“Fee Only” Chapter 13’s

Bankruptcy practitioners often are faced with clients whose situation mandates a Chapter 7, however the client does not have the ability to pay a Chapter 7 legal fee. Some of these situations can be handled pro bono, others may be handled with a “fee only” Chapter 13. The debtor files a Chapter 13 with a plan providing for payment only of legal fees and Trustee fees through the Chapter 13 Trustee. Success depends on the district.

A “fee only” Chapter 13 must meet the “good faith” requirements.

Section 1325(a)(3) of the Bankruptcy Code requires Chapter 13 plans to be “proposed in good faith and not by any means prevented by law.” Section 1325(a)(7) requires that “the action of the debtor in filing the petition was in good faith.” Courts evaluate both good faith provisions through a subjective inquiry into the totality of the circumstances.

A. “Fee only” Chapter 13’s are not “per se” impermissible

Most courts have held that “fee only” Chapter 13’s are not “per se” impermissible. The 11th Circuit has held that each case must be analyzed individually by the fact-finder. The filing will not be found to be in bad faith simply because unsecured creditors do not get paid.

B. “Fee only” Chapter 13’s are permissible if there is a good reason – special circumstances

There must be showing of a good reason. There are many good reasons.

A “fee only” Chapter 13 requires some justification (beyond solely getting the attorney fee paid) for not being able to wait until the debtor acquires the needed fee. There could be a garnishment, utility shut-off or car repossession. The court will look at the totality of the circumstances.

A 5th Circuit decision held that a bankruptcy court properly confirmed a Chapter 13 debtor’s plan that paid little more than her attorney’s $2,800 fee. The 5th Circuit not only found that the “fee only” plan was proposed in good faith but that the……Chapter 13, on the other hand, allowed her to pay her attorney’s fee through the plan…….So she opted to file under Chapter 13….” Before filing, the debtor was paying only minimum payments on credit cards which would take 17 to 20 years to pay off, and would require a year to accumulate the fees for a Chapter 7. Her income was $1060 per month, plus $17 in food stamps.

In another decision, a plan paying only the legal fee of $4,000 (where the no-look ee was $4,300) and the trustee fee was found to be “in good faith” and confirmed over the Trustee’s objection. The court relied on the “good faith” test within the 7th Circuit which is “fact sensitive and should focus on whether the debtor “has unfairly manipulated the Bankruptcy code.”

The court noted that “[c)ompensation of debtors’ attorneys is a matter critical to ‘the integrity of the bankruptcy process.’” The court also rejected the trustee’s argument that “the proposed fee-only plan was ‘more simplistic and less complicated than the average Chapter 13 case’ and therefore the attorney was not entitled to a full no look fee.”

Bankruptcy Judge Janice Miller Karlin, sitting on the Kansas bench, has issued one of the most thorough decisions on the issue. She consolidated several cases and discussed each in detail, finding good faith in some and not in others. The well thought out decision emphasizes the need for extraordinary forces justifying an immediate Chapter 13 filing in lieu of waiting to accumulate legal fees to file a Chapter 7. Her comments on the realities of Chapter 13 merit restatement:

It bears repeating: the “primary purpose of the good faith inquiry is to determine under the totality of the circumstances of a case whether there has been an abuse of the provisions, purpose, or spirit of Chapter 13.” The Court finds no abuse of the provisions, purpose, or spirit of Chapter 13 by the choices made in the cases discussed above. Yes, there may be no distribution to unsecured creditors. Again, in a perfect world, all debtors would file Chapter 13 plans and repay all their debts, and no creditor would walk away empty handed. But we do not live in that world.

Instead, this is a world where debtors are harassed by daily collection calls for admittedly delinquent debts. Where they are repeatedly required to miss work to attend a cattle call docket to explain why they haven’t paid old medical bills. Where they cannot afford to keep the gas on, and feel compelled to incur title or payday loans at exorbitant rates to feed their families. Where their meager wages are reduced even further by garnishments. Where they opt not to seek necessary medical care or take prescribed medication because they cannot afford it. This is the world these Debtors live in, and this real world sometimes requires bankruptcy, even if the debtor cannot save enough to pay the up front attorney’s fees required to file a Chapter 7.

In re Wark, 542 B.R. 522, at 577-578.

