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How Are Attorney’s Fees Paid in Chapter 13 Bankruptcy?

By Walter Metzen

 

In bankruptcy, all attorney’s fees must be approved by the Bankruptcy Court.

Chapter 13 bankruptcy is the best consolidation of debt you’ll ever get. It doesn’t require negotiation with the creditors holding your unsecured debt, can save your home from foreclosure, can help you repay your tax debt without interest or penalties and protects you from creditor collection activity for as long as 5 years.

 

Thus, whatever the fee arrangement between you and your bankruptcy lawyer happens to be, it must be disclosed on Form 2016(b), attached upon filing to your bankruptcy petition.

 

In a Chapter 13 bankruptcy, the fees paid to your bankruptcy attorney will usually be a combination of pre-paid advance retainer and a remainder amount owed.

 

The amount of the balance owed after the initial retainer is paid will depend upon your attorney’s hourly rate and the amount of time expended by the attorney in the prosecution of your case.

 

In a Chapter 13 bankruptcy, the balance of the fees owed will be “built in” to the Chapter 13 payment plan itself. It is paid to your attorney by the Chapter 13 Trustee assigned to your case as a so-called priority administrative expense.

 

What does that mean? And when does it happen?

 

The Chapter 13 Plan Payment Priority Scheme

 

In a Chapter 13 bankruptcy, all of your creditors are stayed from directly engaging in activities to collect the debts you owe them.

 

Instead, for a period of 3-5 years, you make a payment to the Chapter 13 Trustee assigned to your case of an amount essentially tailored to the “net” income your household has remaining each month after necessary household expenses are deducted from take-home pay.

 

This will be higher or lower, depending on your household budget.

 

Whatever it is, the Chapter 13 Trustee takes that payment and disburses it out to both your creditors and to the administrative expenses of the Chapter 13 plan itself.

 

Creditors are prioritized depending on what sort of debt it is that they happen to hold: secured vs. unsecured debt, priority vs. non-priority debt.

 

A debt such as a credit card balance, medical bill, or back-rent owed is, for example, a non-priority, unsecured debt.

 

Such debts are typically paid only what is left over from your payments—after all creditors and other parties are paid.

 

Generally, unsecured creditors receive only a small percentage of what they are owed, with the balance then totally discharged at the end of the Chapter 13 proceeding.

 

Mortgage loans and arrearages, car loans and arrearages, recent tax debt, and child support or other domestic support obligations are examples of secured and priority debts paid prior to any payment to unsecured creditors.

 

The so-called administrative expenses of the Chapter 13 proceeding are paid even prior to these priority debts (in most cases).

 

First to be paid are the expenses of the Chapter 13 Trustee him- or herself.

 

What the Trustee is paid will vary from jurisdiction to jurisdiction and from Trustee to Trustee. In the Eastern District of Michigan, one Chapter 13 Trustee receives 9% of each payment made by the Debtor prior to any other disbursements.

 

The attorney’s fees of your bankruptcy lawyer are paid after the Trustee’s are.

 

Pre-Confirmation Attorney Fee Payment in Chapter 13 Plans

 

The Chapter 13 bankruptcy process is divided into 2 separate phases, in terms of the payment of attorney’s fees.

 

The first phase, in which the majority of attorney fees are typically charged, is called the “pre-confirmation phase” of the process.

 

Confirmation is the name for the eventual court approval of the proposed Chapter 13 plan. It may include a hearing, or it may be obtained without the need for a hearing. Either way, if the filing is successful, a day will come on which the Bankruptcy Judge assigned to the case will sign off on a court order approving the Chapter 13 plan.

 

This is the date of Confirmation of the Chapter 13 plan. Everything from the date on which the debtor first retained his or her attorney until the date of Confirmation falls into the “Pre-Confirmation Phase” of the process.

 

Because all attorney fees in the Chapter 13 bankruptcy process must be approved by the court, the debtor’s attorney will have—in the Eastern District of Michigan—30 days from the date of date of Confirmation to file an application, or Motion, for court approval of fees and expenses incurred in the Pre-Confirmation Phase.

 

The debtor is required to begin making monthly Plan payments from the first month after filing the Chapter 13 case. However, no disbursements are made by the Trustee until after Confirmation (sometimes 6 months or more after filing).

 

Thus, at the time that the debtor’s attorney files his or her application for compensation for pre-confirmation services, the Trustee will be hold several months’ worth of plan payments in the debtor’s account.

 

In a many cases, this will be sufficient to pay the attorney’s Pre-Confirmation fee application in a lump sum, leaving the balance of the debtor’s ongoing Chapter 13 plan payments free for use in meeting the other obligations of the Plan: catching up mortgage arrearages and so on.

