The Massachusetts Attorney General recently settled a major consumer fraud case against subprime auto lender Credit Acceptance Corporation.

The case is long and complicated, but the issue that caught my eye is the argument about the true purchase price of a vehicle.

For example, assume a dealer sells a vehicle for $10,000 and the buyer signs an 18% loan spread over 60 months at $253.93 per month.  Then, assume the dealer immediately sells the loan to a subprime lender for $8,000 cash.

What is the true purchase price of the vehicle? Is it $8,000 or is it $10,000.


I would argue the true sales price is $8,000 because that is what the dealer actually received. In fact, I’m quite certain the dealer would report on its tax return that the vehicle was sold for $8,000.  And the financial records subprime lender probably reports that it acquired the loan for $8,000 as well.  So, isn’t that the true sales price?

But all the purchase documents state a purchase price of $10,000.  All the finance charges and disclosure statements say the cost was $10,000 and that the interest rate is only 18%.

If, however, substance rules over form, both the car dealer and the subprime lender have a major problem. The problem is that they are lying about the true sales price of the vehicle and the true interest rate being charged.  If the true sales price is $8,000, then the actual interest rate is actually 29%, not 18%.  And by failing to disclose the true interest rate, the dealer and lender have committed a violation of the Truth in Lending Act disclosure.


Determining the real purchase price of a vehicle also has importance in a chapter 13 case when the vehicle was purchased within 910 days of filing bankruptcy. Under Section 1325(a)(9) of the Bankruptcy Code, a debtor must pay a lender the current balance of the loan, even if the vehicle is worth less than the balance of the loan.

So it makes a BIG difference if the actual loan amount is $8,000 instead of $10,000.  It also makes a big difference if the true interest rate is 29% and not 18%.

The legal consequence of violating Nebraska laws on usury is that a creditor is entitled to no interest at all.  See Nebraska Statute 45-1024. (“If any amount, in excess of the charges permitted, is charged, contracted for, or received, the loan contract shall not on that account be void, but the licensee shall have no right to collect or receive any interest or other charges whatsoever.”)

Interest rates for installment loans in Nebraska are capped at 24% on the fist $1,000 and 21% on balances above 21%.  If Nebraska Courts rule that the true purchase price of a car is $8,000 and not $10,000, that automatically triggers a violation of these interest rate caps.

So, in theory, a debtor could propose to pay off the car loan at $8,000 and offer no interest to the creditor as a penalty for violating Nebraska Statute 45-1024.  That’s a big deal.


Our courts have routinely ruled that we apply the law to the facts at hand and disregard the forms of a transaction. Labels do not control.

  • Lease to Own Transactions:  The most common form over substance transaction we find is where a creditor tries to disguise a purchase in the form of a lease. Several years ago I litigated against a company called Cash In a Flash Inc. that disguised high interest rate title loans in the form of a lease.  The Nebraska bankruptcy court  and Nebraska Department of Banking ruled that the transactions were really loans and the lender had violated Truth in Lending disclosure requirements.
  • Reasonable Compensation:  Tax courts routinely take issue with business owners who evade payment of Social Security taxes by paying themselves artificially low salaries.
  • IRS Disguised Sales Rules: The IRS commonly recharacterizes transactions between partners under Section 707 of the Internal Revenue Code.
  • Time Sale Transaction:  “It appears quite clearly that the transaction was a loan to Jones disguised as a conditional or time sale with defendant as surety or guarantor. As such it is usurious and subject to the forfeiture of interest. See §§ 45–105 and 45–138(3), R.R.S.1943.” Midstates Acceptance v. Voss, 202 N.W.2d 822, 189 Neb. 411 (Neb. 1972).  Midstates Accceptance v. Voss, 202 N.W. 2d 822, 189 Neb. 411 (Neb. 1972)

But when it comes to the subprime auto lending two-step dance, our courts fail to confront the nonsense of these transactions.

Overcharging is not in itself usury

The Michigan bankruptcy court confronted this issue in the case of Allen-Morris v. Nicholas Fin., Inc. (In re Allen-Morris), 523 B.R. 532 (E.D. Mich. 2014).  In that case the debtor claimed that the auto dealership was inflating the price of the auto to disguise a usurious rate of interest (above 25%).  The debtor attempted to prove the hidden interest rate by relying on NADA and Kelly Blue Book values to prove the cars were sold at inflated prices.

The bankruptcy court disagreed, and on appeal the district court ruled  that “overcharging is not in itself usury.”  The court also stated that “even overcharging solely because a product is being sold on credit rather than for cash in not in itself usury.” However, the court also stated that the debtor did not allege that he was forced to purchase the vehicle at an inflated price to secure the loan, so perhaps the door is not completely shut on this argument.


