If You Need to File Chapter 7, Don’t File Chapter 13

06 Aug If You Need to File Chapter 7, Don’t File Chapter 13

choosing the right bankruptcy chapterYou might not think that a visit to a dry cleaner would give rise to insight about Chapter 7 and Chapter 13, but I was reminded of several very relevant issues while chatting with the two women who worked behind the counter.

I have been a customer of this laundry service for several years and the staff people know that I am a bankruptcy lawyer. While waiting for my order, one of the counter clerks mentioned that she was currently in a Chapter 13, but that she was trying to dismiss it because she could not afford the payment

She stated that she had filed her case because she had overwhelming debt and that her attorney “had given me one price, but three weeks later, the price went way up.” Further, she called the attorney to ask him to “cancel my case” but the attorney said that it would take three days to process a dismissal. She wanted to dismiss to avoid another payroll deduction.

I asked her if she was trying to protect a car or a house by filing Chapter 13, and she replied that she was not – she filed Chapter 13 because her attorney advertised that she could “start bankruptcy protection” for less than $100 and she did not have the $1,300 it would have cost to file Chapter 7.

I think what is going on here is this:

  • this debtor filed Chapter 13 not because she needed to reorganize under a three to five year plan, but because her up front cost to enter bankruptcy was a partial filing fee payment to start Chapter 13 as opposed to a full filing fee + attorney fee payment for Chapter 7
  • given that all of her debt is unsecured and her earnings are meager, she clearly should have been counseled to save up the money to pursue Chapter 7 relief instead of Chapter 13
  • her attorney calculated a very low Chapter 13 plan payment, then increased the plan payment substantially upon receipt of the trustee’s objection
  • it is unclear whether the attorney discussed the increase with the debtor prior to filing an amended plan and payroll deduction; regardless, the debtor does not voice any understanding about why her payment went up
  • experienced bankruptcy lawyers know, or should know, if Chapter 13 trustees in their district will object to Chapter 13 plans that exist primarily to pay attorney’s fees, or if a proposed plan payment is insufficient to cover projected disbursements. I find it hard to believe that this lady’s attorney did not know that the originally proposed plan in this case was destined for failure
  • I think that the three day dely in processing the dismissal is designed to make sure that at least one more payroll deduction is processed. The Chapter 13 plan form we use in the Northern District of Georgia allows attorneys to claim a substantial fee for a case that is dismissed prior to confirmation
  • I know several bankruptcy lawyers in town who rely on pre-confirmation dismissal fees as a significant part of their business model. That appears to be what is going on here.
  • At no point was this debtor advised about any of the consequences of voluntarily dismissing her case. She knew nothing about the limitations to the automatic stay in subsequent filings, nor was she advised about converting to Chapter 7

The law firm that represented my dry cleaner clerk emphasizes low fees to start bankruptcy protection and they market primarily to a very low income client base.

At first blush it appears that this lady was encouraged to file Chapter 13 when she really needed to be in Chapter 7, and that the only really beneficiary here is her lawyer. On the other hand, what options did she have if she needed bankruptcy protection to stop a wage garnishment but she did not have the money to file Chapter 7? Bankruptcy judges around the country have generally held that attorneys may not “finance” Chapter 7 fees by taking post-dated checks or post-filing installments. Should the lawyer be vilified because his client waited far too late to seek bankruptcy counsel and a low entry-fee Chapter 13 is the only practical option?

What should a bankruptcy lawyer do when sitting across the desk from a potential client who desperately needs immediate relief best provided by Chapter 7 that she cannot afford?

by , Atlanta bankruptcy lawyer

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Jonathan Ginsberg, Esq.

I represent individuals in Chapter 7 and Chapter 13 cases filed in the Northern District of Georgia, which includes Atlanta, Newnan, Gainesville and Rome. I publish several informative web sites, including https://www.atlanta-bankruptcy.com and an Atlanta bankruptcy blog, https://www.thebklawyer.com/thebkblog. Please mention Bankruptcy Law Network when you call.
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