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Congress Must Act to Permit Chapter 7 Debtors to Pay Counsel After Filing

Bifurcated fee arrangements are cumbersome, temporary fixes for a problem that the Supreme Court created in Lamie.

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Opinion Link

Case Details

Case Citation

In re Smith-Freeman, 23-20698 (Bankr. W.D. Pa. Jan. 24, 2024).

Case Name

In re Smith-Freeman

Case Type

Consumer

Comments

Lamie isn't the real problem, because it only prohibits debtor's counsel from being paid with assets of the bankruptcy estate. Nearly all of the consumers that could file Chapter 7 but are unable to do so in a reasonable amount of time (especially when faced with garnishment) will have No Asset cases. Simply put, it's hard to get blood from a stone or, since Bankruptcy scoffs at uniformity, turnip. Courts can (and some have made half-way steps in this direction) allow those Debtors to instead file a "Rest Stop" Chapter 13 case, which only pays the attorney a fee closer to what would be received in a Chapter 7, allows continued direct payment of secured claims, has very light-touch review by the Chapter 13 Trustee (comparable to the level by a Chapter 7 Trustee) and then immediately converts the case to Chapter 7 once those fees are paid. (Heck, there's even a reasonable reading of ยง341(a) that wouldn't require a second Meeting of Creditors.) But, here's the problem with that- a Chapter 13 Trustee's commission, even maxed out with commissions on commissions at 11.1%, on a plan only paying $2500 to the debtor's attorney, is $277.50, and that starts to bust their budgets. Now some courts do routinely allow Chapter 13 trustees additional administrative expenses above and beyond their commissions, for example for excessive postage, and could similarly provide that they get a baseline minimum. (And even if shaky statutorily, who's going to be the jerk water that appeals this? Oh wait, there's always that financial industry jerk water.) And that's just me spit-balling (although I have shot this at Bankruptcy Administrators, EOUSTs, Trustees, Judges and Members of Congress with no takers), so really if folks in the bankruptcy world want to actually do more than just bemoan "access to justice" maybe just try something.
There is another approach that is consistent with the applicable law. It is based on trust and a willingness to take a risk. The Ch. 7 lawyer can quote a fee, document it, and file the case having received less than the quoted fee. By law, the client is free to pay the balance in the future. The debt is discharged; the fee agreement must say so. However, many many debtors are willing to honor their promise to pay despite there being no way to compel performance of the promise. The focus of many consumer debtor lawyers of being sure of full payment is inconsistent with the loss tolerance of much of American business. Some losses are seen as inevitable in business generally.