I read a blog today, as well as the written opinion of the Court, concerning what is called a "fee-only Chapter 13 plan". While I agree with the ruling of the Court I completely disagree with the blog and was shocked that a lawyer would take such an action as a matter of course. A summary of the facts are:
A potential client approached a bankruptcy lawyer about filing a Chapter 7 which the client clearly qualified for however, the client did not have the funds to pay the Chapter 7 fee. It is not clear whether the potential client had any money or simply did not have enough money to pay the lawyer in full. It is also not clear what the legal fees were qoted for the Chapter 7 bankruptcy. Finally it is not clear what other facts, if any, existed that would have made the filing reasonable, which is why the case was reversed.
I'll make the assumption that the Chapter 7 fee was between $800 to $1,500 plus filing fees. Inasmuch as the client did not have the funds the lawyer suggested that the client file a Chapter 13 bankruptcy. The fee for a Chapter 13 case was $2,900 plus filing fees. The legal fees would be deferred and paid in installments by the Chapter 13 Trustee. The Chapter 13 payment would be roughly $100 a month for 36 months. A chapter 7 bankruptcy is over in approximately four (4) months while this Chapter 13 case will take three (3) years. The result was the lawyer got paid, the Chapter 13 Trustee received his commission and there was nothing paid to creditors. The Bankruptcy Court and the Federal District Court threw the case out as having been filed in bad faith and the case was appealed to the Federal Circuit Court. The Circuit Court reversed the lower Court's ruling that the bankruptcy court could not, out of hand, dismiss the case without first examining the facts. The bottom line to the ruling is that the Bankruptcy Court must review the facts before concluding whether or not a case was filed in bad faith. I want to make clear this case did not occur in Texas where I practice.
Very few lawyers want to extend credit to a client filing Chapter 7 because the legal fees still owed on the Chapter 7 filing date are discharged and any payment made by the client to the attorney post-filing is strictly voluntary. I believe that I am one of the few lawyers that will allow a client to make payments, get the case started, but not file the case until the case has been paid in full. In almost all cases allowing a client to make weekly or monthly payments usually, but not always, fixes the above problem. Barring some type of situation that required a case to be filed immediately there is no reason for the above fact pattern to take place. If the client could make $100 a month payments to the Chapter 13 Trustee, the client could have made those payments to the lawyer. The result would have been accomplished in for a lot less money and in a lot less time.
What the Appeals Court said, in my opinion, was that merely filing a Chapter 13 case so a lawyer can get paid is not going to fly unless there exists facts of a compelling nature that would have required the attorney to advise his client to file a chapter 13. For example, if the client’s wages were being garnished by a creditor holding a significant claim might well justify the filing of a Chapter 13 immediately. Therefore, the Bankruptcy Court was required to look at the facts before concluding a case was filed in bad faith, rather than summarily dismissing a case. From my point of view the ruling is standard text book law and there is nothing remarkable in this ruling. The case certainly does not stand for the principal that a fee only chapter 13 case is acceptable. In fact the course was very clear when it said fee only plans should only be used in exceptional circumstances, noting that they may be "vulnerable to abuse by attorneys seeking to advance their own interests without due regard for the interests their clients".
On a more personal note, I have a hard time justifying this practice except in very limited circumstances. In fact I never have attempted to accomplish such a thing. Not everything about the practice of law is about money. On numerous occasions I have cut my fees when I concluded that it was appropriate.
Without question just the thought of having to file bankruptcy, Chapter 7, Chapter 13 or a Chapter 11 is very stressful. It is an emotional roller coaster ride before you actually make a decision. When anyone is facing the unknown, coupled with the hearsay gossip about bankruptcy that is almost invariably wrong, it is no small wonder that your stress mounts. During financial hardship the pressure grows from the demands of creditors in the form of harassing phone calls, demand letters, pending lawsuits as well as the strain to keep a roof over your head, the utilities on and enough food on the table to feed your family.
Financial hardship can also increase the strain on a marriage, partnership or with your significant other. This type of situation can and often does lead to divorce, separation or the end of the relationship. There are several things a person needs to both consider and understand when faced with these foregoing challenges. First and foremost what is more important – protecting your family or worrying about how you are going to get your creditors paid. Secondly, bankruptcy does not cause divorce, the blame and shame of financial pressure does. Bankruptcy can remove financial strain that causes the emotional day to day turmoil on you and your family. In order to understand your options clearly it's important to seek the advice of a competent consumer bankruptcy lawyer.
There has been little success with the money allocated by Congress, through HAMP, to help fix the mortgage crisis. Very few people having trouble with their mortgages have received any relief of any kind. No reduction in interest rates, no reduction in the mortgage amount etc. etc. etc. Now there's been an investigation launched to examine why the two giant government created entities seem to be unresponsive and has adopted new rules that make it even harder to obtain help. According to everything I've read the general consensus is that fixing a mortgage for a consumer hurts the profit margin of Fannie and Freddie.
What makes the problem worse is that a Bankruptcy Judge has no authority to do anything with a mortgage on your principal residence in a Chapter 13 or a personal Chapter 11, except to allow for a cure of the past due amount plus the attending fees leading up to the attempt to foreclose. If one has a mortgage on an apartment complex, office building, manufacturing plant, vacation home or any other type of real estate a Bankruptcy Judge in a Chapter 11 can change the interest, redo the amortization period and if the property is underwater (worth less than the debt) reduce the amount of the mortgage to equal the value of the property. For the life of me I cannot see any difference between a mortgage on a home and a mortgage on any other piece of real estate. Why should an apartment owner have more clout than a homeowner?
I am beginning to wonder if there is a complete disconnect between the federal government and the average consumer that is having trouble with their mortgage. There are multiple ways to fix this problem -- most of which seem to be always below the radar. On the other hand those 'fixes' that have been proposed and passed into law have a slim chance of granting the relief they were designed to give.