An email from a new client:

Hi Sam! Thank you for your time yesterday. A few quick questions for you.

    • After my case is filed, and everything goes through, how long does it take for my credit to repair/refresh?
    • What are most of your clients seeing?
    • Can I expect to have an industry average credit score within 3 years?

Credit comes back in phases. Right now his credit is in the gutter and the score has nowhere to go but up. In fact, most debtors have a higher credit score one year after filing bankruptcy than on the day they filed.

That’s right, filing bankruptcy may cause your credit score to go up.  Hold on, I thought bankruptcy ruined credit? Why would filing bankruptcy be good for your credit?

FICO Score

When we refer to credit scores, we are generally referring to your FICO Score created by the Fair Isaac Corporation.  A score below 580 is considered poor and a score above 670 is considered good.

Initial credit score hit followed by positive reporting

In truth, filing bankruptcy usually causes a credit score to drop initially.  And the higher the score is on the day a case is filed, the harder the hit.

But, most people file bankruptcy after they have already maxed out and defaulted on credit card accounts. They file bankruptcy after receiving a court judgment. The credit score is already down so the hit they take is not significant.

Once the initial credit score hit takes place the negative reporting stops. It’s like putting a bandage on an open wound. The blood stops flowing and the credit wound begins to heal. Now the foundation for positive credit reporting is in place.

Ironically, filing bankruptcy may make it easier to get a loan

Many find it easier to get loans after bankruptcy than before. In fact, some bankers send me clients to clean up the bad credit issues so they can actually extend a new loan.

That may seem strange, but think about this for a minute.  If you were a banker, would you prefer to extend credit to a person on the verge of filing bankruptcy or to a person who just walked out of Chapter 7, who is debt free and who cannot file another Chapter 7 for eight years? Who is the better risk?

A credit score is supposed to tell a banker the likelihood that a person will repay a debt, and a person with no debt is a better risk than a person who is deeply in debt.

Debt-to-Income ratio

Thirty percent of a credit score is based on the Debt-to-Income Ratio.  If you owe $5,000 of debt on a $100,000 annual salary, your debt-to-income ratio is 5%, which is very low.  But if you owe $10,000 on an annual income of $20,000, then the ratio is 50%, which is very high.

Bankers focus heavily on debt-to-income ratio when reviewing loan applications.

The number one thing you can do to increase your credit score is to pay down debt. That is why bankruptcy actually improves the credit score–because the debt-to-income ratio immediately improves.

Payment History

Some rebuild credit quickly after bankruptcy as they continue to pay existing car or home loans, and those payments get scored positively. Others stop using all credit after bankruptcy and just use cash, which is fine, but the result is that nobody is scoring their use of credit, so the score stays low.

If you want to build credit after bankruptcy you must use credit. Some clients obtain secured credit cards to rebuild their credit score.  Paying off auto loans after bankruptcy helps. Paying down student loans helps. Paying down any debt after bankruptcy helps.

Paying credit card bills early in the billing cycle helps the score. Not only do they score if you pay a debt on time, but when you pay the debt.

Bankers prefer customers who pay loans the day the bill arrives in the mailbox over customers who pay 2 seconds before the bill is late. Those who pay after a due date incur late fees and that is a sign of a risky loan to a banker.

Studies show that early payers tend to default less and late payers tend to default more. So, pay bills early in the bill cycle and watch the credit score go up.

Focus on the Cash Score, not the Credit Score

Credit scores really only matter if you need to borrow money, like buying a home. Otherwise, instead of focusing on the credit score, focus on the cash score. How much did you save this month? Do you have 3 months of expenses saved in cash? Have you made saving cash systematic?

Unfortunately, our credit scoring models do not account for cash savings, but those who store cash reserves are prepared for unexpected events and default less.

Buying a home after bankruptcy

As a general rule, you must wait two years after filing Chapter 7 to qualify for a FHA home loan.

Those debtors in the middle of a Chapter 13 case must wait at least one year and be able to prove that they have made all bankruptcy payments on time. In addition, a debtor must obtain court approval to incur a mortgage debt during a Chapter 13 case.

