It costs a lot of money to go broke.  It really does. The cost of filing Chapter 7 in Nebraska is about $1,400 to $1,800 for the typical case, and many can never afford that cost.

To make matters worse, once a bankruptcy petition is filed with the court, attorneys are not allowed to accept further payment. As a consequence, bankruptcy attorneys must charge ALL their fee up front before the case is filed.  And that is a big problem for lower-income debtors.

How can a low income debtors afford bankruptcy fees when they are being garnished? 

And then I had and idea after viewing a self-help bankruptcy service called Upsolve. Would it be possible to offer a drastically discounted fee to review bankruptcy petitions prepared by the debtor? If debtors could input most of their petition online and provide us a draft copy, could we offer an inexpensive service to review their petition?

Chapter 7 can be dangerous and complicated, even for low income cases. Bankruptcy trustees appointed by the court must review every case filed and personally meet with with the debtor. Trustees are paid commissions to uncover unprotected property and transfers.  In other words, your mistakes equal their profits, and that is why it is extremely dangerous to file chapter 7 without an attorney.

And then I did the research.

So I researched if we could offer an inexpensive bankruptcy petition review service, and the court cases I read clearly indicate that attorneys may not offer limited scope services in bankruptcy.

In the case of In re Castorena an Idaho attorney set up a legal clinic that charged clients $250 to prepare a bankruptcy petition with the understanding that the client would file their own case and the attorney would make no appearance at the court hearing.  The Idaho bankruptcy court was not pleased with this limited scope arrangement and took away fees in 19 cases.  The court extensively explained why bankruptcy attorneys could never agree to such a limited representation.

  • Regardless of the propriety of the attempt to limit the scope of representation, the attorney was absolutely obligated to sign the petition under Federal Bankruptcy Rule 9011(a).
  • This Court agrees that there is no excuse for a lawyer, who counsels a debtor regarding a bankruptcy and prepares that debtor’s petition, schedules and related documents, to fail to sign the petition.
  • Attorneys must sign what that cause to be prepared.
  • A competent, ethical attorney is confronted with an extremely difficult, if not insoluble, dilemma when contacted by a client who is inclined to file for bankruptcy, but who, for whatever good reasons, does not want or can not afford “full-service” legal representation in the case. Can the attorney legally and ethically assist a client in prosecuting a bankruptcy case when the lawyer can not in good conscience conclude the would-be debtor is capable of analyzing, confronting and successfully overcoming the legal problems he or she may encounter in bankruptcy court?
  • Is consent by the client to a lawyer’s proposal to restrict services of consequence if the client is not equipped to appreciate the intricacies, and perils, associated with such a decision?

The court in Castorena is not alone in its opinion. Lots of courts have made similar rulings.  (See In re Ruiz, 515 B.R. 362,   “Where a law firm entered into a limited representation agreement with the debtor, failed to sign the petition, failed to formally appear in the bankruptcy case or directly file the petition, and failed to attend the meeting of creditors or provide other necessary services to the debtor, the law firm’s attempt to limit their services was prohibited by Bankr. M.D. Fla. R. 9011-1.“)

Solutions to the low income problem of filing bankruptcy.

So how does a lower-income person who is being garnished file bankruptcy?

File Chapter 13: The most effective solution is to file Chapter 13. Under a chapter 13 case a person must pay back SOME of what is owed, but payments can be as low as $100 per month and Chapter 13 cases can be filed for as little as $75 down.

Also, there are many extra benefits to Chapter 13.

  • Vehicle loans can be “crammed down” to the value of the vehicle and repaid at lower interest rates.
  • New medical bills may be added if the case is converted to chapter 7 later. In fact, if a debtor does not have health insurance or is anticipating lots of new medical bills in the near future, chapter 13 may be the preferred solution.
  • Recover Garnishments of the past 90 Days.  Another benefit of filing chapter 13 now is that it may allow a debtor to recover garnishments taken in the 90 days prior to filing bankruptcy. If one creditor garnished more than $600 within 90 days of filing bankruptcy, a debtor may be able to get that garnishment refunded.

The professional service provided by a paid bankruptcy professional should not be undervalued. A competent and properly compensated (Hmm . . . notice that the words “competent” and “compensated” are similar?) bankruptcy attorney will provide numerous benefits. They pull credit reports. They do background checks. They understand what bankruptcy trustees like to take away. They know how to stop garnishments quickly. They know how to retrieve garnishments of the prior 90 days. They know how to avoid judgment liens. They have experience to avoid the numerous pitfalls that await a pro se debtor. In short, a competent bankruptcy attorney should save a client more than the extra fee they charge many times over.

Need for new rules to assist low-income debtors.

Generally speaking, rules regulating bankruptcy attorneys should be few and clear.  Right now there is a lot of confusion about limited scope representation in bankruptcy cases. Courts are rightfully concerned about making it too easy for attorneys and others to provide limited services that basically dump complicated cases in the court that a pro se debtor is unable to manage.

Bankruptcy attorneys are rightfully reluctant to file chapter 7 cases for lower fees knowing they can’t and won’t be paid for services after the case is filed.

Unfortunately, that is the system we currently have and it will probably take new rules to help lower income debtors to file attorney-assisted cases for less money down if the court thinks it is wise to open the Pandora’s Box of problems that will necessarily follow.


Image courtesy of Flickr and Stephen Samuel