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The ironic feature of the bankruptcy system is that a debtor must come up with a lot of money to file a case.  Indeed, it costs a lot of money to go broke!

According to bankruptcy law professors  Pamela Foohey, Robert M. Lawless, Katherine Porter (now Congresswomen Katie Porter), and sociology professor  Deborah Thorne in their 2017 article No Money Down Bankruptcy, the high cost of filing chapter 7 bankruptcy is causing many debtors to file even more expensive, but less successful, chapter 13 cases that can be filed for “no money down.”

Attorneys charge an average of $1,229 to file and represent a debtor in a chapter 7 case and an average of $3,217 to file and represent a debtor in a chapter 13 case.

The study reveals that while 95% of Chapter 7 debtors receive a discharge of their debts, only one-third of chapter 13 debtors obtain a discharge.

Why is this happening? Why are lower-income debtors filing expensive chapter 13 cases instead of the cheaper and more successful chapter 7 cases?

You can fault the drafters of the bankruptcy code and the Bankruptcy Reform Act of 2005 for this mess.

When a debtor files a chapter 7 case, all debts–including fees owed to their bankruptcy attorney–are wiped out.  The debtor’s attorney may not accept payment for services performed prior to filing the bankruptcy petition.

That’s a big problem. Attorneys cannot accept payments for their services after the case is filed, so attorneys typically charge ALL their fees up front.  And lower-income debtors just can’t afford to come up with the money so they wind up filing chapter 13 for no money down.

So why can’t debtors just save up to file chapter 7?  Well, they can and most attorneys will accept payments before a case is filed.  In fact, most debtors break the chapter 7 fee into installments.

The problem is that debtors usually hire a bankruptcy attorney after they have been sued and wage garnishments are imminent. They have run out of time to save up to file the less expensive chapter 7 option. So even though they are a better fit for a chapter 7 case, they opt to file the “no money down” chapter 13 case to stop garnishments, repossessions and foreclosures.

Geography & Race Factors:

A very disturbing fact of bankruptcy cases is that the filing of a chapter 13 case has more to do with a person’s location and race than it does with anything else.  Debtors in Southern states and African American debtors filed a disproportionate number of chapter 13 cases, suggesting that the decision of which chapter to file has more to due to with the attorney they hire than what is best for a particular debtor.

In some districts as many as 80% of the cases are filed as chapter 13, whereas in 2015 in the Northern District of Iowa only 6.7% of the cases were chapter 13.  That difference cannot be explained by determining what was best for the debtor.  Rather, the authors suggest that attorneys are doing what is best for their bottom line at the expense of lower income Americans.

Correct observations but wrong conclusions.

Although the authors correctly point out the problems with No Money Down cases, they reach the wrong conclusions much of the time.

The basic problem here is compensation. Attorneys are more than happy to file chapter 7 cases if they can be compensated. The only reason attorneys are pushing chapter 13 cases is so they can get paid. The solution is to figure out how to compensate chapter 7 attorneys.

The professors make the following statements in their report:

  • “Given that attorneys facilitate “no money down” bankruptcy, the best way to ensure that all debtors have equal access to bankruptcy is to cabin attorneys’ incentives and role in chapter choice, while still allowing debtors access to this filing option if they so choose.”
  • “One solution to combat the effects of the “no money down” bankruptcy is to allow debtors to pay bankruptcy attorneys’ fees in installments during their chapter 7 cases.”
  • “Standing orders could provide that only if the debtor has paid twenty-five percent (or some other percentage) or more in attorneys’ fees prior to filing will the “no look” fee apply.”
  • “A similar solution would be to revise the requirements for confirmation of chapter 13 plans to include a condition that the plan must contemplate making a substantial repayment to creditors.”

So, the professors suggest that attorneys who steer their low income clients into chapter 13 cases should be denied their fees unless a substantial amount of the creditor claims are paid.  Well, that would DRASTICALLY reduce the number of chapter 13 cases filed.  But is that a good result?