Car loans after filing bankruptcy

It used to be that a debtor had to wait for the Chapter 7 discharge to obtain a car loan. That has all changed in recent years. Now, some are getting car loans a day after the case is filed. It appears that the auto lending industry has finally figured out that those entering Chapter 7 are better credit risk since they emerge debt free and cannot file another Chapter 7 for eight years.


Filing bankruptcy does not block access to credit. In many cases it actually increases the ability to borrow. Some waiting periods apply to obtain certain types of credit, but generally a person files for bankruptcy to start building good credit, not to destroy it.

Filing bankruptcy can accelerate the process of building better credit.


Image courtesy of Flickr and eflon

Included in the 2 trillion dollar Coronavirus Aid, Relief, and Economic Security (“CARES”) Act is a provision that allows homeowners with government guaranteed loans (Fannie Mae and Freddie Mac) to request up to 12 months of mortgage payment forbearance.

Under the CARES Act  a homeowner may ask for 6 months of loan payment forbearance that is renewable for another 6 months. In other words, a qualified homeowner can go an entire year without making a single mortgage payment.

What exactly is a mortgage payment forbearance?

Well, it simply means that a payment does not have to be made presently, but eventually the skipped payment must be repaid.

How are skipped payments to be paid?

There are basically three options here:

  1. Reinstatement: Make a one-time payment for the amount due.
  2. Repayment Plan: Pay extra each month on the amount due.
  3. Loan Modification: Rewrite the mortgage loan to pay the amount due over the remaining term of the loan.

Other remedies.

In addition to allowing for a payment forbearance, FHA and Freddie Mac loans will also receive the following benefits:

  • Waiving assessments of penalties and late fees,
  • Halting all foreclosure sales and evictions of borrowers living in Freddie Mac-owned homes until at least May 17, 2020,
  • Suspending reporting to credit bureaus of delinquency related to forbearance,
  • Offering loan modification options that lower payments or keep payments the same after the forbearance period.

Not sure if you have a Fannie Mae or Freddie Mac Loan?

Us the Fannie Mae lookup tool and Freddie Mac lookup tools to see if you have a government guaranteed loan.

USDA Rural Housing Development Loans.

A similar loan deferment program is also being sponsored by the USDA home loans.

Contact Your Mortgage Company:

Bank of America
Phone: 1-800-669-6607

Cenlar FSB
Phone: 1-800-223-6527

Phone: 1-800-848-9380

Freedom Mortgage
Phone: 855-690-5900

Lakeview Loan Servicing, LLC
Phone: 1-855-294-8564

LoanCare, LLC

Mr. Cooper a/k/a Nationstar
Phone: 1-855-375-4001


Phone: 1-800-777-4001

PHH Mortgage Services

Phone: 888-820-6474

Wells Fargo
Phone: 1-800-357-6675


Image courtesy of Flickr and sergio santos


The unfolding of the COVID-19 virus episode has been the weirdest experience in my lifetime. I remember the courthouse bombing by Timothy McVeigh in Oklahoma City and commercial jets hitting the Twin Towers on 9/11, but those were one day events.

The corona virus is different because it continues from day to day and all of us are potential victims. You see young people dying on breathing machines and you realize your family is not safe.

At first the virus seemed like just a bad version of the flu and I dismissed it, but as I kept reading news reports I realized this was different and it was heading our way.  Then it became apparent that all my staff would soon be working from home.

Our attorneys have always been able to work from home, but not the paralegals. I scrambled to purchase computers and then raced to my tech vendor set them up. Thankfully we got the job done just before daycare services closed so all our staff can work from home.

On March 19th our Chapter 13 Trustee, Kathleen Laughlin, held a Zoom conference with 32 attorneys across the state, and she explained that her court hearings would continue on Zoom.  Last week the Chapter 7 trustees declared that their hearings would be conducted by telephone.  So, the good news is that court hearings will go during this period of social distancing.

