Are the fees you are paying your bankruptcy attorney fair?

I have addressed issues around bankruptcy fees and, more specifically, fees in a Chapter 13. As a result, I have spent considerable time contemplating how to make the fees I charge fair to the customer and fair to myself. The difficulty in this task is that many people calling around for a bankruptcy attorney just want to know a bottom line price. I have answered many calls where the one and only question I am asked is “how much do you charge for a Chapter 7 bankruptcy?” The only truly honest answer any bankruptcy practitioner can give is, “it depends.” But, that answer is most unsatisfactory to the customer and they will typically keep calling attorneys until someone gives them a quote for a rock bottom price.

The problem, of course, is that even if an attorney says “$750.00 for a Chapter 7″, that is not the end of the story. The customer will go in, do the paperwork, and discover that the real answer actually is, “it depends.” You see, the most important concept attorneys are taught in law school is “it depends.” Nearly every correct answer to a law school exam question has within it the idea of “it depends” even if those exact words are not used. That is because most answers to legal issues do depend on multiple variables; few things in law are really cut and dried or open and shut. If they were, society would not need lawyers. Hmm, maybe I should not have put that idea out into the public consciousness.

So, I have tried to narrow down those factors that affect the attorney fees in a Chapter 7. Obviously, narrowing down precludes having an all inclusive list, but the main factors I settled on were: 1) the number of creditors; 2) the nature of the case (consumer versus business related debt); 3) the existence of certain types of debt, such as tax debt; and 4) the expectation of reaffirmations of secured debt. The debtor that has primarily consumer debt and few creditors, no tax debt and no anticipation of reaffirming secured debts would pay well below my prior standard fee.

There are a few reasons why I settled on the factors. More creditors means both more time with data entry and an increase in the likelihood of unforeseen complications, including debtors accidentally overlooking one or two in the crowd. Consumer debt cases take considerably less investigation and strategizing than cases brought about as a result of business debts. Tax debts require additional work to determine whether they are dischargeable and increase the likelihood of complications. Finally, reaffirming secured debts takes additional work and creates a higher liability upon the attorney who certifies the reaffirmation.

Now, instead the highly truthful but incredibly unsatisfactory “it depends” I can ask four quick questions and tell the customer that, based on their answers (that is a necessary lawyer caveat by the way), the cost would be $x.xx.

Attorney fees in a Chapter 13

Along with other benefits of a Chapter 13 bankruptcy, the attorney fees can be a bit more flexible than in a Chapter 7. Most attorneys prefer to have all fees paid up front in a Chapter 7 because it is a cleaner approach that keeps the attorney from being a creditor at the same time. In a Chapter 13, attorney fees are given a high priority for being paid through the plan, so there is less concern to the lawyer in getting paid in full. That allows a chunk of the attorney’s fees to be paid through the plan after the petition has been filed. This allows the attorney fees to be paid by the debtor without directly increasing their plan payment; it just lowers the amount the unsecured creditors will receive. However, this will not always work.

If you go back to the “Not as scary as it seems: Chapter 13 plan” post, you can see that there are certain tests applied to a Chapter 13 plan to see if it will get confirmed. One has to pay all their secured debt arrearages for property that is being kept, one has to pay unsecured creditors at least as much through the plan as they would have gotten in a Chapter 7, and there has to be sufficient disposable income to fund the plan AND all disposable income has to be accounted for in the payments. So, putting attorney fees on the back end of the plan interacts with each of these tests and could indirectly impact the confirmation of the plan.
One way that “back-end” attorney fee payments could impact the plan is that it forces the payments to be higher. For example, if you would have paid $10,000.00 to unsecured creditors in a Chapter 7, and your plan payment just barely covers that amount, adding attorney fees into the plan payment would drop the total to unsecureds down below $10,000.00 and so the plan could not be confirmed without increasing the payments. Assuming you were already paying all your disposable income into the plan, then raising the plan payment to make sure enough is paid to unsecured creditors AND the attorney fees would make the plan not feasible. Expenses would need to be cut or additional income found.