What I take away from this is that it is so important to shop for the auto loan before shopping for the vehicle itself.

There is an incestuous relationship between car dealers and subprime lenders. In the above example the car dealer is clearly selling the vehicle for $8,000, but the bill of sale says $10,000.  It is also clear that the dealer does not care if the buyer pays the $8,000 cash or if it is paid by the subprime lender. The case price is $8,000.

I suspect that most buyers would object to paying 29% interest on a car loan. But from what I can see, if your credit is hurting and you agree to finance a car at 18% interest, chances are you are really paying 29% but just don’t realize it.

Cash talks. When consumers walk onto a car lot with their loan already secured, they tend to negotiate lower prices.  Instead of paying $10,000 they negotiate the price down to $8,000.

Never depend on a car dealer to supply financing. Always shop the loan before shopping the car.


Image courtesy Flickr and Nicole Yeary.







Chapter 13 cases are three to five year payment plans.  Creditors receive a monthly payment based on a debtor’s ability to pay, the type of debts they owe, and the amount of unprotected property they own.

But how does one make the payment? Who do you pay?

Chapter 13 payments are paid to the Chapter 13 Trustee, typically an attorney appointed to oversee the bankruptcy case. In Nebraska that person is Kathleen A. Laughlin.


There are only two ways to pay the Trustee:

  1. Money Order or Cashier’s Check.
  2. Garnishment of paycheck.

No other payment methods are allowed.  (Read this.)

What about payment in cash? Are personal checks allowed? What about paying via a debit card? Can you pay online? Can you set up an automatic payment?   What about BillPay services?

None of those payment methods are allowed.  And, to be honest, I just don’t understand.


I wish I understood the answer to that question.  I really see no reason why an automatic payment cannot be set up.  In fact, the TFS company has established a program to facilitate automatic payments in chapter 13 cases.  Many chapter 13 trustees around the country use TFS, including Iowa.

What I do know is that automatic payments work. Clients who have the payment deducted from their paycheck complete their payment plans at a much higher percentage than those who do not.

But not everyone can have a payroll deduction, and that is a real problem. Many clients are self-employed. Many are underemployed and they do not earn enough from one job to make the payment.  Others have jobs where their employers look dimly on payroll garnishments thus causing employment issues.


Working in our nation’s bankruptcy system for nearly 30 years, I can say that Nebraska has just about the best court system in the country. Really, there is something special about Nebraska’s system. Maybe it is because we are small population state and we just know each other better and cut through the red tape. Attorneys just don’t appreciate how great Nebraska’s bankruptcy judges and trustees are until they practice elsewhere.

But the lack of automatic payments in Chapter 13 drives me nuts. Come on Nebraska, we can do better than this!  Let’s automate!



May a person contribute to 401(k) retirement plan during a Nebraska Chapter 13 case?


Prior to the Bankruptcy Reform Act of 2005 the answer was fairly simple: No.  Contributions to a 401(k) retirement plan are voluntary, and prior to 2005 it was commonly known that contributions were not “necessary” to the support of a debtor.

The maximum required length of a plan was only three years, so to deny this deduction was not a terrible burden on debtors.  No matter how high their income was, debtors only had to be in Chapter 13 for three years.


But that all changed in 2005 and now higher-income debtors are required to spend up to five years in Chapter 13. Monthly payments are now, in theory, determined by a Means Test based on income received during the prior six months.

The entire intent of the new law was to make filing bankruptcy more difficult and to force debtors to pay back a greater portion of their debts

But the new 6-month income test also contained a new deduction: qualified retirement plan contributions.  Debtors might have to repay more of their debts, but at least they could contribute to a voluntary retirement plan, or so it appeared.


The problem with applying the Bankruptcy Reform Act of 2005 is that nobody really understands what it says. The language is confusing and it contains incomplete “hanging sentences.”

As a result, bankruptcy courts have crafted different interpretations of whether a debtor may contribute to a voluntary 401k plan during a Chapter 13 case.  (See In re Penfound, 6th Cir 2021)


  1. Majority View–the Johnson View.  The majority of bankruptcy courts hold that a debtor may fund a 401k plan during Chapter 13 if the contributions are made in “good faith.”  Under this view bankruptcy courts look at all the relevant factors to see if the contributions are justified. Contributions must be reasonable in light of the debtor’s income, age, health, existing retirement balances, previous contribution percentages, the type of debt owed, and the amount of debt owed.  See Baxter v. Johnson (In re Johnson), 346 B.R. 256, 263 (Bankr. S.D. Ga. 2006).
  2. Priggee Interpretation: Debtors are never permitted to contribute to voluntary retirement plans during chapter 13. In re Prigge, 441 B.R. 667, 677 & n.5 (Bankr. D. Mont. 2010)
  3. Seafort-BAP Interpretation.  A debtor may continue to contribute to a 401k plan an amount they were contributing “at the time” the case was filed. In other words, you may not start contributing to a program after the case is filed.
  4. CMI Interpretation.  A debtor may only claim a monthly deduction for an amount equal to the average amount contributed in the six months prior to filing.