Four years ago I started a one-man campaign to allow clients to sign bankruptcy petitions using digital signatures.  This blog was instrumental in getting that message across, and two years ago our brave judge, Thomas Saladino, agreed that it was time to allow debtors to sign their bankruptcy petitions digitally.

Nebraska is the first and only state to implement a permanent rule allowing digital signatures. In a state that spans 450 miles across, that rule change has allowed us to serve clients in all 93 Nebraska counties.

Now that attorneys nationwide cannot personally meet with clients to sign petitions, 43 bankruptcy courts recently issued temporary orders allowing for digital signatures and more are expected to allow it soon.  This blog lead the way.

I participated in four bankruptcy hearings by Zoom last week, and I now interview new clients via Zoom right in their living room. Then I conducted a case signing using Zoom and shared my screen with the client who could see me typing in his responses and he could view the same documents I viewed on my screen. He said it was amazing, and it really was.

In many ways, the COVID-19 crisis has forced us to become better communicators and to utilize technology that was at our fingertips all along. Sometimes it takes a crisis to move forward. I doubt we will ever go back to the old ways again.

So, our firm is open. We are answering every call and responding to every email. Sometimes I work in my office apart from other employees, and sometimes I work in my home office. But wherever I or my staff works, we are all working full time every day and we can service new and existing clients thanks to our technology investments.

It’s going to be a wild year. Today we are scared. Tomorrow we start to pick up the pieces of our businesses and protect what remains from the claims of creditors. Whatever comes, our firm stands ready to serve.

Below is a letter written by a 64-year old bankruptcy attorney to the United States Trustee, the agency that oversees bankruptcy cases.

Clifford J. White III, Director
Executive Office for U.S. Trustees

Re: Covid-19 and consumer bankruptcy practice

Dear Director White:

On behalf of our NACBA membership and our entire NACBA Board of Directors, I am writing to you to suggest immediate (and hopefully temporary) remedial actions regarding the administration of Ch. 7 and Ch. 13 bankruptcy cases. These suggestions are meant to help stabilize our joint goal to maintain the integrity of the bankruptcy system while we all struggle for equilibrium in these trying times.

All pending 341(a) meeting of creditors in consumer chapter 7, 13 and 11 cases be automatically adjourned for some period of time (such as at least 4 weeks), OR

that debtors and their counsel be permitted to appear telephonically, in place (given quarantine or social distancing, as applicable), by joint conference call or other electronic means, AND

that ‘wet’ signatures (allow for /s/ signatures) be eliminated for those forms and in those jurisdictions where ‘wet’ signatures are required.

We know that you are aware of the heightened risk of serious illness and death for those aged 60 and over if this Covid-19 virus is contracted. While we cannot know exactly the proportions of our Attorneys, Clients nor Trustees who belong to that demographic, speaking for myself as a 64 year old, the risks to us all, at the present time, are clearly too great to ignore. I am sure you will agree that these suggestions, while representing a change from normal case administration, are warranted.

Your prompt response and action along these lines is appreciated.

On behalf of NACBA,

John C. Colwell
President, Board of Directors
National Association of Consumer Bankruptcy Attorneys

Nebraska is leading the way on this issue.  For two years I nagged the court in this blog and in bankruptcy seminars to allow digital signatures of bankruptcy petition, and our court finally agreed that the evidence supported this practice starting in February 2018.  For the past two years the Nebraska bankruptcy court has allowed debtors to sign their case electronically with digital signatures and the program has been a stunning success.  Debtors may review and sign documents through digital signature vendors like DocuSign and receive an immediate copy of what they signed.

In this strange and stressful Covid-19 virus episode, our clients are able to send and sign all required documents to us electronically. Most if not all of the work can be completed over the telephone and email.

Nebraska is the only bankruptcy court allowing digital signatures. And now the rest of the nation is in a panic to allow what our wise court accepted over two years ago.

The next step is to allow debtors to testify at the required trustee meeting over the telephone or via a video conference, such as Skype.  Our Nebraska trustee has already begun testing that service this past year.