Sometimes, expenses and income are as good as they can get and the plan payments just do not allow the plan to be confirmed with attorney fees included in the plan. In those situations, the entire Chapter 13 attorney fee would have to be paid in advance. In the Western District Bankruptcy Court of Kentucky the “no look” attorney fees in a Chapter 13 is $2,500.00. In the Eastern District, there is not a “no look” fee and the typical Chapter 13 can run several hundred more or less than $2,500.00. In general, though, being able to put attorney fees into the Chapter 13 plan can help make filing bankruptcy affordable to more folks.

Attorney fees and bankruptcy

I am always interested in hearing prospective clients experience with other law firms as they look about for one to represent them in a bankruptcy. For one, it helps me remember that my main objective is to provide a high quality service. Second, it lets me know where the market is going in terms of attorney fees. Two particular items have been prominent lately and I wanted to pass the information along so that you can make an informed choice when hiring a lawyer to help you get relief from debt.

First, make sure you get the entire cost. This should be fairly straight forward with a Chapter 7. There is typically a flat fee ranging from just under $1,000.00 to just around $1,700.00 in the Eastern District of Kentucky. Attorney’s charge this for reviewing your material, preparing the means test and petition, and attending the meeting of creditors. Some, like myself, also include processing reaffirmation agreements. There are additional attorney fees for amendments, contested matters and adversary proceedings but if your attorney reviewed your information carefully, he or she can anticipate those things and tell you those costs in advance. Also, appeals and audits are usually not covered by the flat fee. Now, where you see a difference is in how much time your attorney actually invests in looking at your situation and coming up with the best strategy. I, for example, have the goal when I file a Chapter 7 that it has a very high likelihood of obtaining a discharge without a contested or adversary proceeding arising unless it is one we planned for. So, I personally review the data closely and develop the best strategy.

I recently discovered something that probably should have been obvious to me. When other attorney’s quote the cost of a Chapter 7, they do not include the $299.00 filing fee that goes directly to the bankruptcy court. I have always included that as part of the price I quote. I have now begun quoting the price both ways so that people know exactly what they have to come up with. I suppose that is why some callers did not know that I charge less than many attorneys (and more than some). Anyway, lesson learned and I hope that you ask if the quoted fee includes all fees or just the attorney’s fee.

Next, I learned that many law firms are now charging as much as $200.00 more for a joint (husband and wife) Chapter 7 as an individual one. I had never even considered that option. I understand the logic and someday I might consider going that route, but as of right now I do not see the small amount of additional work in a joint filing as enough to charge extra. I would rather couples feel free to get rid of all the household debt that they can so they can truly experience the fresh start of a bankruptcy. So, when you call around, be sure to ask if that lawyer charges extra for a joint filing.

Finally, I know this is crazy, but I am still doing free initial consults. I am not talking about the ones limited to 30 minutes; I mean an honest to goodness, let’s look at the whole picture and get some options, hour long consult. Again, I may have to rethink that because I have had a number of families discover that they can resolve matters without the assistance of a lawyer and never retain me. For now, though, I’ll chalk that up to “treasure in heaven” and leave it as is.

So, just remember that the rate you get quoted for a Chapter 7 over the phone may sound like you will save a couple hundred dollars, but that might not be the whole story. They may not be telling you about the filing fees that aren’t included or they may charge more when it turns out that it is a joint versus individual filing. Most importantly, you may get someone who is a bit more careful and treats your bankruptcy as the individualized concern that it is so that you are far less likely to run into amendments, contested matters or adversary proceedings later on after you are already wedded to staying with that attorney. So, be sure you feel comfortable with the attorney you retain.

I plan to talke about Chapter 13 fees in the near future, so be sure to check back.

What you should know about fee shopping for a bankruptcy attorney

All bankruptcy attorneys get a fair number of inquiries that start with “How much do you charge for a Chapter 7?” This happens in this area of law more than in other areas because the folks seeking help are already strapped for cash. They are struggling to get through the month and so a couple hundred dollars can make a huge difference. This is understandable, but there is more to consider. Even Chapter 7 bankruptcies can be fairly involved: one or more meetings of creditors, reaffirmation agreements, possible challenges of dischargeability, challenges of “abuse” for being in a 7 rather than a Chapter 13, motions to lift stays, challenges to use of exemptions, audits, and amendments to the petition or schedules are some of the possible issues that could arise.

