Of the three most common chapters of the Bankruptcy Code, Chapter 7 offers an insolvent individual the freshest of starts; yet it is not without its pitfalls. Under Chapter 7 a debtor is not permitted to pay his attorney in installment payments, as a debtor may in Chapter 13. Thus, if a debtor does not have the funds to pay his attorney up front, it makes logical sense to file under Chapter 13, where installment payments are the norm rather than the exception. A recent Eleventh Circuit opinion, however, held that filing for Chapter 13 only because the debtor could not afford an upfront payment constituted a bad faith filing, requiring the debtor to instead save his money and pay his attorneys’ fees up front when refiling his Chapter 7 petition.
To understand the Trustee’s objections to Brown’s Chapter 13 plan, it helps to explain how a straight Chapter 7 liquidation would have worked for the debtor, Levin Brown. The court filing fee for Chapter 7 is $306, which can be paid in four installments. The bankruptcy court also noted that Brown appeared to qualify for an in forma pauperis waiver of the Chapter 7 filing fee, but no such waiver is available in Chapter 13 cases. In a Chapter 7 case, Brown would not have to pay a trustee’s commission. Even more, Brown had no non-exempt assets to liquidate. Thus, he could have filed a Chapter 7 petition and received a full discharge in a matter of a few months, thereby discharging all of his debts.
The bankruptcy court stated that the only reason Brown had filed under Chapter 13 instead of Chapter 7 was because Brown did not have the money to pay his attorneys’ fee up front. The bankruptcy court stated: “All he has got to do is not make any payments, is to hold those [$150] payments that he would make to the trustee for a few months and then he can pay his lawyer and then he can file Chapter 7 and he will then permanently have those debts erased, but, here, all we are really doing is we are financing the lawyer’s fee, and that is not a purpose of Chapter 13.”
In light of these findings, the bankruptcy court held that the petition and plan were not filed or proposed in good faith. Explaining this conclusion, one bankruptcy judge noted: “I am not going to allow these folks to come in here simply to pay lawyers. I think there is a real ethical issue of doing this. If [debtors] can’t come up with the attorney fee, I don’t see how in the world you expect that they are going to be able to pay a five or three-year plan and not default, and then, once they do, they are back in the soup again and they have made no headway.” The judge’s harsh rebuke of Brown and his attorney may seem inequitable, but on the other hand, if Brown’s plan were to have been confirmed, his attorneys’ fees would have been paid in full and his other unsecured creditors would receive pennies on each dollar previously owned by Brown.
It is important to note that attorney fee-centric Chapter 13 cases are per se inappropriate. The court notes that there is no “categorical rule prohibiting attorney-fee-centric or attorney-fee-only Chapter 13 plans.” The court stated that the only party to benefit from Brown’s Chapter 13 plan was his attorney, because (a) Brown’s creditors would receive next to nothing after the attorney’s fees were paid; and (b) because Brown was likely to default and not receive a discharge.