That is actually a horrible idea. How does this help low income debtors? They can’t afford to file chapter 7 so chapter 13 is their only option. Their paychecks are being garnished so they must do something, but these professors just focus on the low success rate of chapter 13 cases instead of the debtor’s immediate need for relief.  Filing chapter 13 does offer IMMEDIATE relief from garnishments, repossessions and foreclosures.

There are two real problems here.  First, we have a chapter 7 compensation problem. Second, we have a chapter 13 success rate problem.

How can we compensate chapter 7 attorneys so they will file cases now and not make a debtor wait to file?  Well, as the professors suggest, legislative changes to allow that would be great, but when is that supposed to happen?

The Bifurcation Solution:

A current option to help allow debtors to file chapter 7 cases for a small retainer fee is to open up the doors to a bifurcated case.  That is, allow attorneys to charge a small payment down to file an incomplete case consisting of nothing more than a debtor’s name and a list of creditors and then allow attorneys to charge monthly payments after the case is filed for completing the remaining schedules.

This solution is available now, but the US Trustee has been extremely hostile to allowing this process even though court decisions say it is allowable.  The problem is, those firms attempting this approach have gone too far and have charged high fees and interest rates making the cost similar to chapter 13. But if courts develop Local Rules creating Safe Harbor zones for reasonable fees and payment schedules, this solution could be implemented right now with no Congressional action.

Chapter 13 Success Rate Solution:

The fact that only one-third of chapter 13 cases nationwide result in a discharge is outrageous. In Nebraska the success rate is about 60% and our firm has normally trended towards 70%. If the success rate of chapter 13 were higher nationally I doubt the authors would be complaining about no money down bankruptcies.

Why do some states have such low success rates for chapter 13? That is the key question not addressed by this article–a glaring omission. Success rates depend on cooperation between the courts, the trustees that supervise the case, and the attorneys who file them.  Chapter 13 cases require fertile soil created by sensible Local Rules that give the system flexibility.

Sometimes debtors cannot make the monthly payment. They lose jobs or file divorce or suffer health problems. Local rules must allow debtors to suspend payments easily.  Attorneys must be properly compensated for keeping the case alive when a debtor encounters trouble, and that means allowing for supplemental fees when amendments to plans or motions to suspend payments are filed.  And courts need simple rules that are easy to enforce. Combine all those ingredients and chapter 13 success rates soar.

The professors also fail to mention many of the benefits of those more expensive chapter 13 cases.  For example, car loans can be paid off for what a vehicle is worth instead of what is owed and at lower interest rates.  That savings can more than offset the higher cost of chapter 13. In addition, new debts incurred after the case is filed–especially ongoing medical bills–may be discharged if the case is converted to chapter 7 later.  Income tax debts may be paid off at lower interest rates as well. No mention of these cost savings is mentioned in the article.

Yes, we need reforms to help lower-income debtors file successful bankruptcies. But attacking attorneys–the gatekeepers to the justice system–or attacking debtors by making it more expensive to file chapter 13 is not the answer to the problem.

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The 8th Circuit Court of Appeals has affirmed a Bankruptcy Appellate Panel’s opinion regarding whether a retirement account awarded to a spouse in a divorce case is exempt in a bankruptcy proceeding.

Last year the BAP court ruled that a retirement account awarded in a divorce case was not earned by the debtor and was therefore not protected in a bankruptcy case under federal exemption laws.  (See Lerbakken decision 2019). This opinion came as a shock to many since funds in a retirement account are traditionally protected.

The BAP court explained that although funds earned and saved in the debtor’s retirement accounts are protected, retirement funds awarded to an ex-spouse are not earned by that debtor and are therefore unprotected under federal exemption laws. (State exemption laws, however, may extend such protection.)

Although the 8th Circuit has now affirmed the BAP’s Lerbakken opinion, it appears that the 8th Circuit is being careful to narrowly limit the scope of that opinion.

The 8th Circuit Court underscored the fact the debtor had failed to transfer the retirement accounts into his own seperate account prior to filing bankruptcy.  The BAP opinion mentioned this fact but did not emphasize it.  So, had the funds been fully transferred to his own account, would the funds be protected?  The 8th Circuit seems to suggest that.

