“Attorney fee only” chapter 13 plans run afoul of bankruptcy code section 1325(a)(3)’s good faith requirement, according to a recent Massachusetts bankruptcy court decision. The court held that where the chapter 13 debtors could have filed chapter 7 and obtained an immediate discharge of all their debts, and where all the debtors’ property was exempt, filing chapter 13 for the sole reason of paying their attorney through the chapter 13 plan was an abuse of the bankruptcy process.
In re Buck, 2010 WL 2746217 (Bky.D.Mass. July 9, 2010), involved debtors whose retainer agreements with the bankruptcy attorney stated that chapter 7 was appropriate for them, and that the attorney would charge a fee of $2,000 for such a case. The retainer agreements also stated that if the debtors chose instead to file chapter 13, the attorney fee would $4,000 or the attorney’s hourly rate, whichever was greater. The debtors chose chapter 13 due to their inability to pay the $2,000 fee for an immediate chapter 7 filing, preferring instead to pay the higher attorney fee, over time, through their chapter 13 plans.
This approach would enable the debtors to obtain immediate relief from their creditors in chapter 13. It also solved the problem of how to handle creditor collection activity if instead the debtors had waited to file chapter 7 bankruptcy while they saved up the funds necessary to pay the attorney the $2,000 fee for a chapter 7 case.
In the two cases before the court, the debtors were to pay $130.00 for 36 months under the chapter 13 plans, for a total $4,680.00 each. In each case, the attorney was to receive $3,959.00 of the $4,680.00 paid into the plan. After payment of the $3,959.00 attorney fee in each of these cases, little remained for payment to creditors. This led the court to label these chapter 13 plans as “attorney fee only” plans.
The attorney argued that the debtors in these cases were unable to save up the $2,000 attorney fee for filing chapter 7; thus the filing of a chapter 13 plan which proposed to pay his attorney fees over three years was a proper solution. This would enable the debtors to obtain bankruptcy protection without delay. He argued that debtors such as these often experienced harassment from creditors, threats of foreclosure, and other financial hardships, and that forcing them to wait to file bankruptcy until they had enough money to pay for a chapter 7 would unfairly deny them access to the bankruptcy process.
The court rejected these arguments, stating that debtors eligible for chapter 7 with only exempt assets, who are counseled to file attorney fee only chapter 13 plans, cannot propose such chapter 13 plans in good faith. It noted that such plans expose the debtors to the risk that the plan will fail, because such plans are usually based upon budgets revealing meager income and household expenses consuming all or most of that income. The court was also displeased that choosing chapter 13 for these debtors delayed their discharges by 36 months, as compared to the immediate discharge of debts available in chapter 7. It also noted that these debtors had to pay a higher attorney fee in chapter 13 than they would have paid in chapter 7.
The court concluded by noting that both cases before it had converted to chapter 7 after the chapter 13 trustee had filed her objections to the cases. It ordered that the attorney would be required to accept no fees for the filing of the chapter 13 cases, nor could the attorney accept a fee for the conversion of these cases to chapter 7.
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Last modified: August 7, 2010