There is no Nebraska or 8th Circuit case exactly on point, but it appears that Nebraska follows the Good Faith rule of Johnson.  A reasonable retirement contribution is allowed.

Counsel for the Chapter 13 Trustees often speak about a higher-income debtor’s level of retirement contributions.  Objections are raised on “good faith” grounds instead of technical arguments. However, when presented with a case involving a high-income debtor who offers to pay very little to unsecured creditors while making significant contributions to their own retirement plan, is is common for the trustee to object to the debtor’s budget.


It is extremely common for debtors to liquidate or to stop contributions to a retirement plan before bankruptcy.  The vast majority of people I meet do not realize that retirement funds are shielded from creditor claims and they feel a strong moral duty to liquidate their savings to pay debts.

The other observation is that liquidating a retirement plan to pay debts rarely provides enough funds to pay back all the debt. At best only a portion of debt is paid and income taxes and penalties frequently consume nearly half of the funds withdrawn. Rarely does it make sense to use retirement savings to pay debts.

Those who do use retirement savings to pay debts suffer a tremendous blow. They forfeit decades of savings they can never restore.

When it becomes clear that filing bankruptcy is necessary, a debtor should cease to pay unsecured debts (credit cards & medical bills) and they should consider contributing to a retirement program prior to filing bankruptcy.  Bankruptcy courts may balk at contributions to 401k plans if those contributions were not being made prior to filing a case.

Most debtors wait too long to visit a bankruptcy attorney. By the time they do visit one they have wiped out savings that would have been fully protected in the bankruptcy case.

The lack of retirement savings is often a strong factor in deciding to file bankruptcy. Although a young person may learn a hard but valuable lesson in paying back debts incurred foolishly, those in their middle years are running out of time to save up for retirement.  Filing bankruptcy enables a person to protect the retirements they have saved so far and frees up future income to devote to that purpose. Bankruptcy has as much to do with planning for the future as it does in cleaning up the past.


Image courtesy Leigh Blackall & Flickr


A new Nebraska bankruptcy court opinion (In re Torres) answers the question of whether a debtor may hold a vehicle title in trust for another person who provided the funds to purchase the vehicle.

In Torres, the debtor’s sister lived in Mexico and she transferred $42,970 to the debtor’s bank account to purchase a 2020 Hyundai Palisade.  The vehicle was titled only in the debtor’s name.

The chapter 7 trustee demanded a turnover of the vehicle, but the debtor objected claiming that he merely held the vehicle in trust for his sister.

There was no written agreement between the debtor and his sister.  The parties stipulated that the sister did not intend to make a gift to her brother but that the funds were transferred to purchase a vehicle for the sister’s use.  Apparently the sister intended to come to Nebraska for medical treatment but was unable to due to Covid-19 travel restrictions.  It’s not clear why the sister’s name was left off the title.


Nebraska statute 60-140 governs the ownership and acquisition of motor vehicles:

No person acquiring a vehicle from the owner thereof . . .  shall acquire any right, title, claim, or interest in or to such vehicle until the acquiring person has had delivered to him or her physical possession of such vehicle and (a) a certificate of title or a duly executed manufacturer’s or importer’s certificate with such assignments as are necessary to show title in the purchaser, (b) a written instrument as required by section 60-1417, (c) an affidavit and notarized bill of sale as provided in section 60-142.01, or (d) a bill of sale for a parts vehicle as required by section 60-142.

That seems very conclusive. No person shall acquire any “right, title claim or interest” without possession of the vehicle and a title, a written instrument, or a bill of sale.  Something must be in writing.


Judge Kruse ruled that “any equitable interest Ms. Torres asserts in the vehicle cannot defeat the trustee’s powers under 11 U.S.C. § 544. This court previously refused to recognize the equitable ownership interest of a non-debtor whose name is not noted on a motor vehicle’s certificate of title. See In re Farrell, Case No. BK19-80282, 2019 Bankr. LEXIS 1949 (Bankr. D. Neb., June 28, 2019).”

The court focused on Nebraska Statute 60-140.  “No person shall acquire any right title claim or interest of any person in or to a vehicle . . . unless there is compliance with this section.”

