DEBTOR’S ATTORNEY’S FEES FOR “PRE-PETITION” WORK DISCHARGED

January 3, 2004

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Pre-petition debts for legal fees are subject to discharge under §727 even if services are performed or owed postpetition, according to the 7th Circuit Court of Appeals. (which is not binding on Texas, which is in the 5th Circuit, but I believe is the correct state of the law).

Three debtors in bankruptcy hired lawyers before filing their petitions. Each agreed to a retainer that would cover the legal services entailed in preparing and prosecuting the proceedings. Unlike most retainers, however, these were to be paid over time — some installments before the petition was filed, others thereafter. The lawyers performed as promised: all three debtors received their discharges, and the cases were closed.

When the lawyers continued to collect the unpaid installments, the three debtors (with the assistance of new counsel) commenced adversary proceedings in which they asked the bankruptcy court to hold their former lawyers in contempt for violating the injunctions implementing the discharges.

The Bankruptcy Court and District Court held that the fees were not dischargeable. Reversed by the Seventh Circuit.

“We . . . agree with In re Biggar, 110 F.3d 685 (9th Cir. 1997), that pre-petition debts for legal fees are subject to discharge under §727. See also In re Sanchez, 241 F.3d 1148, 1150 (9th Cir. 2001). Although Biggar is the only appellate decision squarely in point, almost every bankruptcy judge and district judge who has considered the question has come to the same conclusion . . ”

COMMENT: In this case Circuit Judge CUDAHY, concurring in part and dissenting in part, added to the opinion with an interesting discussion of the conundrum of compensation for debtors’ attorneys in view of an “awkward” code. Bethea v. Robert J. Adams & Associates, __ F.3d __ (7th Cir. 2003).

Editor’s Note: This is why I personally insist on full payment of my attorney fees and costs PRIOR TO FILING a Chapter 7 case; I believe that my fees are discharged, and therefore not collectible, after the Chapter 7 is filed. Other attorneys feel differently, but this case, although not binding here in Texas, is more evidence that my legal opinion is correct.

Frankly, I would be concerned about hiring a lawyer that didn’t even have the sense to protect their own fee, by requiring full payment “up front.” How are they competent to protect your interests, if they can’t even protect their own?

P.S. I am happy to allow my Chapter 7 clients to “pay out” their fees over time, with as little as $200 down, and we will deal with their collection calls. But we do not actually file the case with the Bankruptcy Court until the entire fee is paid.

Chapter 13′s, on the contrary, we will file your case for as little as $300 down, with the balance to be paid by your Chapter 13 Trustee, from the payments that you make to him or her.