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Don’t Inadvertently Work for Free!

178831391The following is a guest blog post by bankruptcy attorney Michael Gouveia, who spoke at the 2013 Annual State Bar Meeting on the New Attorney Guide to Competency. He invites you to visit his popular bankruptcy blog.

This sweet young couple is sitting across from you in your office. You’ve spent a half an hour counseling them on filing a Chapter 7 bankruptcy. The wife then asks, “We need to file Chapter 7 bankruptcy this week, but we don’t have your full attorney fee. Can we give you a little up front and the rest of your fee after we file?” This is the time to start backing away.

In non-bankruptcy areas of law, taking a partial fee up front may be an appropriate business practice. But in Chapter 7 bankruptcy practice, doing so may change the nature of the attorney and client relationship to that of “debtor and creditor” and result in an ethical conflict.

The bells and whistles in your head should go off whenever a Chapter 7 bankruptcy client asks to pay your fee after the filing of the petition. The only answer you should give them is “No.” Explain to them that you cannot receive your attorney fee after filing their Chapter 7 bankruptcy case because then the attorney fee due and owing you after the filing of the bankruptcy will be discharged along with the rest of their unsecured debts.

Attorneys fees due and owing on the bankruptcy petition filing date are “pre-petition debts” and don’t survive the bankruptcy discharge under 11 USC §727. As the Ninth Circuit Court of Appeals wrote in In re Biggar  (9th Cir 1997) 110 F3d 685:

All of the debtor’s pre-petition debts, save those listed in (11 U.S.C.§ 523), are discharged in a Chapter 7 proceeding. Section 523 does not except pre-petition attorneys’ fees from discharge.

Further, because the pre-petition attorney fees are discharged, you, as the attorney, can’t collect on the fees without violating the Bankruptcy Court’s Discharge Order. By trying to help your client in this situation, you’ll be working for free.

So pay attention to the bells and whistles alerting you and never file a Chapter 7 bankruptcy without first obtaining your full fee.

For a helpful discussion on pre-petition attorney fee discharge, turn to CEB’s California Basic Practice Handbook, chapter 13, including a discussion of fee retainers with bankruptcy clients in §13.10.  Also check out CEB’s Fee Agreements Forms Manual, chapter 4 for a sample Chapter 7 flat fee agreement.

Other CEB blog posts you might find useful:

© The Regents of the University of California, 2013. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.

7 replies on “Don’t Inadvertently Work for Free!”

In addition, before the client receives the discharge, the Automatic Stay prevents you from even asking your client for the fee. My clients seem to readily understand when I explain that if they owe me money when I file their case, that debt will be eliminated along with the rest of their debts and I can’t even ask them for the money.

Working as a Bankruptcy Paralegal, prospective clients would constantly say: “if I had $2,500 I wouldn’t need to file bankruptcy! Putting myself in their “laymen” shoes, I do understand their mentality. Many times, they would try interviewing other attornies before they understood, or accepted the inevitable.

I don’t think you really even have to “put [oneself] in their ‘laymen’ shoes” to appreciate the problem. It’s fundamentally illogical.

Just as a lawyer naturally has a lien on whatever she recovers for her client in a civil case (after all, the recovery wouldn’t exist without the lawyer’s time and labor), so a bankruptcy lawyer should not see her fee swept away as a result of her successful efforts in obtaining a discharge of the client’s other debts. The discharge of those other debts — which puts the client in a much better financial position than before — would not exist without the lawyer’s efforts.

I can only conclude that Congress doesn’t really like debtors getting discharges of their debts in bankruptcy (after all, Congress represents the haves, not the have-nots), and therefore doesn’t want to make it any easier for debtors to hire bankruptcy lawyers.

Great blog post. It seems like it might be common sense not to become a creditor of a debtor immediately before bankruptcy, but I could see how some attorneys might make this mistake. One of the commenters, Malcom Ruthven, also made an excellent point about the Automatic Stay barring attorneys from even asking about the client fee once the bankruptcy petition has been filed.

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