Secondly, the 8th Circuit Appeals Court pointed out that true retirement accounts are not subject to creditor claims but the Lerbakken account was subject to a lien for unpaid attorney fees. So, if the funds were not subject to a lien of a current creditor, would they have been protected as an exempt retirement account? That fact seemed to make a difference to the appeals court.

Lerbakken’s interest in the IRA was a sum of money in his ex-wife’s IRA, not an account “set aside for the day when an individual stops working.”

The Takeaway:

First, it appears that had Lerbakken delayed filing his bankruptcy until after the retirement accounts were transferred to his own separate account, the funds might have been protected under federal exemption laws.

Second, had Lerbakken satisfied the claim of his divorce attorney prior to filing bankruptcy, the court may have viewed the accounts as retirement savings.

Nebraska Exemption Laws May Protect Retirement Accounts Awarded in a Divorce

The Lerbakken case was filed in Minnesota where the debtor was using federal bankruptcy exemption laws.  However, Nebraska has opted out of the federal exemption scheme and uses a different exemption law to protect retirement accounts.

Nebraska Statute 25-1563.01 protects retirement accounts in bankruptcy cases, but what about accounts awarded to a debtor in divorce? Are those accounts protected?

In an unpublished opinion the Nebraska bankruptcy court did rule that a retirement account awarded to a debtor pursuant to a divorce decree was exempt under Nebraska statute 25-1563.01. (See In re Reohrs, Case No. 18-41831).

Until there is a written opinion issued in Nebraska, debtors should be careful about filing chapter 7 cases if they own substantial retirement funds received in a divorce case.

Image courtesy of Flickr and Michael.


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:

  1. Online Data Input Forms.
  2. Increasing Provisions for Bro Bono Cases.
  3. Reducing Court Filing Fees.
  4. Video Attendance at 341 Hearings.
  5. Hire Government Attorneys to Prepare Case.
  6. 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.


Image courtesy of Flickr and New Media Consortium.

Low income debtors often need to file bankruptcy to stop garnishments, car repossessions and foreclosures. The problem is, filing Chapter 7 bankruptcy is expensive and attorneys will not file a case until ALL those fees (typically $1,400 to $1,800) are paid.

Why won’t attorneys file cases for a small retainer and monthly payments on the balance? Because court rules prohibit attorneys from doing that.  It’s ironic, but the very laws that are designed to help low income debtors actually impose a roadblock to hiring professional help.

When a bankruptcy case is filed, all debt collection must stop, including fees owed to the attorney. Chapter 7 attorneys cannot accept additional payments once a completed petition is filed.


One solution is to file an incomplete petition.  Under bifurcation the attorney files a skeletal petition consisting of nothing more than a debtor’s name and a list of creditors.  After the case is filed the debtor signs a new fee agreement to cover the work that needs to be completed (drafting asset and debt schedules, income and expense schedules, attending court hearings, etc.).

Since the bulk of the legal work is performed after the case is filed the attorney is allowed to accept monthly payments.  Hence, the process has been divided between pre-petition and post-petition services.

Is this allowed? Can an attorney divide their fees between pre-petition and post-petition services?


The Idaho bankruptcy court was one of the first to rule on bifurcated fee arrangements in the case of In re Grimmett.  In that case the debtor’s attorney used a factoring company called BK Billing based in Utah.  The attorney charged the debtor $500 to file a skeletal petition and then another $1,500 payable in monthly installments for work completed after the case was filed.  The attorney sold his fee contract to BK Billing and received $1,000 immediately.  To summarize this arrangement, the debtor paid $2,000 to file a case ($500 down and $1,500 in monthly installments), the attorney received $1,500, and BK Billing received $500 plus interest.