In Torres there was no writing between the debtor and his sister. Case closed. The sister had no interest recognized under Nebraska motor vehicle title law.

In re Farrell

In the Farrell opinion Judge Saladino relied on the Strong Arm power of Section 544 to allow the chapter 7 trustee to void the interest of a non-debtor spouse in a motor vehicle.  In Farrell the debtor’s mother purchased a vehicle for the debtor and his wife, but the title was only recorded in the debtor’s name. On the bankruptcy schedules the debtor claimed a one-half interest in the vehicle and stated that his wife held an equitable interest in the other half.

Bankruptcy Code Section 544 is called the Strong Arm Power because it allows a chapter 7 trustee to avoid any interest in a judicial or unrecorded lien in property of the debtor.

Importantly, in the Farrell opinion Judge Saladino ruled that Nebraska case law does recognize an ownership interest in a motor vehicle not listed on the vehicle title.

“Nebraska case law makes clear that “while the certificate of title act provides the exclusive method for the transfer of title to a vehicle, it is not conclusive on the issue of ownership[.]” Hanson v. Gen. Motors Corp., 486 N.W.2d 223, 225 (Neb. 1992) (citing Alford v. Neal, 425 N.W.2d 325 (Neb. 1988)). The bankruptcy court has observed that the certificate of title statute’s applicability may not be as broad as initially appears: “The Nebraska Supreme Court recognized that the purpose of § 60–105 is to prevent fraud or misrepresentation, and recognized that there are circumstances where, although § 60–105 would apply by its terms, the circumstances may not be within the intended purview of the statute.” In re Mueller, 123 B.R. 613, 615 (Bankr. D. Neb. 1990) (interpreting the predecessor statute to § 60-140).”

How can we reconcile Judge Saladino’s opinion in Farrell which does recognize an ownership interest in a motor vehicle that does not appear on the vehicle’s title with Judge Kruse’s opinion in Torres that “no right, title, claim or interest” may exist without compliance with 60-140?

Judge Saladino, quoting Hanson v Gen Motors Corp says an ownership interest may exist apart from the vehicle title. Judge Kruse says it does not. We have a conflict of opinions here.

Resulting Trusts:

In Farrell the debtor did not argue that he held his wife’s interest in trust. (“Mr. Farrell has not suggested that he holds the vehicle in trust for his wife, so § 541(d) need not be addressed further here.”)

Why is that significant?  It is significant because if the vehicle was held in trust then it would not be part of the bankruptcy estate and the Strong Arm power of Section 544 would not apply.

It is clear under the Hanson v Gen Motor Corp opinion that Nebraska recognizes that an ownership interest may exist even if it is not recorded on a vehicle title.  Nebraska statute 60-140 is not conclusive.  Judge Saladino says exactly that in Farrell.

In Torres Judge Kruse specifically finds that Nebraska law recognizes resulting trusts, but he finds that Nebraska that statute 60-140, however, does not allow a resulting trust in a motor vehicle. What Judge Kruse does not explain is why the Hanson v Gen Motors Corp case does not apply. We are left to wonder.

Burden of Proving Existence of Resulting Trust:

Judge Kruse explains that the existence of a resulting trust must be established by clear and convincing evidence.  That is a high standard.

In Torres there was no written trust agreement between the debtor and his sister. There was no writing of any type at all to prove the existence of a trust.

Based on the evidence presented, I think the Court got it right in Torres, but we now have a conflict in case law about whether Nebraska law allows a resulting trust in a motor vehicle that will have to be resolved in a future case.













Image courtesy of Flickr and Greg Gjerdingen

The 8th Circuit Bankruptcy Appellate Court (BAP) has issued a new opinion baring excessive attorney fees involved in the use of bifurcated fee arrangements in Chapter 7 cases. See In re Allen, No 20-6023.

The United States Trustee, the agency that polices bankruptcy cases, objected tot he excessive attorney fees charged by William Riding in two chapter 7 cases filed in Missouri.

The attorney offered his clients two payment arrangements:

  • $1,500 for a traditional chapter 7 case where all fees are paid before the case is filed.
  • $2,000 fee payable in 12 monthly installments after the case was filed.

Both debtors chose second option to pay fees after the case was filed.


In both cases the attorney used a company called Fresh Start Funding LLC to finance the case. Under the Fresh Start program the attorney was paid $1,500 for each case and he sold his unpaid receivable to Fresh Start to collect from the debtor in monthly payments.  Fresh Start would earn $500 for financing each case over 12 months.

Essentially, the debtor is taking out a $1,500 loan with an effective interest rate of 57%.


