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It costs a lot of money to go broke, literally.  Chapter 7 fees vary from case to case, but the average case filed in Nebraska ranges from $1,200 to $1,500 depending on the complexity of the case and the attorney hired.  Clients frequently ask if their case can be filed before all fees are paid.  The clear answer to this question is no.  Bankruptcy laws simply do not allow an attorney to accept payment of Chapter 7 legal fees after the case is filed.

A recent case involving Louisiana bankruptcy attorney Glay Collier underscores this rigid rule.  Collier advertised a “No Money Down Chapter 7” where he would charge $100 before the case was filed and then debit his client’s bank account for the remaining fees to be paid after the case was filed.  It goes without saying, an attorney can file a lot of cases for no money down, and Collier did just that.  Unfortunately, when a client failed to make the monthly payment Collier retaliated by failing to file necessary documents and the case was dismissed.  The client hired another attorney and sought damages. 

The Louisiana bankruptcy court imposed $40,000 of sanctions and damages against attorney Collier

In a thundering opinion, the Louisiana bankruptcy court imposed $40,000 of sanctions and damages against attorney Collier for multiple violations of the bankruptcy code.  The Court also referred the case to the Chief Judge of Louisiana for a determination of further sanctions and possible disbarment.  The Court ruled that the “Credit/Debit Authorization From” signed by the debtor prior to filing the bankruptcy case could not be used after the case was filed since that form became void the moment the case was filed.   Once the case was filed the bank account debits ceased to be voluntary and were thus deemed a violation of the bankruptcy stay.

The United States Trustee recently filed a complaint against Colorado attorney Kevin Heupel for his firm’s use of a “no money down” program.  Heupel doubled the price of his service for the No Money Down option and required clients to sign a bank account debit agreement before the bankruptcy case was filed.  Without any court authorization, Heupel zapped money out of his client’s bank accounts right after the bankruptcy was filed and failed to report the full amount of his fees.  The US Trustee’s complaint alleged that debtors were not informed that continuation of the payments were voluntary and required a court-approved Reaffirmation Agreement to be valid.  Heupel also did not inform his clients of the impermissible conflict of interest that prevents a bankruptcy attorney from being a creditor in his client’s case.  As a result of the US Trustee’s complaint and media attention to the case, Kevin Heupel recently filed for Chapter 11 protection.

This is a key point:  Chapter 13 cases can be converted to Chapter 7 at any time.

So what does a person do if they absolutely have to file a bankruptcy case now because 25% of their paycheck is being garnished?  The best answer is to file Chapter 13.  Yes, Chapter 13 is a 3 to 5 year payment plan, but a Chapter 13 case can be filed in Nebraska for as little as $75 down. (Local Nebraska bankruptcy rules require at least $75 of the $310 court fees to be paid when the case is filed, with the remainder due in a reasonable time.)  Also, if more than $600 of a debtor’s paycheck has been garnished in the 90 days prior to filing, that money can generally be recovered by filing a turnover action, thus providing the necessary funds to fully pay attorney fees to convert the case to Chapter 7.  This is a key point:  Chapter 13 cases can be converted to Chapter 7 at any time (provided the debtor was eligible for Chapter 7 when the case was filed). 

No money down Chapter 7?  Nope, can’t do that.  Pay $75 down for Chapter 13 and flip to a Chapter 7 after payment of remaining court fees and attorney fees are paid?  Yes, that may be an option.  If debts are out of control there is always a way to figure out the legal fees.  If lawsuits have been filed there are ways to delay the judgments.  If bank accounts have been hit with garnishments there are ways to exempt the funds.  Never assume you can’t afford to go broke.

Image courtesy of Flckr & Kevin Dooley.