The Idaho court pointed out several problems:

  • The agreement provided that if the debtor failed to make timely payments the schedules would not be filed and court fees would not be paid resulting in a dismissal of the case.  In short, the attorney threatened not to complete his job when payments were late.
  • The agreement provided that the attorney would stop working on the case even if the attorney did not receive court permission to withdraw.
  • The court was concerned about whether debtors were giving “informed consent.”  That is, did the client really understand what they were signing?
  • The attorney threatened to send the unpaid account to collection.
  • Until an attorney is allowed by the court to withdraw from a case, the attorney must be prepared to assist the debtor through normal, ordinary and fundamental aspects of the process.  These core duties would include completion of the bankruptcy schedules, attending the meeting of creditors, and assisting the debtor with normal tasks involved with reaffirmation agreements, filing credit education certificates, etc. An attorney cannot contract away core and fundamental duties.
  • It is doubtful that a debtor can appreciate or understand the adverse consequences that may befall him or her when the attorney abandons the case midway through.
  • There is great suspicion by the court and US Trustee that this is an effort to allocate charges of pre-petition work to post-petition fees. In other words, the US Trustee suspects the arrangement is a scam and most of the work is really done prior to filing the case.

If either lawyer or client wishes to limit services in order to preserve a lower fee, that limitation must be carefully considered and narrowly crafted, and be the result of educated and informed consent.

Several cases have been brought against bankruptcy attorneys in various bankruptcy courts when they sell their unpaid accounts to BK Billing.


In 2019 the Utah bankruptcy court issued a ruling approving the use of bifurcated fees in Chapter 7.  (See In re In re Haszelett).

In May of 2016 Brett Hazlett met with the attorneys of Lincoln Law to file bankruptcy but could not afford to pay a $1,200 retainer fee.  Later that year creditors obtained judgments against Hazlett but he was again informed that no case could be filed until he fully paid the retainer fee.

Hazlett then met with attorneys of the Capstone law firm and entered into a bifurcated chapter 7 agreement to pay Capstone $2,400 payable in 10 payments of $240 after the case was filed.  Hazlett completed his bankruptcy case and received a discharge of his debts.

About a year later an attorney from Lincoln Law contacted the debtor about why he had not filed bankruptcy with  his firm. When the debtor informed the attorney about the zero-down payment system offered by Capstone, Lincoln Law filed a complaint with the Utah bankruptcy court to disgorge fees and impose sanctions.

In contract to the Idaho court, the Utah bankruptcy court found nothing wrong with the BK Billing arrangement and offered the following observations about the BK Billing program:

  • The bifurcation documents included a multitude of disclosures, explanations, and warnings regarding the fee arrangement, the bankruptcy process, the possible use of BK Billing as a third party to collect payments, and the importance of providing true, complete, and accurate information .
  • The Instructions contain almost fifty paragraphs of disclosures and explanations that the Debtor was required to read and initial.
  • The attorney’s fees did not arise under the prepetition agreement as alleged by Debtor. Rather, they arose under a post-petition agreement, which is not governed by § 362 because the “claim”—or right to payment—does not arise “before the commencement of the case under this title.
  • Lincoln Law has repeatedly failed to demonstrate how the Debtor was actually harmed in any way by Capstone Law.
  • After careful scrutiny, this Court determined that all the charges were reasonable, and that the outcome of the bankruptcy case was completely satisfactory as to the Debtor.
  • The Debtor is an adult who, based on his inability to pay an up-front retainer, made an informed business decision to enter into a post-petition agreement.

Wow, two different courts reviewing the same BK Billing contract reach completely opposite conclusions. It appears that the key difference in these cases is how the different attorneys acted towards their client.   The Idaho attorney was basically a threatening jerk to his client while the Utah attorney completed his client’s case resulting in a discharge of the debts.

So is completing the case and obtaining a discharge the key to allowing bifurcated agreements? If the Idaho attorney had simply promised to complete the job regardless of whether the client was current on payments, would the result be different?  That seems to be the great concern of the Idaho court–that “core and fundamental duties” be fulfilled and that clients not be abandoned.

Indeed, if attorneys can promise that core and fundamental duties will be honored and that clients give informed consent, there is no reason for courts or the US Trustee to condemn bifurcated fee agreements. As the Utah court asked, how is a debtor harmed, especially when a debtor is unable to pay a retainer fee and is facing garnishments?