The bankruptcy court found that both chapter 7 cases were relatively simple and routine. No complex issues were involved and both debtors received a discharge of their debts.

Since the attorney performed the exact same duties in these bifurcated fee arrangement cases as are performed in a traditional pay-upfront case, the court deemed the extra $500 charge excessive. The Bankruptcy Appellate Panel agreed and denied the extra $500 finance charge but allowed the attorney to be paid the standard $1,500 fee.


What completely amazes me about this opinion is why the court did not address the obvious fraud this fee arrangement involved:

On May 21, 2020, Mr. Ridings filed a chapter 7 petition and creditor matrix on behalf of Mr. Allen. The schedules, statement of financial affairs, and disclosure of attorney’s fees were filed forty-four minutes later. Mr. Allen received his discharge September 23, 2020.

Forty-four minutes later!!  The Schedules, Statement of Financial Affairs, and the Means Test were filed forty-four minutes later??

What this means is that all of these forms were actually prepared BEFORE the case was filed. This fee arrangement in the Allen case was clearly a fraud.

The entire concept of a bifurcated fee arrangement is that this work is prepared  AFTER the case is filed. That is why attorneys, in theory, are allowed to be paid after the bankruptcy is filed.  Attorneys are allowed to collect post-petition payments because the bulk of the legal work is supposedly performed after the case is filed. But in this case ALL the work was obviously prepared before the case is filed since it was filed only 44 minutes later.

Why should this attorney be allowed to collect a dime for services that were clearly prepared pre-petition?

Why did the 8th BAP not discuss this obvious fraud and automatic stay violation? Why should this attorney be allowed to collect a dime for services that were clearly prepared pre-petition?  How is this not a violation of the bankruptcy stay that prohibits the collection of payments for services rendered pre-petition?


The message to Fresh Start Funding and other bankruptcy fee lenders is clear: You will not be paid in the 8th Circuit (which includes Nebraska, Iowa, Missouri, South Dakota, North Dakota, Minnesota, Arkansas and Oklahoma bankruptcy courts.)

In these cases the debtor got what they needed–an affordable payment plan to file bankruptcy. The debtor’s attorney got paid $1,500 which is his standard fee. But Fresh Start Funding will not be allowed to collect the $500 financing fee.  In other words, get lost, you won’t be paid in the 8th Circuit.

A case is pending in the Nebraska bankruptcy court on this exact issue, and it is now abundantly clear how the Court will rule.


Image courtesy of Flickr and Rachel Kramer Bussel



I’ve received ten of these emails in the past year from the Babbs Law Firm based in Orlando, Florida:

“Good morning Attorney Turco,

 My name is Terrylle, and I am reaching out on behalf of the Babbs Law Firm in Orlando, Florida. I found your name looking for lawyers in the Southern District of Iowa for possible establishment of a local counsel relationship with our outside law firm. The Babbs Law Firm does foreclosure defense in Florida and Washington, DC, but has recently expanded to serve homeowners nationwide. The Babbs Law Firm is looking for attorneys to serve as local counsel, or co-counsel, in many jurisdictions around the country.  I’m contacting your firm to find out if your firm might be interested in working with Babbs Law Firm as cases arise in your area. If we have a need to serve a client in your area, we want to have local counsel, or co-counsel, lined up and ready to go.”    

I really had no idea who Sam Babbs was until I saw a new case issued by the South Carolina bankruptcy court imposing sanctions on the Babbs firm.

There has been an avalanche of these types of cases issued throughout the county in recent years and almost all of them involve a highly entrepreneurial attorney who markets bankruptcy services through the internet.  Bankruptcy law is particularly suited for this type of advertising since bankruptcy petitions are fairly generic and the process of preparing a case can be standardized much like Henry Ford did with the assembly line.

The fact is, successful bankruptcy attorneys do create assembly lines.  Smart attorneys should create streamlined preparation methods. They should automate the process to achieve a standard level of excellence for every case prepared.

So it comes as no surprise that our field increasingly sees regional or national firms entering local markets. They advertise well. They are internet savvy. They use telephone salespeople to quickly sign up new customers. Necessary documents can be faxed or emailed or uploaded to a central case preparation factory anywhere in the world.

But these new firms lack one thing: a local attorney to represent clients at the bankruptcy court hearing.

The challenge for these high-tech law firms is to figure out how to create a network of local counsel to show up at court. Warm bodies are needed, and, quite frankly, that is about the only qualification required.

The results of this spoke-and-wheel legal structure is predictable.

