ATTORNEY FEES: UNSECURED BY ANY OTHER NAME …
Debt owed to an attorney for fees owed at the time of the filing of a Chapter 7 or Chapter 13 bankruptcy case is not treated any differently than any other sort of unsecured debt, such as a credit card balance or a hospital bill.
Unsecured debts, with a few specific exceptions, are completely dischargeable in a Chapter 7 bankruptcy and paid last in priority in a Chapter 13 bankruptcy.
Further, in a Chapter 13 bankruptcy, there is, in most cases, no requirement that unsecured debts be paid anything at all, whereas other sorts of debt may be required to be fully repaid. (A Chapter 13 bankruptcy in which debts are at least partially paid to the extent of debtor’s ability to make a payment from monthly average take-home pay after necessary household expenses are deducted.)
What is an unsecured debt?
It is a debt that is not secured. That is, it is a debt for which the promise to repay the money lent is not “secured” by collateral of some sort, such as the real estate purchased with a home mortgage loan. Or the vehicle purchased with an automobile loan.
In the case of a residential mortgage debt, the home is the collateral securing the debtor’s contractual promise to repay. If the mortgage loan is not repaid, the lender forecloses on the home and takes it back.
An unsecured debt involves no such collateral. If the borrower defaults, the lender must sue to obtain a money judgment, which then must be collected upon, in order to recover the monies lent.
This is, in the vast majority of cases, the case with attorney fees.
There is nothing sacred about attorneys’ fees in bankruptcy, whether arising from divorce, a collections or other lawsuit judgment, or even your own bankruptcy attorney.
But there are exceptions.
When Can’t You Discharge Attorney Fees in Bankruptcy?
There are situations in which a debt to an attorney is either not an unsecured debt, or it is non-dischargeable in bankruptcy because the attorney fees are connected with or arose from the circumstances arising from a separate marital debt that is non-dischargeable.
CHARGING LIENS IN MICHIGAN BANKRUPTCY: ATTORNEY FEES AS SECURED DEBT
Michigan law allows an attorney to attach what is called a “charging lien” to funds received by the lawyer’s client as a result of the lawyer’s contracted professional effort.
A “lien” is a claim of security interest. If the charging lien is validly attached to such funds prior to the filing of a bankruptcy case, that debt for the attorney’s fees will be a secured debt.
Thus, if a debtor files for Chapter 7 bankruptcy owing her attorney $15,000.00 in fees for work the attorney did prior to the filing of the Chapter 7 case retrieving a settlement payment of $20,000.00 from another party, the debtor’s attorney would be able to claim that the Chapter 7 Trustee cannot seize the entire $20,000.00 from the debtor—only $5,000.00.
In a Chapter 13 bankruptcy case, the attorney owed the fees would be able to file a secured claim with the Bankruptcy Court, requiring that he or she be paid in advance of other unsecured creditors.
Whether or not an attorney’s charging lien is valid is, however, always going to be a question of Michigan law.
Bankruptcy is a Federal legal process, but questions such as this will always be resolved by an examination of the law of the state in which the Chapter 7 or Chapter 13 case is filed.
In Michigan, this means that a charging lien must be valid under Michigan law.
Michigan judges have, since at least 1955, held that common-law (case-law derived, rather than statutory in basis) attorney’s charging liens are effective in the state. However, they are valid only where: (1) the parties have an express agreement providing for a lien; (2) the attorney obtains a judgment for the fees and follows the proper procedure for enforcing a judgment; or (3) where special equitable conditions exist to warrant imposition of a lien.
A charging lien in Michigan can never be imposed upon real property—only funds.
Divorce attorneys in Michigan commonly include a stock paragraph encumbering a marital home with a lien for the balance of fees owed by one or both divorcing parties. However, such clauses are invalid unless they constitute an express (written) contractual agreement to allow this—and the judgment signed by a judge, approving it.
If an attorney claiming the existence of a charging lien shows up in Bankruptcy Court with a signed Michigan divorce judgment in hand including such a clause, the Federal Bankruptcy Judge will defer to the judgment as written.
The debt for attorney fees will be treated as a higher priority secured claim in a Chapter 13 bankruptcy, along with any mortgage on the home.
However, if the home appraises for less than is owed on a mortgage balance for which the lien was perfected prior to the attorney’s charging lien, the attorney’s lien can still be stripped off and discharged in a Chapter 13.
Michigan law also provides for a separate attorney’s fee lien: the retaining or possessory lien. This is a lien upon property of the debtor in the possession of the attorney, allowing the attorney to retain the property until and unless his or her fees are paid by the debtor.
ATTORNEY FEES AS SPOUSAL SUPPORT OR AS DIVORCE PROPERTY SETTLEMENT
Additionally, an attorney fee can be outright non-dischargeable if the work done by the attorney pursuant to a divorce proceeding in Michigan is required to be paid by one of the divorcing parties as a form of spousal support to the other party.
This debt will be non-dischargeable in either a Chapter 7 or Chapter 13 bankruptcy with regard to the party obligated to pay the fees and as regards the divorce attorney, should the obliged party seek to file his or her own Chapter 7 or Chapter 13.
Such an obligation would need to be explicit in the divorce judgment to have this effect in Bankruptcy Court.
A requirement to pay the attorney’s fees related to a divorce as a measure of property settlement would be likewise non-dischargeable in Chapter 7 bankruptcy—but not Chapter 13.
The above is true not because the attorney fees are secured in any way under these circumstances but because the Bankruptcy Code—the Federal statute governing the bankruptcy process—makes non-dischargeable spousal support and child support obligations completely and renders property settlement obligations arising from Michigan divorce judgments non-dischargeable in Chapter 7 bankruptcies.
DISCHARGING ATTORNEY FEES IN BANKRUPTCY: THE BOTTM LINE
An experienced bankruptcy attorney will be able to help you explore your options for truly freeing yourself from such debt obligations.
Attorney Walter Metzen has represented thousands of consumers in Chapter 7 and Chapter 13 bankruptcy cases in Michigan. A Board Certified Bankruptcy Expert, Attorney Metzen has dealt with bankruptcy, non-bankruptcy attorneys, and the nexus of Michigan family law and Federal bankruptcy law for over 28 years.
The Law Offices of Walter A. Metzen & Associates offers free consultations for those interested in the bankruptcy process and is experienced in determining and advising as to the best course of action when filing a Chapter 7 or Chapter 13 bankruptcy in Michigan.