Even the American Bankruptcy Institute’s Commission on Consumer Bankruptcy has recommended that Chapter 7 bankruptcy fees be excepted from discharge so that attorneys may offer payment plans similar to the BK Billing program.

Honoring core and fundamental duties.  Informed consent. These are the building blocks of a successful bifurcation fee arrangement.


Image courtesy of Flickr and Juhan Sonin

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


I recently returned to work after being a stay at home mom. When I quit working I stopped paying on one large credit card. They took this all the way to judgement and are now trying to garnish my wages with my new employer. I am a mortgage processor and am wondering if I file bankruptcy will it affect my NMLS? My second question is will I even qualify for bankruptcy at this point? The judgement is for about $10,000.  I can’t afford the $400 per paycheck garnishment. I’m going to see if they will take a settlement but if they don’t, bankruptcy is my only other option. I’m just worried I make too much money now to file bankruptcy. Any advice or experiences you’ve had would be great to hear. Just trying to figure out the best way to move forward.

The Nationwide Multistate Licensing System & Registry (NMLS) is the agency that regulates those who originate mortgage loans. Because these individuals handle sensitive financial information and are responsible for ensuring the integrity of our nation’s mortgage lending industry, mortgage originators are subject to many regulations that affect their license.

Generally speaking, the filing of a bankruptcy case does not threaten the license of a mortgage originator, but the filing of a bankruptcy must be reported on license applications and renewals. Some state’s require that a copy of the bankruptcy petition be provided along with an explanation of the circumstances surrounding the filing.

Income Requirements to File Bankruptcy.

There are income limits to qualify for Chapter 7 bankruptcy based on the size of a debtor’s household.  The income limits are adjusted every six months to stay current with the average income in each state, and the median income figures for Nebraska as of January 2020 are as follows:

1 Earner 2 People 3 People 4 People 5 People
$ 48,796 $ 68,061 $ 77,274 $ 93,747 $ 102,747

If your income is below these median income figures, you should qualify for Chapter 7 (unless it is abundantly clear that you have excess income available to repay a significant portion of the debt).  However, if your income is slightly over median income, a person may still qualify for Chapter 7 after taking into account such monthly expenses as mortgage payments, auto loans, health care expenses, etc.  In addition, not all types of income count, such as Social Security or Veterans benefits that are excluded from median income calculations.

Even if your income is too high to qualify for Chapter 7, you always have the right to file for the repayment bankruptcy of Chapter 13.  In Chapter 13 you repay  a portion of what you owe based on your income over a 3 to 5 year period of time, and the unpaid portion is discharged at the end of the case. While you are in Chapter 13 creditors may not garnish paychecks or bank accounts.

Is this enough debt to justify filing bankruptcy?

Given that your income is on the rise and that you question whether you even qualify for bankruptcy, it may be that working out a payment agreement or settlement with your judgment creditor may be the better option.

A good bankruptcy attorney not only helps guide clients through the bankruptcy process, but they actually help clients to avoid filing bankruptcy by working with creditors to set up payment plans and settlements. In fact, bankruptcy attorneys are usually the most effective attorneys to negotiate settlements since they routinely work with creditor attorneys on a daily basis.


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“So I’m not great with adult life, I’m 22, I’ve came into work today for my boss to tell me there’s a court order in which they’re garnishing my wages to pay off a debt. The thing is I have no idea as to where this debt has come from. The only time in my life I’ve ever had a letter about a debt is from long ago. Never received any letters about a court order or what not prior to this news. PLEASE HELP THANKS IN ADVANCE!!”


It seems so wrong, but the first indication of owing a debt may be when a paycheck or bank account is garnished. Isn’t a person supposed to receive a copy of the lawsuit and have an opportunity to object before garnishments commence?