Our office is fully ready to protect clients from the spread of the Covid-19 virus with the following service:

  1. Telephone or video consultations.
  2. Digital signatures of all bankruptcy documents.
  3. Documents may be emailed or sent via a ShareFile system.
  4. Payments are accepted online on our website,
  5. We have video conferencing services ready to facilitate handling court hearings over the internet.
  6. All our staff is able to work from home.
  7. We handle cases in all 93 Nebraska counties.

As a result of continuously modernizing our firm, we are 100% ready for this Covid-19 virus.  Imagine that, a little state like Nebraska is the clear leader in solving this national problem, and I am in daily contact with attorneys nationwide who are looking to copy what we implemented two years ago. So much thanks is owed to Judge Thomas Saladino who had the guts to try something new that will soon benefit debtors and attorneys nationally.



At first glance it appeared that the debtor had a “slam dunk” case to receive a hardship discharge of her $140,000 student loan debt.

The debtor is a 36-year-old single mother of two disabled children, ages 11 and 12. She received no child support since her ex-husband voluntarily terminated his parental rights. She could not afford her own apartment and lived with her parents. She earned a $36,000 annual salary and did not expect any wage increases.

Obtaining a hardship discharge seemed like a no-brainer–this debtor was stuck in the mud and her student loans imposed a real and long-term financial hardship.

But the Nebraska bankruptcy court denied her application for a hardship discharge, and a closer look at the facts indicates why. (See In re Wells, Case #18-08339)

Public Service Loan Forgiveness Program.

Although the debtor had enrolled her loans into a 25-year income-based repayment program, she did not apply for the 10-year Public Service Loan Forgiveness Program even though she worked for an eligible nonprofit employer.

In fact, during the case the government attorneys offered to delay the trial to allow the debtor to apply for this program, but she declined to make an application.

Why should a bankruptcy court discharge federal student loans when a debtor can eliminate the debt in 10 years with no tax consequences through the Public Service Loan Forgiveness Program? The debtor failed to answer that question to the court’s satisfaction.

Lack of Evidence of Future Income and Living Expenses.

The court was also annoyed by a general lack of evidence presented at trial.

The debtor’s children were disabled and it appears that they might be eligible for Social Security benefits, but no evidence was supplied by the debtor as to whether an application would be made to obtain this income.

The debtor claimed her children’s needs could not be satisfied by attending the local public school and she was therefore incurring the expense of private school tuition, but no medical evidence was provided to support this position.

The debtor failed to provide any evidence indicating that higher paying jobs were not available.  No evidence of denied job applications were presented or that the debtor had maxed out her earnings capacity.

The debtor had a pending personal injury claim but no evidence was presented as to when the claim might be settled or the amount she might receive.

No medical evidence was supplied to show the necessity of certain medical expenses she incurred for her children.

In short, the debtor failed to provide evidence to support her expenses or future income potential.

Actual Expenses did not match Scheduled Expenses.

A review of the debtor’s bank statements revealed that her actual expenses differed significantly from the expenses she listed on her bankruptcy schedules. Specifically, her entertainment and recreational expenses appeared to be much higher than she reported.

Debtors seeking a hardship discharge of their student loans should expect a thorough examination of their spending activity as revealed by a close examination of their bank statements.  The bank statements and bankruptcy schedules must tell the same story.


Although bankruptcy courts have become increasingly skeptical of the eligibility for various income-based repayment programs as a bar to student loan hardship discharge applications, eligibility for the Public Service Loan Forgiveness Program is almost a certain bar to a hardship discharge.

The Public Service Loan Forgiveness Program is relatively short (10 years) and unlike other income-based programs, if successfully completed it does not result in any income tax liability.  An eligible debtor who fails to apply for this program will almost never receive a hardship discharge.


Image courtesy of Flickr and GotCredit.





Lower-income debtors simply cannot afford the high cost of filing chapter 7, and that is a real problem when garnishments strike.

The cost of filing Chapter 7 in Nebraska ranges from $1,300 to $1,800 and ALL of those fees must be paid in full to file a case. How can low-income debtors stop garnishments if they cannot afford the fee?