 

How much is the Pre-Confirmation attorney’s fee amount?

 

That depends upon your particular case. Was it a straightforward Chapter 13 with no litigious creditors, and perhaps no secured debt to be paid at all?

 

If so, your bankruptcy attorney may simply have requested what is called the “No-Look Fee.”

 

The No-Look Fee is a sort of flat attorney’s fee. In the Eastern District of Michigan, it is currently $3,500.00.

If your bankruptcy attorney’s Pre-Confirmation fees and expenses amount to $3,500 or less, he or she, instead of filing a fee application for payment for X hours of work performed at his or her hourly rate, may have simply inserted a line into the Order of Confirmation accepting this $3,500 No-Look fee instead.

 

Otherwise, the fee application will request an amount based on hours invested at a certain hourly rate.

 

The Bankruptcy Court requires that you have the opportunity to review the Fee Application at least 7 days before your attorney files it.

 

Post-Confirmation Attorney Fee Payment in Chapter 13 Bankruptcy

 

The “Post-Confirmation Phase” of the Chapter 13 process is—everything else that happens from the Date of Confirmation on through the discharge of the debt and the final, administrative closure of the case by the court.

 

This period of time can be for 3-5 years. In the Eastern District of Michigan, it typically does not begin to run until Confirmation is granted.

 

In other words, the Pre-Confirmation Phase is “extra” time spent in the Chapter 13 process in most cases. While some may view this as commensurate to extra time spent in a prison sentence, accumulating that Pre-Confirmation lump sum of plan payment funds is helpful with regard to the payment of your attorney’s fees.

 

This in turn makes it possible for the balance of the Chapter 13 Plan to function with a less sizeable monthly plan payment.

 

This is something to keep in mind, either way, when deciding whether to work with a bankruptcy attorney claiming to offer “no money down” Chapter 13 filings: the piper must be paid, one way or another, eventually.

 

Not making an advance retainer payment to a bankruptcy attorney for a Chapter 13 filing may simply be increasing the cost of the Chapter 13 itself.

 

In any case, post-Confirmation, all attorney’s fees are paid via the filing of a fee application by your attorney.

 

These may not be for an enormous amount of money, each, but, even if you never, throughout your Chapter 13 proceeding, lose your job, experience an income change or a change in expenses, need to buy a new car, or undergo any variation in your personal circumstances as they stood when your case was Confirmed, your lawyer still has work to do.

 

At least twice per year, bankruptcy lawyers in the Eastern District of Michigan typically “audit” or conduct a bi-annual review of each client’s plan, reviewing claims filed by creditors, plan payment increase or decrease steps required by the Order of Confirmation, ensure that you have made all of your plan payments and have no deficiency on the Trustee’s books, and so on.

 

Your attorney must constantly, for 3-5 years, ensure that your Chapter 13 plan is ticking along like a well-oiled machine and, if it is not, must take action to get it moving properly again.

 

If you have failed to communicate any difficulty, change in circumstances, creditor collections activity, or anything else relevant to your Chapter 13 plan, you will make that job more time-consuming for your attorney—and your Post-Confirmation Attorney’s Fees more expensive for yourself.

 

At the end of your Chapter 13 process, your attorney will file a final fee application. Any portion of this fee award, if granted, that is not paid by the Chapter 13 Trustee will be invoiced to you by your attorney after the case closes.

 

The same is true if your Chapter 13 bankruptcy case is dismissed at any time by the Court.

 

Attorney’s Fees in Michigan Chapter 13 Bankruptcy: The Bottom Line

 

The bottom line with regard to attorney’s fees in Chapter 13 bankruptcy cases is that Chapter 13 is a process that allows you to build your fee payments into your bankruptcy reorganization plan rather than largely requiring that you pay in advance, as you would with most other legal services.

 

This is a great advantage to those suffering from the hardship of debt. However, caveat emptor when it comes to jumping too quickly at a “no money down” deal from a bankruptcy lawyer. There is making filing easy, and then there is kicking a can down the road at later and possibly greater cost.

 

Regardless, however, in a Chapter 13, to a certain extent, if you have little or not secured or priority debt requiring full payment in a Chapter 13 plan, your unsecured creditors pay your attorney’s fees for you, at least in part, given the priority of your attorney’s administrative expense over that sort of debt.

 

Contact us if you are considering filing for Chapter 13 Bankruptcy.

 

Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully represented thousands of Michigan bankruptcy clients for over 25 years.

 

 

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