Back in the Day Cafe: Zero-down Bankruptcy

Remember that one of the local radio stations used to have a segment called “Back in the Day Cafe” during which they would play “old school” hits from the 80’s and 90’s. Well, today we are going back in the bankruptcy day to 1994. This was a very different time in the bankruptcy world; a time when 341 hearings were not held at the bankruptcy courthouse on 1st Avenue and Van Buren but at the Firstar Metropolitan Bank & Trust building.

This was also a time of the “zero-down” bankruptcy epidemic. A few select bankruptcy firms in Arizona were offering zero-down bankruptcies, meaning a potential bankruptcy client only had to pay the bankruptcy filing fee up front. All attorney’s fees would be paid after the bankruptcy was filed and on an installment plan. These firms would actually issue unsecured promissory notes for repayment.  The notes would then be sold to collection agencies and pursued aggressively post-bankruptcy filing.

So, why do you have to pay your bankruptcy attorney all those fees before they can file your case? Because of the lesson that bankruptcy in the 1990s taught us: that attorneys should not be your existing creditors when you file a  bankruptcy case.  If an attorney is owed money at the time your bankruptcy case is filed, that money would be an antecedent and dischargeable debt.  If the attorney attempted to collect from you, they would be in violation of the bankruptcy code.  And besides all of that, attorneys want to get paid for the work they do, and you should pay them to ensure the work they complete is the high standard of work you expect. What happened in the 1990’s is that the “zero-down” bankruptcy firms produced such shoddy work that the bankruptcy community became very concerned.  The end result was that many of the zero-down attorneys were sanctioned and suspended from practicing law.

Additionally, there is a little bankruptcy rule found at 11 U.S.C. Sec 526(a)(4), which states that a debt relief agency (your bankruptcy attorney) can’t advise you to incur more debt prior to filing for bankruptcy.  What is a zero-down bankruptcy if not an incurring of more debt prior to filing?

If you do go for a bankruptcy consultation, and the attorney makes the statement that your case will not be filed until all fees are paid in full, please try to remember that this attorney is not greedy.  Remember this little trip back to the wild bankruptcy days of the 90’s and the lessons learned from zero-down bankruptcy law firms.

(The background for this blog was taken from a very interesting article in Phoenix NewTimes.  If you wish to read the entire article, you can find it at https://www.phoenixnewtimes.com/news/debt-in-the-water-zero-down-bankruptcy-firms-cost-their-clients-plenty-6445977)