Many debtors have no choice but to file a chapter 13 case which can be filed for as little as $75 down.  But attorney fees in Chapter 13 cases are currently set by court rules at $4,000 payable in monthly installments over 3 to 5 years. Chapter 13 cases are cheap to file but cost 3 to 4 times more in the long run.

And whereas chapter 7 cases have a 95% success rate, chapter 13 discharge rates are less than 50% nationally.

Lower-income families face a tough choice, but a bankruptcy court in Kentucky recently issued an opinion that may provide a roadmap to making the chapter 7 process more affordable.

Kentucky’s Bifurcation Opinion.

In the case of Chanda S. Carr, the Kentucky court reviewed a bifurcated fee arrangement in which the debtor was charged $300 down to file an incomplete chapter 7 petition consisting of nothing more than her name and a list of her creditors.

After the case was filed, the debtor signed a new fee agreement to pay $1,185 payable in 12 monthly installments of $98.75 for the remainder of the legal work.

On it’s own motion, the court reviewed this fee arrangement in great detail. The court noted several important factors in approving this Dual Contract scheme.


It was very apparent that the debtor’s attorney made a full disclosure of all payment options.

First, the debtor was offered the option of filing a normal chapter 7 case for $1,135, but all of that fee had to be paid in full before the case could be filed.

Then, the debtor was offered a bifurcated fee arrangement of $300 down and then 12 payments of $98.75, for a total of $1,485.  This bifurcated arrangement would ultimately cost the debtor an extra $350 since it is more costly to prepare cases in this manner and payment to the attorney is stretched out over a year.

The combination of an inability to pay for a lower upfront fee combined with an imminent garnishment was a key factor in the court’s analysis. In other words, the debtor made an informed choice.

What is important to observe here is that the debtor was first offered a standard contract–pay a lower fee upfront to file a standard chapter 7 case. The debtor was not steered to the dual contract scheme, but rather chose that option when it was apparent that she could not afford to prepay all the fees up front and garnishments were pending.

The combination of an inability to pay for a lower upfront fee combined with an imminent garnishment was a key factor in the court’s analysis. In other words, the debtor made an informed choice.  She chose the lesser of of two evils–to pay a little more in the long run in order to avoid losing even more from a garnishment.  All the alternatives were laid on the table. She made a reasoned choice. That is a key factor.

Pre-petition Fees Not Shifted to Post-Petition Payments.

The United States Trustees Office–the supervisor of bankruptcy cases–is highly suspicious that attorneys using the Dual Contract method are really preparing most of the case prior to filing and then attempting to collect their fees after the case is filed.  In other words, the US Trustee believes this scheme is a fraud.

In fact, US Trustee investigations of attorneys using bifurcated contracts have revealed that some attorneys have clients sign both contracts at the same meeting and that most of the petition was prepared before the case was filed.

In the Carr case the Kentucky court determined that attorney and the debtor had a post-petition meeting to sign the second contract. The court found that the attorney really did prepare the bulk of the petition and perform the majority of the legal work after the case was filed. The court underscored the importance of this factor.

The Debtor’s Case Must Be Simple.

Bifurcation agreements are not appropriate for complex cases.  Why? Because complex cases require more pre-petition analysis to determine if a debtor’s income is too high to qualify for chapter 7 and even more analysis to determine if the debtor’s property is protected by exemption laws.

Cases involving higher-income debtors who own substantial property require most of the legal work be completed before the case is filed.  Thus, it is a fraud to use bifurcated contracts in those cases since no competent attorney would file a risky case without a full analysis of the debtor’s income, expenses, property and property transfers. A bifurcated fee arrangement in complex cases would be a lie.

But cases involving lower-income debtors with little property are inherently simple and require little pre-petition analysis. Determining if a debtor is above or below Median Income is simple.  For example, the annual median income for a single person in Nebraska is $48,796.  A debtor earning $12 per hour clearly earns less than that amount.  A debtor who rents an apartment with only basic household goods and who owns a used vehicle does not present a complex asset case requiring careful exemption planning.

