Alexandria, Va. — Problematic fee arrangements in chapter 7 cases by unscrupulous consumer attorneys might come at the expense of the debtor and the true goal of the consumer bankruptcy system: the debtor's fresh start, according to an October ABI Journal article. “All stakeholders in the bankruptcy system should be vigilant that the system is functioning as intended for the benefit of debris and creditors,” writes Adam D. Herring of the Executive Office for U.S. Trustees (Washington, D.C.) in his article “Problematic Consumer Debtor Attorneys’ Fee Arrangements and the Illusion of ‘Access to Justice.’”
Consumer debtors in financial distress sometimes find it difficult to pay the chapter 7 attorney's fee in a lump sum prior to filing the bankruptcy case, according to Herring. “In contrast to chapters 11 and 13, the Bankruptcy Code is relatively silent as to payment of debtor attorneys' fees in chapter 7 cases,” he writes.
Herring said that the U.S. Trustee Program (USTP) has identified that alternative payment arrangements in chapter 7 cases fall into three general categories:
- Outright or potential fraudulent schemes. “Fortunately, these sorts of attorneys’ fee payment arrangements are not typical, but extreme misconduct presents substantial risks to both participating attorneys and other stakeholders.”
- Fee-only chapter 13 cases (practice of placing debtors who are otherwise better served by chapter 7 in chapter 13 cases). “Fees in chapter 13, even for “no-money-down chapter 13[,] cases could be substantially higher than in chapter 7, meaning that these debtors pay more for the same relief that they could more easily (and quickly) obtain in chapter 7,” according to Herring.
- Bifurcated fee agreements (including "factoring" arrangements). “The practice by which an attorney representing a consumer debtor in a chapter 7 case charges for their services under the color of two fee agreements,” primarily pre- and post-petition agreements.
Herring writes that some cynical practitioners raise the “access to justice” argument when defending harmful and noncompliant fee structures to debtors. Herring writes that the argument, while cloaked in concern for the ability of consumers in financial distress to access the bankruptcy system, should not be a catchphrase to conceal and legitimize schemes designed to benefit professionals.
“The USTP will continue to investigate and take enforcement action to end harmful substandard practice and misconduct by consumer attorneys,” Herring writes.
Herring will be participating on a panel at ABI’s Winter Leadership Conference titled, “Access to Justice Revisited: Getting Chapter 7 Debtor Counsel Paid.” For more information about the panel and other programs at ABI’s Winter Leadership Conference set to take place December 6-8 in Scottsdale, Ariz., please click here.
Payment of chapter 7 debtors attorneys is one of the many issues that ABI’s Commission on Consumer Bankruptcy is examining in order to provide improvements to the consumer bankruptcy system. The Commission is set to provide its final recommendations at ABI’s 2019 Annual Spring Meeting. Learn more about the efforts of the Commission by clicking here.
To obtain a copy of Problematic Consumer Debtor Attorneys’ Fee Arrangements and the Illusion of ‘Access to Justice,’” please click here.
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ABI is the largest multi-disciplinary, nonpartisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide Congress and the public with unbiased analysis of bankruptcy issues. The ABI membership includes nearly 11,000 attorneys, accountants, bankers, judges, professors, lenders, turnaround specialists and other bankruptcy professionals, providing a forum for the exchange of ideas and information. For additional information on ABI, visit www.abiworld.org. For additional conference information, visit http://www.abi.org/education-events.
Wednesday, October 24, 2018