A recent Massachusetts bankruptcy court case has ruled against "attorney fee only" Chapter 13 bankruptcy plans. Now, as a Missouri bankruptcy attorney, I am always following the court activities of other states because it might have an influence on how bankruptcy law in Missouri works. You see, law isn't set in stone--it actually evolves and changes with every case, judgment, and holding. So, here is what this new Massachusetts ruling says.
The case in Massachusetts banned a practice which involved attorneys who filed Chapter 13 bankruptcies for the purpose of paying attorney's fees through the chapter 13 payment plan.
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Why did this situation arise in the first place? These attorneys had their clients file Chapter 13 bankruptcies so they could try to pay their fees over a long amount of time because the clients didn't have enough money to pay the Chapter 7 fees upfront. The Judge ruled that filing a Chapter 13 for the sole purpose of paying attorneys fees was not in "good faith" if the client was better suited for a Chapter 7.
Wait, let's back track. What's the difference between a Chapter 7 and Chapter 13 bankruptcy? A Chapter 7 gets rid of "unsecured" debt allowing debtors to eliminate credit card debt, medical bills, payday loans and other unsecured debts. While you can get certain exemptions, a Chapter 7 bankruptcy is meant for those who mostly have debt and very little assets.
On the other hand, a Chapter 13 bankruptcy allows protection from foreclosure and other actions of your creditors with an affordable payment plan that lasts for usually 3-5 years and bundles all of your debts together. The good thing about a Chapter 13 bankruptcy is that for people with a lot of assets, such as a home, are able to keep them.
Now, both Chapter 7 and Chapter 13 provide immediate protection from creditors. This means that harassing creditor calls, wage garnishments, and threats to your property can finally end. However, as you can see, Chapter 7 and Chapter 13 are meant to help two entirely different kinds of debtors. Advising someone to file a chapter of bankruptcy that isn't right for their situation could leave them without a real fresh start. The debtors in this situation probably won't be able to get through a Chapter 13--because their income and debt were more appropriate for a Chapter 7. The judges issued a ruling to help the debtors from having their new start fall apart.
The most important thing to do is to find the best bankruptcy attorney you can who will advise you on the most prudent options. How can you find a good bankruptcy attorney who has your best interests at heart? Look for someone willing to provide you with all the information you need to know beforehand--so you can also make an informed decision about your bankruptcy. What does that mean? Nothing other than that a bankruptcy lawyer is experienced and proves her experience in multiple publications online and off.
Each individual bankruptcy case needs to be evaluated to decide if a Chapter 13 or chapter 7 is the best choice, and a good bankruptcy lawyer will tell you why. The best bankruptcy attorneys will make sure to recommend whichever one is best for you--not for their own pocketbook.
So here's what you need to know about attorney fee only Chapter 13 payment plans: they are probably not in your best interest if you are better off filing a Chapter 7.
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