Should ‘No Money Down’ Chapter 7s Be Allowed?

I am quoted by Danny Gill in his Bloomberg Bankruptcy Law Reporter article.  He quotes me saying that I agree that there should be some way to permit bankruptcy attorneys to be paid post-petition for filing a chapter 7 petition and representing the debtor throughout.   The article is here.

“I talk to people all the time who don’t have the money to file a Chapter 7,” M. Jonathan Hayes told Bloomberg Law Oct. 16.  Hayes is a member of Simon Resnik & Hayes in Sherman Oaks, Calif., and has practiced consumer bankruptcy law for 37 years in the Central District of California.

Hayes said that he would likely accept cases for $500 down and the rest paid over time if he were allowed.  But he can’t accept those types of clients, who often end up trying to file themselves or going to petition preparers who are not attorneys, or seeking out less experienced counsel.

Section 524(f) allows a debtor to voluntarily reaffirm—or agree to pay—a debt that would otherwise be discharged in bankruptcy. But for a lawyer to ask a client to reaffirm a debt for attorneys’ fees would be fraught with ethical concerns. Can a lawyer demand a client reaffirm a debt that would otherwise be discharged? That arguably creates a conflict of interest for the attorney, Rao said.

In order to reaffirm the debt ethically, the debtor would need advice from an independent counsel, not a “realistic solution,” Rao said.

Creating a Fix

The ABI Commission on Consumer Bankruptcy is charged with researching and recommending improvements to the consumer bankruptcy system that can be implemented within its existing structure, according to its website.

Connelly has suggested that the commission recommend changes that would authorize a Chapter 7 debtor to contract to pay attorney fees over a period of time, from exempt assets or other non-property of the estate, or that would permit voluntary repayment of attorney fees. Alternatively, she suggested excepting debtor attorney fees in Chapter 7 from the discharge.

“I don’t know that making Chapter 7 attorney fees non-dischargeable is the right way to solve the problem, but there should be some way for a lawyer to get paid after the case is filed,” Hayes said.


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