It costs a lot of money to go broke.  The cost of filing Chapter 7 bankruptcy in Nebraska is $1,300 to $1,800 on average, and once a complete bankruptcy petition is filed attorneys are bared from collecting unpaid fees.  The bankruptcy petition wipes out all debt, including unpaid legal fees associated with preparing a bankruptcy petition.

Many debtors need to file bankruptcy immediately to stop garnishments, but how can they pay legal fees when their wages are being garnished?

Attorneys also face a financial problem. They need to file cases to earn a living and most are willing to accept fees in installments, but the current bankruptcy law prohibits them from accepting payments after a Chapter 7 case is filed.

I think the bifurcation is all about informing the client. . . . I do think we are on the cutting edge of something big in Nebraska. I think bifurcation will become the norm.

What is the solution to this problem? Bifurcated fees.

What is a bifurcated Chapter 7 case?

Under a bifurcated case, the attorney files a bare bones skeletal case for little or no money down consisting of nothing more than a the debtor’s name, address and a list of creditors.  None of the bankruptcy schedules are prepared or filed at this time.

Then, after the incomplete petition is filed, the attorney schedules a second meeting with the client to complete the remainder of the case.  Since the schedules are prepared after the case is filed, the attorney, in theory, is allowed to accept payments for this work.

The attorney and client sign two contracts during the case: a pre-petition contract for filing the skeletal petition and a post-petition contract for completing the case.

Bifurcated cases have the potential to revolutionize the Chapter 7 world by allowing debtors to file cases for little money down.

Why are bifurcated fees a burning issue in Nebraska?

The Courts and the US Trustee (the agency that oversees bankruptcy cases) hate bifurcated cases.

The US Trustee’s Office hates the use of bifurcated fees because it feels the program is based on a lie.  Attorneys say they are completing most of the work after the case is filed, but investigations indicate otherwise.  It is clear that many of these attorneys are merely accepting payments post-petition for work completed pre-petition, and that is a violation of bankruptcy injunction baring the collection of pre-petition debts.

A second reason the US Trustee dislikes bifurcated cases is that they believe unsuspecting debtors are being abused with abnormally high fees.  Whereas a debtor may pay $1,400 to file a traditional chapter 7 case, those who file bifurcated cases are paying substantially more, often twice as much.

Some attorneys hate bifurcated fees.

Not only is the Court and the US Trustee hostile to the use of bifurcated fees, some attorneys are angry at their use as well.  Allowing bifurcated fees is a “Race to the Bottom” where attorneys desperate to file new cases advertise “Zero Down” chapter 7 fees.  One local Omaha attorney is advertising his $170 down chapter 7 service that ultimately charges a client $2,100 to complete the case.

Veteran attorneys are crying foul.  First, to file a case for $170 down means that virtually nothing is paid for pre-petition services and they say that is a lie. Lots of services must be performed to file any case.  There must be some basic interview of the client before any case can be filed.  There must be some measurement of a client’s income to see if they even qualify for chapter 7 relief. There must be some basic examination of the debtor’s property list to see if any of it is subject to liquidation. Also, an attorney has an ethical duty to see if any preferential or fraudulent transfers have occurred prior to filing a case.

He’s only charging $75.00 up front. And, an attorney must do more work than that to ethically file. Which, we all know he is. He wouldn’t file the case without checking stuff out. He’s analyzing the case, checking Justice, going through the questionnaire with the clients BEFORE he files. He’s not negligent.”

So how can an attorney ethically file a case for no money down when all these required pre-petition duties exist?  The plain answer is that they cannot do so ethically, and the concept of a Zero Down chapter 7 is inherently unethical.

A Race to the Bottom

Anybody who advertises Zero Down Chapter 7 is going to get business and take away from those who don’t.  Bankruptcy attorneys are suffering a loss of business during COVID-19.  Attorneys are laying off staff and more layoffs are coming soon if revenues don’t change.

Mortgage foreclosures are at a record low due to the moratorium in place, so profitable Chapter 13 cases are dramatically down.  Clients who would normally file cases to avoid car repossessions or paycheck garnishments are currently unemployed.  Lots of folks are just waiting for Covid-19 to end before dealing with the financial problems the pandemic has caused.  So, bankruptcy attorneys have faced steep declines in income and are desperate to try new things.

So when one attorney advertises no money down chapter 7 cases, others must follow. Soon the majority of chapter 7 cases in Nebraska will be bifurcated unless the Court or the US Trustee intervene.

Final thoughts.

Every court opinion on bifurcated fees starts out by saying the arrangement is allowed, but it must be carefully tailored to avoid ethical and legal dangers.

  • An attorney that doubles his or her fee when filing a bifurcated case risks a motion to disgorge fees.
  • The use of a factoring company to sell unpaid legal fees to a high interest rate lender presents problems.
  • Charging nothing down to file a skeletal case when everyone knows a fair amount of work must be done pre-petition is seriously flawed.
  • Complicated cases involving high income or potentially non-exempt assets should not be filed as a bifurcated case.
  • Filing bi-furcated cases for clients who are in no present threat of garnishment seems unnecessary.
  • Not collecting a reasonable partial fee prior to filing a case to cover necessary pre-petition services is unwise.

Something tells me we will be seeing more US Trustee and Court oversight of the bifurcation process in the near future.







Image courtesy of Flickr and USFWS Mountain-Prairie