  • Clients get lost in the shuffle. They don’t know the name of the attorney who represents them.
  • Local counsel rarely meets the client prior to the bankruptcy court hearing.
  • Bankruptcy petitions are prepared by staff in the central national office.
  • Petitions are prepared by non-attorney staff who lack any courtroom experience and who are compensated by the number of cases prepared instead of the quality of the cases.
  • Communications with the firm are limited to telephone calls with no one person or team assigned to the case. You talk to a new person on the phone every time.
  • Petitions are frequently bare-boned and lack important details to explain the case to the court trustee.

Read the entire Babbs case and all these shortcomings are revealed.

What these national firms don’t  seem to understand is that they have their organizational structure backwards.  The key to a successful national firm is not centralized operations but empowerment of the local counsel.

A national firm should used its centralized powers of technology, advertising, organization and finance to empower local counsel.

A smart national firm should immediately route new customers to speak with local attorneys. Instead keeping costs down by hiring the cheapest local attorney to show up in court, national firms should seek out enterprising local attorneys  who want a partner to handle advertising, technology, accounting and routine management duties so that they can focus on their role of representing clients. Talented local partners do not just want a token payment for being a warm body. They want ownership of their work and profits.

A savvy national firm that empowers its local partners would have a multiplier effect. The national office could answer phones and provide extra paralegal services and provide a template for standardized excellence in service. When times are busy the national office could inject extra personal to prepare cases. When times are slow a national office could tap local counsel to help out other local counsel in busier regions.

A national firm that focuses on making the local partner successful by enabling them to provide superior service is the blueprint for success. But this cannot be achieved if the national leader thinks like a fast food franchisor.

In my firm all new clients speak to an attorney who is then assigned their case for the duration of the matter. We work in teams, and a paralegal is partnered with each attorney to provide clients with an attorney/paralegal team that follows them through every step of the case. You always know who handles your case.  This is the most expensive way to structure a bankruptcy firm, but it also produces the highest quality of work and client happiness.

I’m not interested in being a warm body for the Babbs firm. No self-respecting attorney would.



The credit counseling profession has been turned upside down over the past 20 years. When I first started representing clients in bankruptcy cases, we would routinely refer clients to a Consumer Credit Counseling Services of Nebraska if we thought bankruptcy could be avoided.

Unfortunately, CCCSN closed in 2015 and there was no local professional left to send clients to for real credit counseling.

A real credit counselor is a professional who sees beyond the numbers. Behind every financial problem lies a deeper issue: divorce, gambling, drug addiction, mental conditions, business failures and every other disorder you can imagine. To understand a money problem you must first understand the root cause of the problem, and money problems are usually secondary to a larger issue. Real credit counseling professionals have largely disappeared.

What happened? Why did traditional credit counseling die?

Many factors contributed to the death of traditional credit counseling.

  • Fair Share compensation drastically declined. Fair is the percentage of a monthly credit counseling payment creditors allow the agency to retain to fund its operation. That percentage declined from 15% to almost zero in recent years.
  • Debt Settlement firms have taken over the market. Why? Because their payments are so much cheaper. Instead of paying all the debt back settlement companies falsely claim that debtors only need to pay a fraction of what they owe. They lure clients away with slick advertising and lower monthly payments.
  • Technology changes are disrupting every industry these days and only the most tech savvy firms are surviving in any field.
  • Consumers cannot distinguish real credit counseling programs (i.e., those certified by the NFCC) from phony agencies that pretend to be nonprofit counselors.

Traditional credit counselors could not contend with dropping revenue, increased competition, and blinding technology changes while consumers became lost in a sea of confusing alternatives.

The bottom 60% of America is lost, losing ground and is in debt.

At the same time real credit counseling has been disappearing, Americans have been struggling to stay in the middle class.

  • Few workers receive pension plans today. In their place, workers receive 401(k) Plans that are commonly cashed out as they go from one job to the next.
  • Foreign competition and job outsourcing has put a squeeze on wages.
  • Relationships are less stable and an increasing percentage of children are raised by one parent.
  • Jobs change frequently and once a worker reaches 50 they want you gone due to higher insurance costs.
  • Church membership is down and there is a general sense of social dissolution.

The top 40% of America is doing well and they have abundant financial counseling, mostly in how to invest their savings, but the bottom 60%–the people who need financial counseling the most–have nowhere to turn.

It is time to reinvent credit counseling.

The trending term in credit counseling these days is called Financial Coaching.  This goes beyond managing a debt repayment plan. Financial coaching is a process of teaching and assisting a consumer to manage their way out of debt and into savings.

How does Financial Coaching differ from Credit Counseling?

