Consumer Bankruptcy Journal Spring 2015 - Page 34

CHAPTER 7 ATTORNEY FEES Protecting Debtors While Ensuring Attorneys Get Paid By Amanda A. Page Page Law, PLLC M ost debtors that are contemplating a Chapter 7 are on the brink of economic disaster. They have creditors harassing them every waking moment, calling them nonstop, garnishing their wages, garnishing their income tax returns and seizing their vehicles to satisfy judgments. These hardworking individuals simply do not have the extra funds to pay a bankruptcy attorney up front in full to file a bankruptcy and to stop the creditors. Alternatively, the options for the unfortunate debtor are to proceed file their bankruptcy pro se, hire a bankruptcy petition preparer or to find an attorney that accepts alternative fee agreements. The debtor that attempts to go it alone or with a petition preparer faces a substantially greater risk of their bankruptcy getting dismissed without a receiving a Chapter 7 discharge. In the Eastern District of Michigan, during 2010 and 2011 approximately 98% of individual Chapter 7 cases filed by an attorney received a discharge, while only approximately 69% of Chapter 7 cases filed without an attorney received a discharge.1 Attorney fees in a Chapter 7 have long been a disputed and a contentious portion of the Bankruptcy Code and the Rule of Professional Responsibility because bankruptcy attorneys must be zealous advocates for their client while attempting to keep their lights on in their own offices. Bankruptcy attorneys attempts to creatively structure getting 34 CONSUMER BANKRUPTCY JOURNAL paid has been address by the U.S. Supreme Court which has held in Lamie v. United States that “§ 330(a) (1) does not authorize compensation awards to debtors’ attorneys from estate funds, unless they are employed as authorized by 11 U.S.C. § 327.”2 Further, the Bankruptcy Code in 11 U.S.C § 523 states that attorney fees are not except from discharge and prepetition debts for legal fees are subject to discharge pursuant to 11 U.S.C § 727.3 Consequently, pursuant to 11 U.S.C § 362, bankruptcy attorneys are unable to proceed with any active collection activity for pre-petition debt. It is apparent that a bankruptcy attorney will lead to a successful Chapter 7, ensuring that the debtor receives a discharge and obtains a fresh start. Unfortunately, if the debtor seeks counsel but is unable to pay the entire attorneys’ fees, filling fees and credit counseling fees up front, it appears they might have run into a road block to their fresh start. Creative bankruptcy attorneys have attempted to craft alternative fee agreements that ensure that the debtor is protected from creditors and that the attorneys are able to receive their fees. The bankruptcy attorney might agree to either one fee agreement with payments to be made pre-petition and post-petition or a bifurcated fee agreement where services and fees are split prepetition and post-petition. However, these alternative fee agreements Spring 2015 are challenged on many fronts in the Bankruptcy Court as violating the Bankruptcy Code and, in Michigan, the Michigan Rules of Professional Conduct (MRPC). In 2004, a challenge of alternative fee payment in the Bankruptcy Court for Eastern District of Michigan in the matter of In re Michel held that a prepetition fee agreement that draws no distinction between pre-petition and post-petition services and fees creates a debt that is entirely pre-petition debt which is subject to the automat