I recently reviewed an article that questions whether bankruptcy attorneys steer their clients into chapter 13 cases when the clients may be better served by a chapter 7 case. I am not here to question the statistical methodology used by any of the authors or even to necessarily question their conclusions. I can’t speak for what happens in districts other than my own. And even in my own district, there is a significant amount of variation in practice. Nevertheless, as an attorney, I do not like the conclusions drawn in these particular articles and believe that a significant piece of the puzzle is missing. I’ll start with an example.
Suppose a potential client who is actually a good candidate for a chapter 7 case. This client does not have a problem with the “means test.” She does not have any assets over and above what could be exempted and any secured debts are affordable if the credit card debt is discharged. In other words, an excellent chapter 7 candidate.
However, the fees for a chapter 7, particularly for a potential client living paycheck to paycheck, may be more than a debtor can come up with quickly. Of course, if the potential client had $2,000 cash in hand, as has often been said, she would not be sitting in my office in the first place. Incidentally, I do take issue with the article’s assertion that $700 is a typical chapter 7 fee–not in my district! It may take a while for the client to save up the money for a chapter 7 bankruptcy filing.
In the meantime, what should the client do about the creditors? I have advised in the past that, under the federal Fair Debt Collections Practices Act (FDCPA) and under most state debt collection laws (for N.C., click here), you can write to the creditors and request that the creditors no longer contact you. Upon receipt of these letters (always mailed certified mail–return receipt requested), the creditors should stop calling. So far, so good, right?
Not exactly. Creditors understand bankruptcy. Creditors understand that when a debtor files bankruptcy, the automatic stay means that the creditors may no longer communicate with the debtor except as the bankruptcy court allows. Upon a bankruptcy filing, creditors stop.
However, it seems that quite a few creditors do not understand their obligations under the FDCPA and particularly under state law. As stated above, under the FDCPA and under most state debt collection statutes, the consumer can request that communication from a creditor stop. But it should be remembered that the FDCPA does not apply to creditors collecting their own debts. So unless a state has a debt collection statute similar to the FDCPA in in effect, Bad Bank Card Services can ignore most requirements under the FDCPA with impunity because they are collecting their own debt. The FDCPA simply does not apply.
Back to our example–the client does exactly as instructed–that is, the client writes to the creditors and requests that all communication be in writing and to stop calling. Guess what? Often, the phone calls do not stop. In fact, the phone calls often get worse as the client’s debts became more delinquent. Potentially, the robo calls can even come in on the debtor’s cell phone! At this point, the client is frantic and stressed over the repeated phone calls–several from the same creditor on the same day! So, what to do?
Let’s consider options at this point. The client does not have the money for the legal fees and costs associated with the bankruptcy filing. I suppose a lawyer could file the case anyway under chapter 7, right? No. If the lawyer files the case and the client still owes legal fees, the lawyer becomes a creditor and, after the bankruptcy filing, may not seek to recover the fees from the client (which is why lawyers insist on money up front). Of course, the client could choose to pay the remainder of the fee but that is not exactly a great position to be in. Most lawyers will not do this.
As an attorney, I could write to the creditors and tell them that I represent the prospective debtor and the phone calls should stop. Under the FDCPA and under most state debt collection laws, once an attorney is involved, the collector may not contact the debtor. This will cause the phone calls to stop and the client can get to work on getting necessary money for the bankruptcy filing.
But, now my office is getting phone calls fairly often from creditors asking about the client’s intentions. Furthermore, how does it take for the client to come back prepared to file bankruptcy? Two months? Six months? Will the client come back at all? Will there be additional fees for having to respond to all these creditor requests? Not exactly a winning option from the attorney’s perspective.
I could sue the creditors for violations of the FDCPA and/or state debt collection law assuming that a state debt collection law is applicable. This can certainly be fun but from a practical standpoint, I can’t sue them all and the client may or may not be interested in that option. If getting phone calls is stressful, how is the client going to hold up for a deposition in a debt collection lawsuit? There certainly may be other reasons why a debt collection lawsuit is not appropriate.
I could tell the client to “suck it up” or just don’t answer the phone. Problem solved, right? I don’t think so. People need their phones and people need to be available for their family and friends in an emergency or just because we like to get phone calls from folks we know and love. It is not an option, in my opinion, to surrender your phone to a debt collector. Just not answering the phone is not an option.
So, what is left? How can we deal with the creditors? How about a chapter 13?
A chapter 13 bankruptcy case allows an attorney to put the bulk of his fees inside the chapter 13 plan to be paid through payments made by the debtor. It is true that chapter 13 attorney’s fees generally are higher than chapter 7. But, for the example above, the debtor is getting something for these extra fees. Immediate and sure relief from collection calls. In short, the automatic stay provided by the Bankruptcy Code has value! Relief that the debtor may not otherwise get absent a bankruptcy filing.
In that respect, I think the analysis and complaint that attorneys are steering their clients into chapter 13 cases for higher fees may not accurately present all pieces of the puzzle. A chapter 13 filing does allow the debtor to obtain immediate relief from her debts sooner and that may be well worth the additional fees a chapter 13 case commands.
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Last modified: June 5, 2012