Most courts use a totality of the circumstances test to determine if a fee only Chapter 13 is in bad faith. A “fee only” Chapter 13 should only be filed in rare situations where there are special circumstances that require a filing to provide some protection to a debtor who cannot wait to accumulate the appropriate Chapter 7 fees. Schedules I and J should be carefully examined to make sure that the debtor will be able to successfully complete the plan. Further, the fee requested should be based on the work required, as opposed to a standard “no look” fee. It is suggested that a standard Chapter 7 fee, or less, should be requested.

Conclusion

The use of “fee only” Chapter 13’s allows debtors who would otherwise have no remedy, participate in the bankruptcy system. Judge Karlin, supra, recognizes that we live in a world where those who most need a fresh start cannot even afford to pay lump sum Chapter 13 fees in advance. That reality may be difficult to understand for many who live comfortable lives without fear that the “repo” man may come at any moment, that the next paycheck will be snapped up by a collector, or that the debts on the credit report will affect a job application. Everyone is entitled to the “fresh start” mentioned by Justice Paul Stevens.

 

II. APPLIATION OF “FEE ONLY” CHAPTER 13 IN A PARTICULAR CASE

It is suggested that the following elements be met for a “fee only chapter 13”:

A. Debtor is unable to pay an upfront Chapter 7 fee.

There should be a discussion of Schedules I and J, showing that debtor(s) does not now have, and likely will not have in the near future, the financial ability to pay a community standard chapter 7 fee.

B. Debtor needs immediate protection from creditors.

There should also be a discussion showing a Debtor is unable to deal with an impending problem (cannot pay current utilities and has received a “shut-off” notice for electricity; a pending garnishment which reduces income below what is required for basic needs; etc.)

C. The fee set up in the Chapter 13 should be below the average Chapter 7 fee in the community.

It is recommended that the legal fee requested should be at, or below, the standard Chapter 7 fee in the community.

References

  1. 1325(a)(3) reads: Except as provided in subsection (b), the court shall confirm a plan if—*** (3) the plan has been proposed in good faith and not by any means forbidden by law;

  2. 1325 (a)(7) reads: Except as provided in subsection (b), the court shall confirm a plan if—*** (7) the action of the debtor in filing the petition was in good faith;

  3. Emory Bankruptcy Developments Journal 2014 30 Emory Bankr. Dev. J. 473

  4. In re Brown, 742 F.3d 1309, 1319 (11th Cir.2014).

  5. In re Puffer, 674 F.3d 78, 83 (1sr Cir. Mass, 2012).

  6. In re Crager, 691 F.3d 671 (5th Cir.2012).

  7. In re Elkins, 2010 WL 1490585, at *3 (Bankr. E.D. N.C. Apr. 3, 2010).

  8. In re Brown, 742 F.3d 1309 (11th Cir. 2014) (filing of “fee only” 13 was in bad faith where it was done solely to get the attorney paid).

  9. In re Dugan, 549 B.R. 790 (D. Kansas, Ma3 2016).

  10. Sikes v. Crager (In re Patricia Ann Crager), 2012 WL 3518473 (5th Cir. 8/16/12).

  11. Consumer Bankruptcy News September 25, 2012 22 No. 20 Cons. Bankr. News 1

  12. In re Crager, at 672.

  13. Id., at 674.

  14. In re Banks, 545 B.R. 241 (Bankr. N.D.Ill., Feb. 9, 2016).

  15. Id., 545 B.R. at 244.

  16. Id., 545 B.R. at 247.

  17. Id.

  18. In re Wark, 542 B.R. 522 (D. Kansas, Dec, 17, 2015)

  19. Brown v. Gore (In re Brown), 742 F.3d 1309, 1318-19 (11th Cir. 2014); Puffer, 674 F.3d at 82; Sikes v. Crager (In re Crager), 691 F.3d 671, 675-76 (5th Cir. 2012).

  20. In re Puffer, 674 F.3d 78, 83 (1sr Cir. Mass. 2012): In re Molina, 420 B.R. 825 (Bankr. D. N.M. 2009)(filing to stop garnishment was in good faith).

  21. In re Antonio, 2010 WL 1490589 (Bankr. E.D. N.C. Apr. 13, 2010).

  22. Grogan v. Garner, 498 U.S. 279 (1991).