It may seem strange, but there are several reason you may not be aware that a judgment was issued against you:

  1. YOU MOVED:  It is common for creditors to deliver a copy of the court summons to your former address. They frequently are not aware that you moved and so they use the last address they have on file. And, since many folks are not home when the Sheriff attempts to deliver a copy of the lawsuit, creditors us a process called Alternate Service to have a copy of the lawsuit taped to your door and mailed via First Class mail.  But if you don’t live there anymore, you may never know that you were served.
  2. THE ROOMMATE FORGOT TO TELL YOU:  The Sheriff may serve the lawsuit on any member of your household of suitable age. There is no strict definition of what a suitable age is, but the papers may be served on any person who resides in the home and who seems responsible.  So if your clueless roommate or child accepted the papers and just forgot to tell you and threw the papers behind the sofa, you may not have know that you got sued.
  3. SERVICE BY PUBLICATION:  When creditors cannot get the papers personally served by Sheriff delivery or Certified Mail, they may ask the court to allow them to serve notice by publishing a notice in the local newspaper.  Unless you read the newspaper–and who reads a newspaper these days–you would have been unaware of the lawsuit.

I once had a client whose 10-year-old daughter was given the court summons by the Sheriff.  As you can expect, the kid totally forgot to tell his mom and she was shocked to discover a judgment lien was placed against her home.  Is a ten year old mature enough to accept service of summons? Apparently so in the eyes of one sheriff.


So what does a person do when they first learn of a judgment when a garnishment is received? The answer is to file a motion to vacate the judgment.  For more information on that procedure, refer to this article on How to Vacate a Default Judgment.


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I’m trying to buy a home and a fairly old judgement that I was unaware of needs to be paid in order for me to close on the home.

Paying the debt is not the issue, I just need to find who owns it.

The original judgement was filed in 2014. The cosigner on the loan filed for bankruptcy and my most recent payment was returned from the collections agency with a note that the debt was listed in a bankruptcy proceeding.

We have had no communication from the debt collector since this time. The judgement is still active according to the county.

I don’t know who the original lender was and I don’t have the contact info from the original collector. The judgement filing only has this name and no contact information.

Any ideas on tracking down an old collector?

Paying an old debt can be frustrating, especially when the original creditor has closed or merged with another company. And if that unpaid balance was reported to the credit bureaus, that can make it difficult to get a mortgage loan.

The good news is that a judgment may be paid even if the original creditor has gone out of business.

How to pay a judgment.

  • Pay Online:  You may the judgment or fine online by going to this link.  Payment can be made by credit cards, debit cards or with e-checks.
  • Pay the Clerk of the Court:  Send a check or money order to the Clerk of the Court.  Many courts also accept cash payments made in person.  To find out how much you owe on the judgment, including interest, call the Clerk of the Court.  Here is a link to each County Court Clerk in Nebraska.
  • Pay the Creditor’s Attorney:   The court file will have the name and phone number of the attorney who filed the lawsuit.  Contact the attorney’s office and make payment arrangements.  Remember that when you send payment to a creditor’s attorney you are giving them information about where you bank, and unless you are paying the balance in full you are providing them clues as to where to send a garnishment. Be cautious about what information you share with the creditor’s attorney.  Email seems to be a great way to negotiate directly the attorney. Here is the link to get the email address of the creditor’s attorney.

If a judgment has been entered against you it is important to get a Satisfaction of Judgment filed in the court record after payment.  Once the judgment is settled you want to send the credit bureaus a copy of the Satisfaction so your credit report can be updated.

My parents passed away a year ago. I was estranged from them. My sister was the sole beneficiary of the estate and I was told I was getting nothing. I had my meeting with the bankruptcy trustee today and the trustee asked if I was expecting any inheritance in the next 6 months. I said no. I got home and my sister said she sold our parent’s house. She wrote me a check for a share of the proceeds. I was not in any way shape or form expecting this money. What should I do??

The starting point to understand this question is found in Bankruptcy Code section 541(a)(5)(A):

The bankruptcy estate is comprised of all the following property, wherever located and by whomever held of any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date . . .by bequest, devise, or inheritance.

In short, any inheritance a debtor becomes entitled to within 6 months after a case is filed is considered property owned on the date the case was filed. In other words, if a person dies within 6 months after a case is filed and leaves the debtor an inheritance, that must be reported.