Lower-income debtors with few assets facing imminent garnishments are the ideal candidates for bifurcated fee agreements since the bulk of the legal work can be prepared post-petition.  The Kentucky court agreed with this reality.

Bifurcated Legal Fees Must Be Reasonable and Should Not Utilize Factoring Arrangements.

The common link between cases where attorneys have been disciplined for the use of bifurcated fee agreements is the presence of factoring arrangements.

Almost all the attorneys sanctioned in bifurcated fee arrangements were using an accounts receivable factoring arrangement offered by BK Billing or Fresh  Start Funding.

The factoring finance companies present attorneys with a slick marketing package complete with fee agreements, disclosure statements and a pricing scheme that basically doubles the cost of the chapter 7 case.   Attorneys that would normally charge $1,500 to file a chapter 7 case are encouraged to bump the price of the case to $2,400.  After the dual contracts are signed by the client, the attorney sells off his post-petition contact to the finance company and receives an immediate payment of $1,500.  The financing company collects future payments from the debtor at typically high interest rates.

Factoring the legal fee contract is attractive to attorneys. Instead of waiting for debtors to slowly pay in their normal fee, they can now streamline the process and get paid now by advertising “No Money Down” chapter 7 services. And believe me, you can file a lot of chapter 7 cases if you can really charge no money down.  There is no shortage of people who need to file bankruptcy, but there is a real shortage of debtors who can afford the $1,500 fee to go broke.

Factoring arrangements should be avoided since they escalate the price of bankruptcy services to unreasonable levels.

But the attorney in the Carr case did not utilize a factoring arrangement. Nor did the attorney charge high interest rates. The extra cost he charged the client for the bifurcated fee arrangement was only $350, and that amount seems reasonable given the extra work bifurcated contracts require and the delay and risk associated with collecting payment.

Birfurcated contracts that charge only slightly higher fees than standard contracts for lower-income debtors with relatively simple cases are likely to be respected by the US Trustee and the courts.

Is the Bifurcated Contract Affordable?

The debtor in the Carr opinion was only required to pay 12 monthly payments of $98.75 post-petition.  Her monthly budget indicated that she could afford that payment. The amount of that payment was reasonable.  The Kentucky court found this payment agreement to be feasible and modest.

Courts that have sanctioned attorneys have found the payment demanded by factoring finance companies to be excessive and predatory. In those cases the debtor’s income and expense schedules would often show negative monthly income but the factoring contract would require payments of $200 per month or more.

If it is clear that a debtor cannot afford to a pay post-petition legal fee installment it is advisable not to enter into a bifurcated fee arrangement.


The time has come for bankruptcy courts to craft Safe Harbor rules on the use of bifurcated fee arrangements. If we are really serious about addressing the very real problem of low-income debtors being denied access to our justice system, then we need to come up with a compensation system that encourages attorneys to assist those debtors now.

Just making statements like “we really need to change the bankruptcy law” is not enough. We have to work with the tools we have in our hands now instead of waiting for a legislative change that may never come.  Bifurcation is a tool we currently have that can immediately help lower-income debtors facing wage garnishments.

The cost of delaying the establishment of safe harbor bifurcation rules is significant. When low-income debtors cannot afford to pay for bankruptcy fees their wages become garnished, they fall behind on rent, they suffer evictions, their financial distress ignites family distress, and their children pay a dear price.

Attorneys feel threatened by the US Trustee’s office. The attorney in the Carr case faced a significant investigation by the US Trustee and faced potential sanctions and disgorgement of fees. Without safe harbor rules attorneys are reluctant to take a chance of being sanctioned or having their fees disgorged.

Congress is not going to fix this problem anytime soon. Nonprofit organizations lack the resources to handle the volume of cases.

The bankruptcy community of attorneys, trustees and judges must lay the framework to help the working poor access our justice system with the tools we already possess.


Image courtesy of Flickr Carl Wycoff.

photo by CafeCredit

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.

Image courtesy of Flickr and

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.

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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.


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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