The controversial use of bifurcated attorney fees in Nebraska chapter 7 cases has reached critical mass.  We can expect US Trustee complaints to be filed against attorneys using BK Billing and Fresh Start Funding in the near future.

Under a bifurcated fee arrangement, the bankruptcy attorney charges a small amount down to file an incomplete bankruptcy petition.  A few days later a second fee agreement is signed to to prepare the remaining schedules which allows the attorney to accept monthly payments.

In theory, this fee arrangement makes filing Chapter 7 more affordable, but the reality is that debtors pay substantially more, and the United States Trustee’s Office believes the practice is abusive.

The Big Lie in Bifurcated Fee Arrangements.

The basic problem with bifurcated fee arrangements is that too little is paid to file a case. Bifurcation attorneys say that hardly any service is provided in the first stage so little must be paid.  Nothing more than the name of the debtor and a list of creditors is prepared. And that is the big lie.

In truth, a lot of work MUST be performed in Stage One of the bifurcated case.  It’s more than just stating a debtor’s name and list of creditors.

  • The Chapter 7 attorney has a legal duty to determine if any of the debtor’s property is unprotected BEFORE the case is filed.  That requires a careful review of a property list.
  • The attorney must verify if the debtor’s income is sufficiently low to qualify for chapter 7, and that requires a review of tax returns, bank statements and paycheck stubs.
  • The attorney must look for avoidable preferences payments to creditors or family members.
  • Credit Reports and background checks are carefully reviewed.

To claim that only a list of creditors is prepared is simply a lie.  And the truth is that bifurcation attorneys ARE performing these chores prior to filing the case. They are not fools. They are investigating the case to identify non-exempt property that could be seized by the Chapter 7 Trustee.  Work is being performed, a lot of it.

So how does the attorney get paid for these services when the case is filed for no money down? Here lies the issue.  The attorneys are collecting those fees in Stage Two after the case is filed, and that is a violation of the bankruptcy stay which bars the collection of pre-petition debts.

Inflated Fees in Stage Two.

Attorneys claim that bifurcation cases are more difficult since they require one appointment to sign the petition and another appointment to complete the schedules. Additional work is required to collect monthly fees and that justifies the higher fees.

But many bifurcation arrangements call for Stage Two fees that are higher than the entire fee charged in a traditional case. For example, one Nebraska attorney charges $170 down to file a case and then $1,930 in stage two. However this same attorney only charges $1,400 to file a traditional case.  Is this attorney really performing $1,930 of services in stage two or is he improperly collecting stage-one services with stage-two payments?

Reforming the Bifurcation Process.

An ethical application of a bifurcated fee arrangement involves the following principles:

  • Limit the process to lower-income debtors who clearly qualify for chapter 7.
  • Do not file a bifurcated case unless a garnishment is imminent.
  • Charge sufficient fees in stage one to pay all court fees, credit reports, and reasonable attorney fees.
  • The more difficult the case, the more the attorney should charge in stage one.
  • Avoid filing complex cases with bifurcated fees.
  • Keep the total cost of a bifurcated case at no more than 25% over the cost of a traditional case.
  • Avoid the appearance of collecting fees in stage two for services performed in stage one.
  • Ensure that debtors can afford the amount of the monthly post-petition fee and report that payment on the bankruptcy schedules.


Image courtesy of Flickr and Stewart Black.