I would assume that this is a common occurrence for any bankruptcy attorney: you sit down for an initial consultation with a nice debtor. You chat about bankruptcy for awhile. The debtor has a garnishment? No problem. The filing of the bankruptcy will put a stop to that garnishment. Creditor calls will end too. Bankruptcy will give the debtor the fresh start he/she has been looking for. Then the talk quickly turns to the most important issue: fees. The once pleasant debtor now says, “What is this going to cost me, and how do I have to pay?” The friendly bankruptcy attorney replies, “Well, a typical bankruptcy costs (insert fee here), and we accept installment payments. However, your case cannot be filed until the fee has been paid in full, which means that garnishment won’t stop immediately.” No longer pleasant debtor says, “What?! How can I pay that? Can’t you take some money now, and the rest later?”
The answer to this question is, unfortunately, no. When a bankruptcy is filed, it triggers the creation of the Section 362 Automatic Stay of Protection. This is a stay of “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case.” 11 U.S.C. Sec 362. Once a discharge is entered, the automatic stay becomes permanent, and provides an injunction of any further action to collect on a claim against the debtor. This is the whole reason that a debtor files bankruptcy: to be insulated from creditors and their claims. A claim is “any right to payment.” 11 U.S.C. Sec 101(5). Guess what? This includes the right to payment of attorney’s fees. So, if a bankruptcy attorney makes an agreement, prior to the filing of the bankruptcy, with a debtor for a payment of fees, but does not fully collect, that attorney has created a dischargeable claim in the very bankruptcy he/she just filed. Not the smartest move, and something most bankruptcy attorneys try to avoid by requiring that clients pay a fee in full before a bankruptcy petition will be filed. It should be noted that this mostly applies to Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, fees for post-filing work can be included in the Chapter 13 re-payment Plan to be paid after filing.
Besides not being the smartest move, bankruptcy attorneys now have case law that prohibits the acceptance of payment for fees post-filing. An Atlanta law firm, Clark & Washington, P.C., was recently reprimanded by the United States Bankruptcy Court for the Middle District of Florida in In re: Donald F. Watson v. Clark & Washington, PC, Case No. 8:09-mp-00010-MGW. Clark & Washington established a practice of allowing clients to pay for “post-petition” bankruptcy work through post-dated checks. The checks were cashed after the bankruptcies were filed. If a check bounced, the law firm would initiate collection actions, including sending demand letters. In this case, the Bankruptcy Court determined that the law firm’s right to payment and post-dated checks were claims and “the equivalent of a promissory note.” Therefore, the right to payment and each post-dated check would be dischargeable in bankruptcy. The Court did not follow Clark & Washington’s reasoning that the checks were not pre-petition claims because their fees were segregated into pre-petition and post-petition work, and the checks in question were to pay for the post-petition segment. Instead, the Court noted “allocating the postdated checks to payment of its post-petition services does not alter the true nature of the postdated checks: they are for pre-petition claims dischargeable in bankruptcy.” What’s even more significant about this case, beyond just defining bankruptcy fees as entirely pre-petition claims, is that the Court found that Clark & Washington’s payment scheme created a conflict of interest with its clients. The conflict arises because attorneys should not enter into business transactions or security agreements that are adverse to the interests of their clients. Attorneys should not allow the collection of fees post-petition because this violates the debtor’s bankruptcy rights. In doing so, attorneys may commit a sanction-able act.
When faced with the scenario described at the beginning of this blog, know that your potential bankruptcy attorney isn’t trying to make life difficult by demanding payment in full before filing. He/she is simply using common sense and following his/her ethical duties as an attorney.