Because not every Chapter 7 is alike, most bankruptcy attorneys carve out exceptions to what the flat fee quoted at the beginning of the case will cover. Some attorneys just prepare the petition and file it and state in the fee agreement or petition that they will not do anything else. Some attorneys will also cover rearffirmation agreements. Some attorneys include audits (which happens to roughly 1 out of every 250 cases) for the same flat fee. So, you could call one attorney who quotes $750.00 attorney fees and another attorney that quotes $1,400.00. At first blush, it seems like the $750.00 is the best deal, but what if that attorney only prepares the petition for you and perhaps goes to one meeting of creditors while the other one covers everything audits and appeals? What if you end up getting your case dismissed or a significant amount of debt undischarged with the $750.00 attorney? Now it looks like the other attorney, the $1,400.00 attorney, was the better deal.

Another quality of representation that one cannot determine by just calling for a quote on attorney fees is how you and your bankruptcy are handled within the law firm. Some law firms are set up to handle a very high volume of cases and quote lower fees. With these, you typically will only meet the attorney once (maybe twice) and all the rest of your conversation is with a secretary or paralegal. While this may work fine for many cases, what if your situation has just one little oddity that requires the greater expertise and attention of the lawyer? What if you end up losing an asset because an exemption was applied automatically rather than with consideration for the big picture?

Other firms treat your bankruptcy the same way they would other legal matters in that they pay special attention to the facts and issues unique to your situation. They strategize the best approach and then direct their secretary or paralegal in making sure all the supporting documentation is pulled together rather than letting the secretary or paralegal drive the case. To do this, they cannot take as many bankruptcies and so they charge more per case.

Clearly I have a bias; I prefer to spend time and make sure each bankruptcy is approached with the best outcome in mind for that individual debtor. I do recognize the economic pressures of the moment to find the cheapest, fastest relief. When people call and ask what I charge, I tell them right away they will find less expensive bankruptcy attorneys. Although it seems hard, I do try to remind debtors that a couple hundred dollars difference in attorney fees is mere pennies to the discharge of thousands of dollars in debt. I then help them figure out a way to come up with those couple hundred dollars. While getting served with a lawsuit can send anyone into panic mode, usually there is still time to come up with a workable strategy.

Whichever approach your choose, the least expensive bare bones assistance or a little more expensive and more expansive assistance, just be aware of exactly what you are getting for the fee you pay. Insist on the items covered by the fee and those excluded from the fee being spelled out in writing. Make yourself aware of what will be charged should you end up needing help with an exluded item. For example, how much will they charge you if the trustee files a motion to dismiss.

Voluntary Underemployment & Child Support (or Roy’s Very Bad Day)

In a prior post discussing dischargeability of a Dodge Durango Debt from a Divorce, I said that in the case, Howard v Howard, 2008-CA-001059-MR (June 12, 2009)(to be published) the Kentucky Court of Appeals addressed two important domestic support obligation issues. This post reveals that second issue.

As we saw before, Roy lost his argument that the deficiency judgment debt on his Dodge Durango was discharged through bankruptcy. As to his ex-wife Sondra, he remained responsible for the payments because it was agreed to and decreed through the divorce. That made it non-dischargeable as a domestic support obligation and so Sondra could pursue payment through contempt proceedings.

Now, Roy also had left a nice paying job as a federal prison guard claiming a medical reason. Apparently it was not a very good medical reason (or he failed to prove it up) because the trial court determined that his new employment at half his former wages was voluntary. Because it was deemed a voluntary reduction in pay, Roy was ordered to keep paying the same child support as before while earning half the amount of wages as before. He wouldn’t even be able to put gas in the tank of a Durango now.

In order to modify child support, the movant must show “a material change in circumstances that is substantial and continuing.” KRS 403.213. Judges have considerable discretion to decide whether a job change resulting in much less income is voluntary or involuntary. If it is voluntary then that person does not get a break on the child support.