  • Credit Counselors take possession of client funds to manage debt repayment plans. Financial coaches never take possession of client’s funds.
  • Financial coaches do not receive Fair Share payments from creditors, so there are no conflicts of interest.
  • Coaching requires regular face-to-face meetings to review progress and to continue education.
  • Coaches focus on diagnosis, organization, and educating.
  • Coaches teach skills and then make the client implement the payment plans.
  • Coaches help set short-term and long-term financial goals.
  • Credit Counseling is about managing a payment plan. Financial Coaching is about a relationship.
  • Credit Counseling normally requires a large corporate organization to manage plans. Financial Coaching is a profession operated by independent actors.

The opportunity going forward is to build a network of professionals who gradually guide clients out of debt and into savings while teaching life-long skills and awareness that changes peoples lives.

Technologies like Zoom and Teams and Google Meet allow us to break through geographic boundaries and to share information like never before.  We can share files and calendars and spreadsheets and video calls without leaving our homes. It is now possible to create a financial classroom with one-on-one counseling at virtually no cost.

It is possible for a single financial coach to guide 100 or more families out of debt and into savings.  A modest monthly fee will support the compensation necessary to support this new profession. As a bankruptcy attorney I personally manage hundreds of cases through 5-year chapter 13 payment plans, and a financial coach with 20 working days in a month can easily meet with 100 clients monthly by conducting 5 meetings per day.

Do the math.  I recently reviewed a new client’s debt payment program with a credit counselor. She was paying nearly $150 per month to have them manage a plan that was going nowhere. No real credit coaching was taking place.  If a trained financial coach could guild 100 clients out of debt and out of the ignorance of thinking like a poor person, they would earn a very decent living.

So, it is time to build a new network of professions that folks like me can refer clients to for real financial coaching. It’s time to build a brand that is easily recognized as a standard of professional care. The Association for Financial Counseling and Planning Education (AFCPE) is a newer organization moving in this direction.

I know where to send clients to prepare taxes or to fix their car or to have their lawn cut, but I don’t know a single individual who takes on personal credit counseling matters. If someone asks me for a lawyer referral I give them the lawyer’s name, not their firm’s name.  I know of credit counseling agencies who help with debt problems, but not a single human being who does. It’s time to change that.

Nebraska bankruptcy attorney Patrick Patino and had a great conversation about the hot topic of bifurcated chapter 7 fees in Nebraska.

In a traditional chapter 7 case all fees must be paid before a case is filed.  Why? Because unpaid attorney fees are wiped out once a case is filed so attorneys demand that all fees be paid BEFORE a case is filed.

But under the controversial bifurcation fee agreement the attorney only prepares some of the work before the case is field. After the case is filed the client signs a new contract  to complete the case.  Since most of the work is prepared after the case is filed the attorneys are, in theory, allowed to accept monthly payments.

Is this possible? Can attorneys charge a small fee down to file a skeletal chapter 7 case and then accept payments after the case is filed for the remaining work?

As our discussion reveals, the promise of affordable chapter 7 fees under the bifurcation fee arrangement may be illusory.

The controversial use of bifurcated attorney fees in Nebraska chapter 7 cases has reached critical mass.  We can expect US Trustee complaints to be filed against attorneys using BK Billing and Fresh Start Funding in the near future.

Under a bifurcated fee arrangement, the bankruptcy attorney charges a small amount down to file an incomplete bankruptcy petition.  A few days later a second fee agreement is signed to to prepare the remaining schedules which allows the attorney to accept monthly payments.

In theory, this fee arrangement makes filing Chapter 7 more affordable, but the reality is that debtors pay substantially more, and the United States Trustee’s Office believes the practice is abusive.

The Big Lie in Bifurcated Fee Arrangements.

The basic problem with bifurcated fee arrangements is that too little is paid to file a case. Bifurcation attorneys say that hardly any service is provided in the first stage so little must be paid.  Nothing more than the name of the debtor and a list of creditors is prepared. And that is the big lie.

In truth, a lot of work MUST be performed in Stage One of the bifurcated case.  It’s more than just stating a debtor’s name and list of creditors.

  • The Chapter 7 attorney has a legal duty to determine if any of the debtor’s property is unprotected BEFORE the case is filed.  That requires a careful review of a property list.
  • The attorney must verify if the debtor’s income is sufficiently low to qualify for chapter 7, and that requires a review of tax returns, bank statements and paycheck stubs.
  • The attorney must look for avoidable preferences payments to creditors or family members.
  • Credit Reports and background checks are carefully reviewed.

To claim that only a list of creditors is prepared is simply a lie.  And the truth is that bifurcation attorneys ARE performing these chores prior to filing the case. They are not fools. They are investigating the case to identify non-exempt property that could be seized by the Chapter 7 Trustee.  Work is being performed, a lot of it.

