s no time to raise money to file chapter 7, and they generally cannot incur
additional debt to pay their attorney. [5
The attorney faces an ethical issue. It’s no secret that most consumer bankruptcy practitioners
are small or solo firms. They need cases to keep the lights on, and they perform an essential
function in their communities and the economy. Yet, they are expected to be fortunetellers
because their fee is intended to be for “all services essential to the successful completion of
the case.” [6] As every attorney knows, your client often hasn’t told you everything. In other
matters, compensation for the undisclosed issues is handled through the hourly billings or
adjustments in the agreement, but that isn’t an option for debtor’s counsel in Chapter 7? What
is that attorney to do? They must anticipate the worst and quote accordingly. However, that fee
must be reasonable, despite the necessity of potentially overquoting to protect against
unexpected work. Indeed, the U.S. Trustee inspects all consumer chapter 7 cases to ensure
“that debtors are properly and adequately represented by their attorneys, who in turn are
negotiating the terms of their fee arrangements.” [7] The combination of requiring the upfront
payment of all anticipated work and the client’s limited means generally results in frustration.
To provide the client with a solution, attorneys often turn to chapter 13.
There are plenty of reasons why chapter 13 is beneficial for a client. It’s a financial Swiss-army
knife for catching up on a mortgage, reducing a car payment and more. [8] But for many filers,
they simply have no choice because they need to pay their attorney fees over time. That
sounds straightforward, but it is a difficult ethical position for the attorney.
First, they are recommending a remedy that isn’t the ideal outcome for the client. A chapter 7
client is usually discharged and on with their life within six months of filing, [9] while a
chapter 13 client will be in the case for 36 to 60 months. [10] A chapter 7 client generally will
repay little to no debt in the case. [11] Their cost is often limited only to the fees and costs of
filing the case. A chapter 13 client will nearly always repay some debt. Without other cause, a
chapter 7 client has a strictly better outcome than a chapter 13 client, as chapter 7 is faster and
requires less payments to their adversaries.
Second, the attorney is prioritizing their fees over the client’s outcome. They both know this
should be a chapter 7, but the best outcome is out of reach within the mandated time frame.
While there is a rational basis for that decision, it should still cause the attorney anxiety. Their
fees are the obstacle, and the solution is ultimately a windfall. You see, the fees quoted in
chapter 7 are almost always less than the attorney will receive in chapter 13. Not only do they
have to prioritize getting paid over the client’s needs, but they get paid more for doing so.
That’s great from a business perspective, but it goes against the spirit of professional
ethics. [12] This is not to say that the additional fees aren’t justified, though; chapter 13
generally requires substantially more from both parties.
It’s those additional requirements that make up the last reason for why this all feels like
potential conflict. Those requirements result in more failed cases. ABI reports that chapter 13
success rates vary from 40-70% depending on the state and law firm. [13] By contrast, chapter
7 has about a 95% success rate. [14] The chapter 13 success rate may be influenced by the
number of cases filed that should have been in chapter 7. Those cases have less cause to be in
chapter 13, because the case isn’t saving an important asset like a vehicle or home, [15] and the
client often doesn’t have the means to ensure success in the case.
Recently, the U.S. Trustee has taken steps to allow for “bifurcated” fee agreements, allowing
the initial filing to be done at a flat rate and via a subsequent agreement post-petition. [16]
While this is a step in the right direction, it is hollow for a few reasons. First, the guidelines
still warn that disgorgement of fees is possible if the structure isn’t to their satisfaction. [17]
This complicates the process, because each office handles things differently. Second, the risk is
ultimately borne by the attorney. Finally, these arrangements are based on the client paying
the fees after they have gotten their initial relief. Although the client wants a discharge, they
receive the
feeling of that relief with the automatic stay. The motivation for the filing, and its
accompanying stress, are gone when the first post-petition payment is due. Plus, there is no
certainty that the client will pay. Remember how nonpayment is grounds for withdrawal in
those other matters? Not in bankruptcy; if that client doesn’t pay for your post-petition
representation, the attorney is likely stuck. [18]
For true progress to occur, a solution must be found that allows for the ethical and economic
protection of the attorney in the process as well. Until we prioritize the clients’ true needs,
obtaining a discharge with their attorneys’ security, debtor and counsel will have to settle for
the next best thing
This complicates the process, because each office handles things differently. Second, the risk is
ultimately borne by the attorney. Finally, these arrangements are based on the client paying
the fees after they have gotten their initial relief. Although the client wants a discharge, they
receive the
feeling of that relief with the automatic stay. The motivation for the filing, and its
accompanying stress, are gone when the first post-petition payment is due. Plus, there is no
certainty that the client will pay. Remember how nonpayment is grounds for withdrawal in
those other matters? Not in bankruptcy; if that client doesn’t pay for your post-petition
representation, the attorney is likely stuck. [18]
For true progress to occur, a solution must be found that allows for the ethical and economic
protection of the attorney in the process as well. Until we prioritize the clients’ true needs,
obtaining a discharge with their attorneys’ security, debtor and counsel will have to settle for
the next best thing.
