The Final Report of the American Bankruptcy Institute on Consumer Bankruptcy offers suggestions to make paying for bankruptcy more affordable. The report does a good job of explaining why fees are so high, but the suggested remedies are generally lame and at times just plain wrong.
In what way? Well, the report correctly diagnoses the problems of escalating legal fees faced by debtors filing Chapter 7 cases, but the proposed recommendations to solve this problem are just bizarre. The ABI commission makes the following recommendations:
- Online Data Input Forms.
- Increasing Provisions for Bro Bono Cases.
- Reducing Court Filing Fees.
- Video Attendance at 341 Hearings.
- Hire Government Attorneys to Prepare Case.
- Make Chapter 7 Attorney Fees Nondischargeable.
Online Data Input Forms.
The ABI suggests that if debtors could enter their own schedules online using easy-to-understand forms then attorneys could use this information to prepare cases less expensively.
First off, this already exists. There are multiple websites that provide forms a debtor can enter online and the cost is usually less than $100.
Second, most attorneys use software that allows debtors to input their creditors, property, income etc. Few attorneys utilize the service. Why? The truth is, debtors do a poor job of entering information. In fact, most do such a poor job that asking them to enter information is generally counterproductive.
This is not to belittle clients, but unless you work with bankruptcy schedules on a regular basis you will not understand what is being requested and why it is important. The ABI’s recommendation that new online data input forms be created is just a waste of time and money. The service already exists.
Increasing Provisions for Pro Bono Cases.
It is interesting that an organization comprised of law professors, attorneys and judges is actually suggesting that debtors would be better off by not having a competent attorney represent them. The ABI is suggesting that more funds be paid to Legal Aid clinics to help debtors file their own case.
First, it is unethical for Legal Aid attorneys to prepare pro se petitions and then abandon the client to file their own case. Bankruptcy Rule 9011 requires that attorneys who help prepare a bankruptcy petition must actually sign the petition. Multiple attorneys have been sanctioned by the court for attempting to contract away the duty to attend court and to provide “core and fundamental” services. Ghostwriting bankruptcy petitions is unethical under current court rules, but that is what Legal Aid clinics do.
Second, filing bankruptcy is a complex process even for attorneys, let alone a pro se debtor. The ABI is encouraging legal clinics to draft petitions and then abandon the debtor in court. I’ve seen pro se debtors lose homes, cars, and tax refunds because they were not properly represented. To encourage more of this is simply unwise. Filing bankruptcy is a dangerous process and debtors need competent (i.e., compensated) attorneys representing them.
Reducing Court Filing Fees.
Yes, reducing the $335 court fee to file Chapter 7 would help lower income debtors. But it would also deprive courts of their main source of revenue. Defunding our bankruptcy court system is probably not in the best interest of debtors. The ABI report does not state how this decrease in court funding would be addressed.
Video Attendance at 341 Hearings.
The move towards video court hearings is valid and that is actually starting to take place in rural communities. I’ve heard that this practice is already occurring in the Wyoming bankruptcy court and the US Trustee’s Office in Nebraska says they will start experimenting with it for rural cases. However, whether the hearing is live or on video, the debtor and their attorney must attend the meeting and I doubt this will result in much cost savings.
Hire Government Attorneys to Prepare Case.
The ABI commission suggests that an agency similar to a Public Defender office be established to help lower income debtors file cases. Gosh, isn’t that what Legal Aid clinics already do? I see nothing but disaster with this idea. First, this is never going to happen. Congress is not going to spend billions of taxpayer money to help people file bankruptcy. Second, does anyone actually think a government attorney is going to crank out a large number of petitions in any given week? Really, this idea is just plain dumb.
Make Chapter 7 Attorney Fees Nondischargeable.
This idea makes sense, but I doubt it will be approved by Congress anytime soon.
Once a bankruptcy petition is filed with the court, bankruptcy laws prohibit an attorney from accepting payment for work prepared prior to filing. So, Chapter 7 attorneys routinely demand that ALL fees be paid before the case is filed.
Excepting attorney fees from the bankruptcy discharge would encourage attorneys to accept monthly payments for their services after the case is filed, and that would greatly help lower-income debtors.
Interestingly, the bifurcation of legal fees into pre-filing and post-filing services is gaining momentum and this practice does allow attorneys to accept monthly payments after the case is filed. For lower income debtors who cannot come up with large retainer fees, a bifurcated legal fee arrangement may be their best option to make the process affordable.
The ABI Report gives negative reviews of the bifurcation process, but there is no substantial difference between bifurcating fees and making Chapter 7 legal fees nondischargeable. It is really the same thing. Bifurcation merely employs the legal trick of filing an incomplete petition that only provides a debtor’s name and list of creditors while the majority of the legal work is prepared immediately after the case is filed.
Bifurcation achieves the ABI’s goal of making legal fees nondischargeable and thus affordable. And since this procedure is already available, no laws need to be passed to make this a reality.
It would seem that the ABI Commission may have better spent its time creating guidelines to make the bifurcation process more available to lower income debtors. Bifurcation does not require more government programs or changes to the law. There is no shortage of competent bankruptcy attorneys, but there is a shortage of compensated attorneys in this field. That’s the real problem. Most bankruptcy attorneys I know are desperate for more business. This is strictly a compensation problem. Solve the attorney compensation problem and you solve the low income debtor problem.
Chapter 13 Benefits Overlooked.
The ABI Commission is apparently distressed about lower income debtors being lured into expensive chapter 13 cases. Yes, legal fees in chapter 13 cases are significantly higher than fees chapter 7 cases. However, the ABI Commission is overlooking significant advantages offered in the chapter 13 process.
First, debtors are represented by extremely competent attorneys in chapter 13 cases. (Again, compensated = competent.) That means attorneys are aggressive at stopping garnishments, foreclosures and judgment liens. Their fees are generally contingent on getting a chapter 13 plan approved, so attorneys are diligent in proposing feasible payment plans within a debtor’s ability to pay. A dismissed chapter 13 case results in the attorney not receiving compensation, so filing successful plans is the goal.
Second, chapter 13 plans have the power to cram down car loans to the value of a vehicle and to reduce interest rates as well. Those savings often pay for the additional cost of the chapter 13 case.
Third, new medical bills and other debts incurred after the chapter 13 case is filed may be added to the case if it is converted to chapter 7 later. Converting chapter 13 cases to chapter 7 is extremely common and the ability to add new debts provides a debtor with a longer-term benefit, especially for debtors who lack health insurance coverage.
Forth, chapter 13 fees are not that expensive. For a lower income debtor with no secured or priority debts, a 3-year chapter 13 case can be field for $310 of court fees down and a monthly payment of $100 per month. That seems damn reasonable to most folks.
Fifth, the ABI Commission reports that only 46% of chapter 13 cases are successful. Really? Then perhaps the ABI Commission should focus on that dismal success rate. In Nebraska the rate is closer to 60% and our firm has traditionally achieved a 70% discharge rate. Compared to Credit Counseling agencies that report a 25% to 40% success rate, that is actually pretty good. And why do some courts have such poor success rates? That’s the real question. Are the procedures streamlined? Does the court provide a framework of Local Rules that make the process simple? Do the Chapter 13 Trustee’s nitpick the cases and basically make the process miserable? Chapter 13 is an incredibility powerful tool to help lower income debtors when used properly and the fact that attorneys are compensated for providing that service is not a problem but is actually a mark of success. Imagine that, attorneys who work for lower income America actually can earn a decent income. That’s a problem? Gee wiz, clean your glasses ABI.
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