Payment Plans and Chapter 7 Bankruptcy

23 Nov Payment Plans and Chapter 7 Bankruptcy

When someone isconsidering filing for bankruptcy, many people do not have sufficient funds to pay for attorney fees and bankruptcy costs immediately. Consequently, payment plans are attractive to many consumers, and lawyers often offer them as a way to pay for their fees.

However, in general, when it comes to Chapter 7cases, all fees and costs must be paid before the case is filed in the court. This is because unpaid, pre-filing debts owed, including bankruptcy attorney fees, cannot be collected after aChapter 7 case is filedbecause of the automatic stay that prevents all creditors from collecting pre-petition debts.

If a discharge is later entered, then it will be permanently forbidden because of the discharge injunction. Yet, payment plans are routinely offered in the Chapter 7context all the time. That means that not all of your attorney’s fees are paid at once, but what do you actually get?

WhileI wanted to write something about payment plans and Chapter 7 bankruptcy, understand that since I am a Massachusetts attorney these thoughts are restricted to the laws here in my state. While the bankruptcy laws are federal so you would think that it is the same everywhere, local practices vary somewhat state by state. Various state laws also come into play so that there are differences depending on where you are, and not all areas allow some types of payment plans.

So here’s how they typically work where I am.

The payment plan period is usually made to overlap with the work that is done pre-filing during the bankruptcy preparation process. In other words, while the case is being prepared, the client makes periodic fee payments. When the payments are paid and all the work preparing the case is done, the case is filed in the court.

So being on a payment plan can make a difference when it comes to the timing of a case filing: if you are on an extended payment plan, the work of the case will be spaced out, and the actual case filing would likely take place long after the point where it would have if the fees had been paid in full earlier. That is usually how bankruptcy payment plans work in Chapter 7.

However, it is sometimes permissible for an attorney to charge for pre-filing work and then bill hourly for post-filing work in a Chapter 7 case, as long as the court allows that and the fees are disclosed to the court. This is actually not a payment plan at all, just a lawyer charging his normal hourly rate for work as it is completed. Again, not all courts approve the same type of plans so you need to know what your area allows a lawyer to do.

This type of arrangement is not very common in the consumer Chapter 7 context (though it is in business Chapter 7 cases). Many consumers like to know with some certainty the total amount of their bill for their case up front. However, as a practical matter, splitting the payments up and using hourly fee billing can reduce the amount of money needed up front to get a Chapter 7 case filed.

For my next installment in this two-part series, I will explain how payment plans for attorney fees work in Chapter 13bankruptcies.


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Nicholas Ortiz, Boston Bankruptcy Attorney

From Attorney Ortiz: We have been helping consumers and small businesses in Massachusetts successfully navigate through the bankruptcy process since 2002. We offer free initial consultations and payment plans. Call us at 617-716-0282 to discuss your debt relief options. Mention the Bankruptcy Law Network when you call!
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