[1] A Michigan native, Morley moved to the south to obtain his law degree, graduating withcum laude honors and in the top 10 of his class. While in law school, he met his future wife
who brought him back to her hometown of Prairieville, La. in 2016. Prior to coming to
Louisiana, Morley earned a reputation for creative deal making and unconventional
approaches to problems. After passing the Louisiana Bar, Morley started Diment and
Associates.
[2]
See Terrence L. Michael,
There’s a Storm A Brewin: The Ethical and Realities of Paying
Debtor’s Counsel in Consumer Chapter 7 Bankruptcy Cases and the Need for Reform, 94 Am.
Bankr. L.J. 387 (2020).
[3]
See United States Department of Justice, Office for the United States Trustee (2002);
Guidelines for United States Trustee Program (USTP) Enforcement Related to Bifurcated
Chapter 7 Fee Agreements
available at https://www.justice.gov/ust/page/file/1511976/dl?
inline.
[4]
See Lamie v. United States Trustee, 540 U.S. 526, 537 (2004).
See also Rittenhouse v. Eisen,
404 F.3d 395, 397 (6th Cir. 2005)
[5]
See Terrence L. Michael,
There’s a Storm a’ Brewin: The Ethical and Realities of Paying
Debtor’s Counsel in Consumer Chapter 7 Bankruptcy Cases and the Need for Reform, 94 Am.
Bankr. L.J. 387 (2020).
[6]
See United States Department of Justice, Office for the United States Trustee (2002);
Guidelines for United States Trustee Program (USTP) Enforcement Related to Bifurcated
Chapter 7 Fee Agreements,
available at https://www.justice.gov/ust/page/file/1511976/dl?
inline.
[7]
Id.
See also 11 U.S.C. § 329(b).
[8] United States Courts — Discharge in Bankruptcy — Bankruptcy Basics, retrieved July 1,
2024, from https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-
basics/discharge-bankruptcy-bankruptcy-basics.
[5]
See Terrence L. Michael,
There’s a Storm a’ Brewin: The Ethical and Realities of Paying
Debtor’s Counsel in Consumer Chapter 7 Bankruptcy Cases and the Need for Reform, 94 Am.
Bankr. L.J. 387 (2020).
[6]
See United States Department of Justice, Office for the United States Trustee (2002);
Guidelines for United States Trustee Program (USTP) Enforcement Related to Bifurcated
Chapter 7 Fee Agreements,
available at https://www.justice.gov/ust/page/file/1511976/dl?
inline.
[7]
Id.
See also 11 U.S.C. § 329(b).
[8] United States Courts — Discharge in Bankruptcy — Bankruptcy Basics, retrieved July 1,
2024, from https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-
basics/discharge-bankruptcy-bankruptcy-basics.
[9]
Id.
[10]
Id.
[11] Chapter 7 Asset Cases, retrieved July 1, 2024, from https://www.abi.org/abi-
journal/chapter-7-asset-cases.
[12] ABA Model Rules of Professional Conduct Rule 1.7.
[13] Chapter 13 Success Rate Greater than Credit Counseling Plans, retrieved July 1, 2024, from
https://www.abi.org/feed-item/chapter-13-success-rate-greater-than-credit-counseling-
plans.
[14]
Id.
[15] United States Courts — Discharge in Bankruptcy — Bankruptcy Basics, retrieved July 1,
2024, from https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-
basics/discharge-bankruptcy-bankruptcy-basics.
[5]
See Terrence L. Michael,
There’s a Storm a’ Brewin: The Ethical and Realities of Paying
Debtor’s Counsel in Consumer Chapter 7 Bankruptcy Cases and the Need for Reform, 94 Am.
Bankr. L.J. 387 (2020).
[6]
See United States Department of Justice, Office for the United States Trustee (2002);
Guidelines for United States Trustee Program (USTP) Enforcement Related to Bifurcated
Chapter 7 Fee Agreements,
available at https://www.justice.gov/ust/page/file/1511976/dl?
inline.
[7]
Id.
See also 11 U.S.C. § 329(b).
[8] United States Courts — Discharge in Bankruptcy — Bankruptcy Basics, retrieved July 1,
2024, from https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-
basics/discharge-bankruptcy-bankruptcy-basics.
[9]
Id.
[10]
Id.
[11] Chapter 7 Asset Cases, retrieved July 1, 2024, from https://www.abi.org/abi-
journal/chapter-7-asset-cases.
[12] ABA Model Rules of Professional Conduct Rule 1.7.
[13] Chapter 13 Success Rate Greater than Credit Counseling Plans, retrieved July 1, 2024, from
https://www.abi.org/feed-item/chapter-13-success-rate-greater-than-credit-counseling-
plans.
[14]
Id.
[15] United States Courts — Discharge in Bankruptcy — Bankruptcy Basics, retrieved July 1,
2024, from https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-
basics/discharge-bankruptcy-bankruptcy-basics.
[16]
See U.S. Department of Justice, Office for the United States Trustee (2002), Guidelines for
United States Trustee Program (USTP) Enforcement Related to Bifurcated Chapter 7 Fee
Agreements,
available at https://www.justice.gov/ust/page/file/1511976/dl?inline.
[17]
Id.