Another court has sanctioned a necessarily cumbersome process to make bankruptcy affordable for those who need it most — namely, people so broke they can’t pay the filing fee, much less a retainer.
Bankruptcy Judge Tracey N. Wise of Lexington, Ky., approved an intricately crafted process where the chapter 7 debtor need pay only $300 before filing, with $1,185 due in installments after filing.
The problem for destitute debtors was the result of an inevitable holding by the Supreme Court exacerbated by the congressional “reform” of bankruptcy in 2005. In Lamie v. U.S. Trustee, 540 U.S. 526 (2004), the Supreme Court held that a chapter 7 debtor’s counsel’s fees cannot be paid from estate property, and any prepetition obligation for unpaid attorneys’ fees is dischargeable.
Then, the 2005 amendments to the Bankruptcy Code imposed myriad new requirements with the cumulative effect of forcing lawyers to charge more for representing individuals in chapters 7 and 13.
A consumer’s lawyer in Judge Wise’s court offered his clients alternative payment arrangements. If the client had the cash, the lawyer would collect $800 plus the $335 filing fee before filing a chapter 7 petition. However, the lawyer said most clients couldn’t afford the $1,135 all before filing.
As an alternative, the lawyer allowed the chapter 7 client to pay only $300 before filing. For that, the lawyer analyzed the debtor’s situation before filing. The lawyer would file a skeleton petition and list of creditors, along with a motion to pay the filing fee in installments.
The client would sign an engagement agreement before bankruptcy explaining the limited services the lawyer would perform for $300. The agreement explained how the lawyer would perform no other services unless the client signed a second retainer agreement after filing. Naturally, the lawyer told the client that he or she could represent herself or find another attorney after filing.
After filing, the lawyer would meet with the client a second time, when the client, if so inclined, would sign a second retainer agreement calling for a total, additional fee of $1,185, which included the $335 filing fee that the lawyer would pay. The arrangement allowed the client to pay the fee in automatic deductions from the client’s bank account at the rate of $98.75 a month for 12 months. The installment fee arrangement included interest at the rate of 7.75%. In other words, the client would pay $350 more under the installment program than if the client had paid the entire fee before filing.
The lawyer was charging more under the installment arrangement in view of the delay in payment. The lawyer did not factor the installment payments, nor did he accept credit card payments.
The lawyer had the client initial every page of the engagement agreement and sign at the end. The agreement laid out the services the lawyer would or would not perform. The agreement also warned the client that the obligation to make post-petition payments would not be discharged in bankruptcy and that the client could be sued if the lawyer was not paid.
Sua sponte, Judge Wise reviewed the fee arrangement under applicable statutes and ethical rules. As a matter of first impression in her district, Judge Wise approved the fee arrangement. She ticked off the following ways in which the arrangement passed muster:
- The attorney and client had both signed a written agreement as required by Section 528(a)(1).
- The attorney had not advised the client to incur debt and thus did not violate Section 526(a)(4).
- The lawyer did not take payment of post-petition fees before full payment of the filing fee and thus did not violate Bankruptcy Rule 1006(b)(3).
- Judge Wise found that the fee was “reasonable.”
- In compliance with the Kentucky Rules of Professional Conduct, the limitations on the services to be performed were reasonable, and the client had given informed, written consent, accompanied by a “comprehensive written explanation.”
In sum, Judge Wise said that the attorney had “assiduously followed the best practices drawn from” other cases, such as In re Hazlett, 16-30360, 2019 BL 130455, 2019 WL 1567751 (Bankr. D. Utah April 10, 2019). To read ABI’s discussion of Hazlett, click here.
Because the lawyer was not factoring client receivables, Judge Wise was not required to grapple with the ethical question. She said that Kentucky had not issued an ethics opinion about factoring. She noted that Arizona bars the sale of client accounts, while Utah allows the sale or pledge of client accounts.
We recommend reading Judge Wise’s opinion in full text, along with related documents on the docket, to comprehend the detail required for an installment agreement to comply with the Code and Rules.
Another court has sanctioned a necessarily cumbersome process to make bankruptcy affordable for those who need it most — namely, people so broke they can’t pay the filing fee, much less a retainer.
Bankruptcy Judge Tracey N. Wise of Lexington, Ky., approved an intricately crafted process where the chapter 7 debtor need pay only $300 before filing, with $1,185 due in installments after filing.
The problem for destitute debtors was the result of an inevitable holding by the Supreme Court exacerbated by the congressional “reform” of bankruptcy in 2005. In Lamie v. U.S. Trustee, 540 U.S. 526 (2004), the Supreme Court held that a chapter 7 debtor’s counsel’s fees cannot be paid from estate property, and any prepetition obligation for unpaid attorneys’ fees is dischargeable.
Then, the 2005 amendments to the Bankruptcy Code imposed myriad new requirements with the cumulative effect of forcing lawyers to charge more for representing individuals in chapters 7 and 13.
A consumer’s lawyer in Judge Wise’s court offered his clients alternative payment arrangements. If the client had the cash, the lawyer would collect $800 plus the $335 filing fee before filing a chapter 7 petition. However, the lawyer said most clients couldn’t afford the $1,135 all before filing.