I meet lots of people who desperately need to file bankruptcy, but they lack the money to file. A typical Chapter 7 case costs $1,300, and paying the fee is probably the biggest stumbling block to filing a case.

A company called BK Billing provides an answer: borrow the money.  Under the BK Billing model, bankruptcy attorneys divide the Chapter 7 case into two parts: Services rendered before the bankruptcy petition is filed with the court, and services provided after the petition is filed.  In bankruptcy lingo we refer to this as pre-petition and post-petition services.

Attorneys using the BK Billing system charge clients a small amount for pre-petition services, typically from zero to $500, to get a case filed. They limit pre-petition services to filing an “emergency petition” that reports nothing more than a list of the creditors.  Then, after the case is filed with the court, the client must enter into a new fee agreement to complete the post-petition services, including the filing of asset and liability schedules, income and expense schedules, attendance of the court hearing before a Chapter 7 Trustee, etc.  BK Billing then buys the account from the attorney at 70% of face value for the the post-petition services.  Since the post-petition fee agreement is signed after the case is filed it is not discharged.

In theory, the BK Billing system makes it easier to file Chapter 7.  Instead of having to come up with $1,300 or more to file a case, they just have to pay a small initial deposit.  Bankruptcy attorneys win too since they can file more cases and increase profits.  What could go wrong?

The Ashcroft Firm of Murrieta, California recently found out how much can go wrong.  They advertised “$0 Down Same-Day Filing” bankruptcy services using the BK Billing business model and increased their monthly filings by more than five-fold.  But the US Trustee’s office recently sued the law firm for multiple counts of misrepresentation and violations of the bankruptcy code.

There are multiple problems and complications presented with the bifurcation business model for Chapter 7 services.

First, the vast majority of chapter 7 work MUST be performed before the case can be filed.  An ethical and competent chapter 7 attorney cannot just file a skeletal petition consisting of nothing more than a list of the creditors.  To file a case in such a manner is to commit gross professional malpractice.  BEFORE a case can be filed the attorney MUST review ALL of a debtor’s assets to determine if any are unprotected.  Whether these asset and exemption schedules are filed with the petition is immaterial.  The fact is, to competently represent a debtor the attorney must prepare the asset and exemption schedules.  The attorney must also prepare income and expense schedules to see if a debtor even qualifies for chapter 7 since debtors with too much disposable income cannot receive a chapter 7 discharge.  The attorney must also prepare a Means Test review prior to filing a case to see if the income received by a debtor in the preceding 6 months is too high to qualify for chapter 7. Property transfers must also be scrutinized to see if fraudulent conveyances have occurred.  Bankruptcy attorneys have an ethical and legal duty to perform a “due diligence” investigation before any case is filed, and that means that the majority of legal work must necessarily be performed prior to filing a case.  The BK Billing business model suggests that most of the work can be performed after the case is filed, and that assumption is simply false.

Second, even though there are many services that must be performed after the bankruptcy petition is filed, it is clear that such services are so essential and fundamental to the bankruptcy case that they cannot be severed or unbundled.  For example, attendance of the Trustee Meeting occurring 30 days after a case is filed is fundamental to the bankruptcy process, and attorneys cannot ethically sever their duty to attend such a hearing with a post-petition contract.  The Idaho legal ethics committee has recently issued an opinion on this topic underscoring the inherent danger of attempting to unbundle legal services in bankruptcy cases.

Another recent opinion involving BK  Billing was issued by the Idaho bankruptcy court,  In re Grimmett.  In that case the Idaho court ordered the debtor’s attorney to disgorge all fees paid under that agreement.

The concept of bifurcating chapter 7 attorney services into pre-petition and post-petition categories is inherently flawed.  Too much of the attorney services are essential and fundamental to the bankruptcy process to be severed. It is difficult to show that debtors give an informed consent to such a division of services. A better option is to file the case as a Chapter 13 proceeding and then to convert the case to Chapter 7 after the required attorneys fees have been paid pursuant to a court-approved plan.


Image courtesy of Flickr and Iqbal Osman