So how does the attorney get paid for these services when the case is filed for no money down? Here lies the issue.  The attorneys are collecting those fees in Stage Two after the case is filed, and that is a violation of the bankruptcy stay which bars the collection of pre-petition debts.

Inflated Fees in Stage Two.

Attorneys claim that bifurcation cases are more difficult since they require one appointment to sign the petition and another appointment to complete the schedules. Additional work is required to collect monthly fees and that justifies the higher fees.

But many bifurcation arrangements call for Stage Two fees that are higher than the entire fee charged in a traditional case. For example, one Nebraska attorney charges $170 down to file a case and then $1,930 in stage two. However this same attorney only charges $1,400 to file a traditional case.  Is this attorney really performing $1,930 of services in stage two or is he improperly collecting stage-one services with stage-two payments?

Reforming the Bifurcation Process.

An ethical application of a bifurcated fee arrangement involves the following principles:

  • Limit the process to lower-income debtors who clearly qualify for chapter 7.
  • Do not file a bifurcated case unless a garnishment is imminent.
  • Charge sufficient fees in stage one to pay all court fees, credit reports, and reasonable attorney fees.
  • The more difficult the case, the more the attorney should charge in stage one.
  • Avoid filing complex cases with bifurcated fees.
  • Keep the total cost of a bifurcated case at no more than 25% over the cost of a traditional case.
  • Avoid the appearance of collecting fees in stage two for services performed in stage one.
  • Ensure that debtors can afford the amount of the monthly post-petition fee and report that payment on the bankruptcy schedules.


Image courtesy of Flickr and Stewart Black.



Most people think the bankruptcy process is just about wiping out debt.  Indeed, discharging debt is the key mission of bankruptcy.

However, there is another important goal of the bankruptcy process: ensuring fair treatment of creditors. To achieve equality of treatment the bankruptcy law empowers its Trustees to avoid payments that unfairly prefer one creditor over another.

When a debtor has paid back money borrowed from family members within one year of filing they must disclose those payments on the bankruptcy schedules. These payments are considered to be “insider preference payments.”

Law of Insider Preference Payments.

Section 547 of the Bankruptcy Code sets forth the rules on avoiding preference payments.

The trustee may . . .  avoid any transfer of an interest of the debtor in property

    1. to or for the benefit of a creditor;
    2. for or on account of an antecedent debt owed by the debtor before such transfer was made;
    3. made while the debtor was insolvent;
    4. made—(A) on or within 90 days before the date of the filing of the petition; or (B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider.

Who is an insider?

Bankruptcy Code Section 101(31) defines the term “insider” and it includes any relative of the debtor.  So who is a relative?  “The term “relative” means individual related by affinity (i.e., by marriage) or consanguinity (i.e., a blood relative) within the third degree as determined by the common law, or individual in a step or adoptive relationship within such third degree.”

The typical insider preference payment.

Most insider/family preference payments are fairly straightforward.  A debtor paying back his or her parents $200 per month for 12 months has a $2,400 preference to report on the bankruptcy schedules.  The bankruptcy Trustee will then demand the parents return the money to be distributed to all creditors pro-rata.  That is fairly simple.

Revolving door preference payments.

What gets complicated are cases where the same $100 is borrowed and paid over the course of a year.  If a debtor borrows $100 from a parent and pays it back and then borrows and pays it again each month throughout the year, how much is the preference? Is the preference $100 or $1,200?

In the case where a debtor has something of a Revolving Line of Credit arrangement with a parent, the courts look to see whether the parent’s relative position has improved or worsened during the year.

For example, assume a parent was owed $1,200 at the beginning of the year but, due to new borrowing and payments, at the end of the year the parent was owed $2,000. In that case the parent’s position got worse and there is no avoidable preference.  However, if the parent was owed $1,200 at the beginning of the year and by the end of the year was owed only $500, then the parent has a voidable preference of $700.

Listing family debts on the creditor list.

A very common mistake made by bankruptcy attorneys occurs when they list a preference payment on the Statement of Financial Affairs but fail to list the parent on the  creditor list.  If the parent is still owed money they should be listed on both sections.

Solutions to the Insider Preference Payment Problem

The most obvious solution to insider payments is to wait one year before filing the Chapter 7 case.  If a significant preference payment occurred and the case must be filed now, consider filing a Chapter 13 payment plan.  The bankruptcy trustee in chapter 13 has no power to claw back insider preferences (although it may be a factor in how much is repaid to creditors).  A third option is to reverse the preference and have the parent pay back the money to the debtor assuming there are enough exemptions to protect the money. This last option is somewhat questionable and the court may not approve of such a tactic.


Image courtesy of Flickr and Kevin Dooley.