In this case, the debtor’s parents died one year before the bankruptcy was filed and she did not expect any inheritance, so it is doubtful she reported any inheritance to the bankruptcy court when the case was filed.

What is not clear from this question is why her sister wrote her a check from the sale of the home. Did she write a check because the debtor was entitled to the money or did the sister just feel it was the right thing to do and made a gift of her inheritance to the debtor?

If the debtor was entitled to the money because of her parent’s Will or Living Trust, then the inheritance must be reported to the bankruptcy court.

On the other hand, if the sister was just being generous, the debtor’s duty to report the money will vary on whether this is a Chapter 7 or Chapter 13 case.

If the sister merely made a gift and this is a Chapter 7 case, there is probably no duty to report the gift. However, if this is a Chapter 13 case, in addition to the duty of reporting inheritance a person becomes entitled to within 180 days after the case is filed, a debtor also has a duty to report income received during the case, and a sizable gift from a sister is probably income that should be reported.

As a practical matter, it is best to report all sizable money receipts to the bankruptcy trustee while the case is open, regardless if a duty to report that receipt exists.  I once had a client who won a $500,000 lottery about 30 days after his Chapter 7 case was completed.  Was it inheritance? No. Was there a duty to report the winning? Probably not.  Still, we reported the winning and the trustee replied that the debtor should enjoy the money.  We all felt better since now we knew for certain that money was not owed to the bankruptcy court and my client could fully enjoy his winnings.

Bankruptcy Estate Includes Inheritance but not Payable on Death Benefits.

The 180-rule about inheritance only applies to property received by bequest, devise or inheritance.  Those three legal terms deal with gifts from a Will or Living Trust. But what about Payable on Death (POD) accounts?  If a debtor receives money as the beneficiary of a POD account within 180 days after filing bankruptcy, must that be turned over to the bankruptcy trustee?

The Northern District of Iowa bankruptcy court answered that question a few years ago in the negative.  A POD account beneficiary has not received a bequest, devise or inheritance.

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photo by CafeCredit

Here is the question posed in today’s Reddit debt column.


“So, as the title says. In total, between a few credit cards and a personal loan through Lending Club I owe about $25,000 in debt. Never missed a single payment in my life, never even been late with one. But my credit has gone way down simply due to the utilization ratio. Somewhere around 90% of my cards are maxed out and it’s dropped me down to a score of just a bit under 600. Simulations on Credit Karma say that If I can get it back under 30% I’d go up to somewhere between 720 and 780 though. So it’s really just my utilization causing me problems. And the insane interest rates on the cards are obviously making them super hard to pay off.

So I was shopping around for another personal loan like I got with Lending Club before but none of them want to help me anymore with my lower score.

Instead I keep getting companies trying to bait & switch me with these flashy “Debt Consolidation” plans.

So I just talked to one for a while (from Simple Path) and she explained all the benefits and advantages and how I’d be “debt free” from the start. Made it sound pretty enticing actually. Until she started telling me about how I’ll have to “ignore the harassment from my current creditors…”

She said I have to stop paying my cards and pay them instead and then eventually they pay off my creditors at a lower rate and at that point, then everyone’s happy again?

Like, is this a scam I’m being roped into? I want my credit to go back up, not get oddly manipulated by a random company that sent me a flyer…

Can someone give me some advice please? She’s calling me back tomorrow but do I have any better options without killing my payment streak?

I’ve seriously considered just walking into a bank and explaining my situation and trying to get a loan the old fashioned way but I don’t know if they will for someone with less than a 600 score. Even considered trying to get a car loan for something like a Porsche so I can pay off my cards and get something cheaper instead.

Or should I just stay on my grind and try to do this myself?

Sounds like a kinda nice deal considering she says the utilization rate is 50% impact compared to the payment history only being 10%. Like, if they actually get me out of debt and lower that utilization for me then my score could shoot up back to 700 like the personal loan did last year but at the same time I don’t want a bunch of missed payments on my history for life.

