Academic journal article Vanderbilt Law Review

Bankruptcy, Just for the Rich? an Analysis of Popular Fee Arrangements for Pre-Petition Legal Fees and a Call to Amend

Academic journal article Vanderbilt Law Review

Bankruptcy, Just for the Rich? an Analysis of Popular Fee Arrangements for Pre-Petition Legal Fees and a Call to Amend

Article excerpt

I. INTRODUCTION

The scenario is typical. An individual sits amid a pile of overdue bills. He calculates and recalculates only to verify what he has already suspected-his debt far exceeds his monthly income. Meanwhile, creditors and collection agencies demand payment while threatening repossession and other legal action. With no ready source of additional income, the debtor ultimately decides to file for bankruptcy. He consults an attorney, and the two agree to file a consumer no-asset Chapter 7 bankruptcy petition.1 The lawyer then promises to use her best efforts to secure relief for the debtor. All she needs is a retainer.2 A retainer? The debtor has no money, which is why he sought the counsel of a bankruptcy attorney in the first place. The attorney, however, needs to be paid up front for the services she renders prior to filing the bankruptcy petition.3 Otherwise the court will likely discharge4 those fees in the IMAGE FORMULA10IMAGE FORMULA11

bankruptcy proceedings, and the attorney will not get paid for her pre-petition work. Dejected, the debtor leaves without an agreement or an attorney, wishing he were wealthy enough to file for bankruptcy.

Legal counsel is indispensable if a debtor is to effectively file for bankruptcy.5 The bankruptcy laws are complex, and legal counsel is often crucial in helping the debtor make an informed decision based on his unique circumstances and the available alternatives.6 Unfortunately, it is unlikely that a no-asset Chapter 7 bankruptcy debtor can afford to pay a bankruptcy attorney up front.7 This leaves bankruptcy practitioners in a predicament; without a retainer, prudent counsel will not agree to pay the requisite filing fees or to perform other necessary pre-petition services because the debtor's obligations to pay for pre-petition legal services are likely to be discharged in the bankruptcy proceeding.8 This situation "limit[s] indigent debtors' access to bankruptcy relief and, perhaps, increase [s] the number of pro se bankruptcy debtors,"9 leaving ignorant debtors alone to navigate the complex waters of bankruptcy law.

The Bankruptcy Code fails to properly enable bankruptcy counsel in a no-asset Chapter 7 proceeding to guarantee payment for the legal services they render pre-petition.10 Section 329 of the Code governs debtors' transactions with attorneys, requiring the debtor's attorney to file disclosure statements setting forth the source of her compensation and the amount of fees `paid or agreed to be paid ... for services rendered or to be rendered""11 in contemplation of the bankruptcy proceeding.12 By its own terms, 329 adIMAGE FORMULA14IMAGE FORMULA15IMAGE FORMULA16

vocates a discharge exemption for pre-petition attorney's fees; the phrase "paid or agreed to be paid for services rendered or agreed to be rendered" authorizes post-petition payment of fees incurred prepetition. 13

In contrast, 727 of the Code discharges the debtor "from all debts that arose before the date of the order for relief under this chapter and any liability on a claim14 ... as if the claim had arisen before the commencement of the case... except as provided under [section] 523."15 Section 523 governs exceptions to discharge, and it does not explicitly exempt bankruptcy attorneys' pre-petition fees.16 Thus, unpaid pre-petition attorneys fees appear to be dischargeable claims under 727 and 523.17

If 329 were the only provision relevant in determining the dischargeability of pre-petition legal fees, those fees would be exempted from discharge, unless the court found the fees unreasonable.18 Other Code provisions, however, particularly 727 and

523, must be considered when determining the dischargeability of pre-petition legal fees. …

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