"Fee Only" Chapter 13 Filings are Not Necessarily Made in Bad Faith

Written By: Emil FleysherApril 8, 2012,

Bankruptcy courts have expressed mixed views on fee-only plans as their experience accumulates. In a recent case, the Chapter 13 debtor proposed a 36-month plan paying $100 per month to the trustee. Out of this money, $2,900 was to go to the debtor’s attorney. The bankruptcy court denied confirmation citing In re Buck, 432 B.R. 13 (Bankr. D. Mass. 2010), which held that submitting “fee-only” Chapter 13 plans happens in bad faith.

Furthermore, the Court determined that good faith needs to be determined based on the totality of the circumstances. The only thing the majority rejected was the bankruptcy court’s reliance on a per se rule. The rule is that “fee-only” plans are proposed in bad faith. Moreover, the majority did not reject the bankruptcy court’s concern that “fee-only” plans are abusive.

Paid Upfront

Fee-only plans benefit debtors who need Chapter 7 relief but can’t afford to pay the attorney’s fee upfront. In 2004, the U.S. Supreme Court ruled that fees charged by debtors’ attorneys in Chapter 7 cases generally may not be paid from estate funds. Rather than risk not getting paid for their work, debtors’ attorneys demand payment upfront. The amount of that payment increased substantially; following the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

The fee-only Chapter 13 petition can be a creative solution for the "paid upfront" problem. At least some debtors who cannot afford an attorney-assisted Chapter 7 filing – because the attorney would expect upfront payment – can afford to pay for an attorney to assist with a Chapter 13 filing. This is because the payment of the fee will go in post-petition installments. Debtors who are unable to pay an attorney’s fee up front have limited options. Theoretically, they can proceed pro se. But, is having them attempt to navigate the complexities of bankruptcy on their own better than allowing them to pay the attorney’s fee through Chapter 13? There should be a better understanding of critical facts; before fashioning a rule that may, in practical effect, make fee-only Chapter 13 plans unavailable. For some debtors, the press of creditors, and the resulting stress, would make waiting to accumulate legal fees intolerable.

If you have questions about foreclosure, loan modification, bankruptcy; or other alternatives, please feel free to call my office at 954-484-9987. Or, send an e-mail to emil@fleysherlaw.com, or complete the contact form below.

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