I just have to do something fast cause I can’t save any money for emergencies with these payments and have no space on the cards left to pay if it happens. That 25% interest rate is stressing me out to the max.

What’s my best option here to get out of debt and stay out forever? Gonna cut up most of the cards when they get paid off. Can’t wait.”

How do you get out of a $25,000 credit card debt?  

I’m going to assume that income is not the problem here as much as an out of control spending problem. In fact, if you read between the lines, this writer is more concerned about the decline of his credit score–i.e., about his ability to borrow more money–than he is about being $25,000 in debt.

Option 1: Credit Card Consolidation Loan:

This option may be valid if you have a really high credit score and can benefit from a loan that consolidates several high interest rate accounts into a single lower interest rate loan spread out over a longer period of time.  If a person can refinance $25,000 of credit cards with a minimum monthly payment of $800 to a lower interest rate loan requiring $500 per month, that is often a smart move.  But this borrower states that his credit score has dropped to below 600 and it is doubtful that an affordable consolidation loan is available.

Option 2: Debt Settlement Company.

The borrower was rightly concerned about the flashy claims of a debt settlement company. These programs almost never work. The idea that you can simply stop paying on credit cards and settle the accounts for pennies on the dollars is just a lie. Most credit card companies will start legal proceedings once an account has become more than 6 months delinquent, so unless you have saved up a minimum of one-third of the credit card debt within 6 months of stopping payments, the settlement program is doomed to failure. However, at first the program seems like it is working, especially when these flashy companies settle small balance accounts in the first few months. But in time you realize the program will fail as you begin to be sued and garnished for the unpaid accounts.  Debt settlement is a real debt solution, but only if you have cash on hand to settle the account.  Starting from zero savings to settle $25,000 of debt is just not realistic.

Option 3: Debt Management Plan.

This is the most realistic option for this debtor.  Under a reputable debt management plan (DMP) sponsored by a National Foundation for Credit Counseling member, such as GreenPath (formerly known as Consumer Credit Counseling Services of Nebraska), credit card debts are consolidated into a monthly payment plan that reduces interest rates to about 8%.  Since the debtor’s current credit score is less than 600 he is unlikely to find a loan offering such a low interest rate and this is his best option to get out of debt.

However, 60% to 75% of debt management plans fail, unusually because the debtor cannot afford the monthly payment. Credit counselors, who are trying to make a buck themselves, tend to enroll too many clients into payment plans they cannot afford.  What most debtors lack is an emergency savings account, and without such savings these payment plans tend to crash and burn.  So, enrollment into a DMP should be limited to those who can afford the payment and who have emergency savings that they continue to build each month.  As a general rule, do not enter a DMP until you have $1,000 in savings.

Option 4: Stop paying credit cards until they agree to lower the interest rate.

This option is not used enough. There is really nothing a credit counseling agency does that you cannot do yourself if you have the courage to stop paying the credit cards until the bank agrees to lower the interest rate. Banks will not lower rates or offer special payment plans until the account is in default. So, sometimes skipping a payment or two will “wake up” the bank and force them to take your debt problem seriously. Obviously, such radical action will cause your credit score to drop dramatically, but you can demand that you will not resume payments until their negative reporting is removed and the account is shown to be in good standing. I’ve seen banks completely drop all interest charges and rewrite accounts to fixed payment debts once the borrower got tough and refused to pay until a satisfactory payment agreement was reached.

Option 5: Consider bankruptcy options.

This particular debtor seems to have income that would allow him to repay his debt, but sometimes that picture is unclear.  What makes him able to repay the debt? Is he paying his student loans or is he deferring them? The practice of deferring student loan payments until credit cards are paid is very unwise since credit card debts may be discharged in bankruptcy but student loans generally cannot be discharged. Is the debtor saving for retirement in his 401(k) plan? A lot folks say they can afford to pay their debts, but really this is only true because they are not saving for retirement or they have no health insurance or they are deferring student loan payments.  If that is the case, perhaps bankruptcy may be the wiser choice since a bankruptcy budget does allow for retirement savings, health insurance premiums and student loan payments.

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