But what if Roy really had a medical problem and could not longer work at the federal prison? Well, if his medical condition was legitimate, and it may have been, then there should have been a trail of documentation that was produced as evidence to the court. If Roy had that evidence, then he needed to pull it together and convince the judge. This is where it actually saves money in the long run to invest in having a good attorney. A good attorney would have either told Roy he was wasting his time because an ingrown toe-nail won’t convice the court, or she would have made sure the evidence was there.

Unfortunately, losing on the Durango Debt and losing on the reduction of child support did not end his very bad day. Roy also had to pay $500.00 towards Sondra’s legal fees. I mean no offense to any of my colleagues that may have represented Roy, and if Roy reads this I am sorry if it seems I am rubbing salt in the wounds, but had he invested in legal counsel knowledgeable in bankruptcy and family law, he could have saved a heap of money in the long run.

Tobacco payments and property allocation; attorney fees

The process of dividing property in a divorces consists of three broad steps as outlined in Jones v. Jones, 2006-CA-001870 (Feb. 1, 2008)(to be published): “(1) classify the property as marital or nonmarital, (2) assign to each party nonmarital property owned by that party, and (3) divide in just proportions marital property.” In the Jones case, the ex-husband, Ricky, appealed the trial court’s classification of Tobacco Transition Payment Program payments (“TTPP”) as marital property.

TTPP is an important source of income for many Kentucky farmer’s and is divided into payments for growers of tobacco and payments for owners of the land where the tobacco would otherwise have been planted. This is where the particulars of the Jones case becomes important. Ricky inherited a life estate in the family farm. Without becoming too bogged down in the technicalities of a life estate, this means the farm was his to use during a lifetime, most likely his own. Since he inherited the farm, it was non-marital property by operation of KRS 403.190(2)(a). Ricky argued that the owner’s share TTPP came to him as the owner of the farm by devise so that it was not a marital asset.

Here, the trial court basically said that Ricky might be right about the owner’s share of the TTPP being non-marital, but the overall division was equitable, so let’s leave it alone. The Court of Appeals disagreed with the trial court and asserted that the owner’s payments under TTPP were compensation for the taking of the property interest of growing tobacco on the property, so it was non-marital.

However, the grower’s TTPP payments took the place of income earned from the sale of tobacco that would have been grown. Therefore, the compensation for loss of income and would be marital. Ricky still won this argument, though, because he and his ex-wife, Lynn, had a prenuptial agreement that specified “life estate in the farm “together with the income produced thereby, shall continue and remain the separate property’ of Ricky.” Id. at 5-6.

Next, Ricky challenged the trial court’s allocation of $44,648.00 out of $67,000.00 in improvements to the farm (main house, garage, lake) as marital. The Court of Appeals analyzed this under KRS 403.190(2)(e) which states:

The increase in value of property acquired before the marriage to the extent that such increase did not result from the efforts of the parties during marriage.

The life estate was given to Ricky before the marriage (obviously or else the pre-nuptial agreement would have involved prescience) and there were improvements made during the marrigage. The problem with the trial court’s analysis came from how it valued those improvements.

The trial court equated the actual cost of improvements to the increase in value of the life estate. This makes no sense because a life estate has much less value than outright ownership (fee simple). Basically, one can sell a life estate, but who would want to buy it? It would come to an end as soon as that life ended, which could be the day after the closing. Thus, the $44,648.00 that the trial court assigned as marital probably exceeded the fair market value of the life estate. Usually, expert testimony is required to determine fair market values. The Court of Appeals remanded the case to the trial court to recalculate the values involved and strongly suggested getting expert testimony.

Finally, Ricky appealed the award of payment of Lynn’s attorney fees. This is often appealed because it really hacks people off to go through a divorce and then have to pay their ex’s attorney fees too. However, these appeals rarely win because such an award is “soundly” in the discretion of the trial court. The court must consider the financial resources of the parties and, if an imbalance in resources exists, can award attorney’s fees. Well Ricky, two out of three ain’t bad.