New Article from the Consumer Bankruptcy Project: Attorneys’ Fees and Chapter Choice
Many of us on Credit Slips have been part of the Consumer Bankruptcy Project (CBP), a long-term research project studying people who file chapter 7 and 13 bankruptcy. Several years ago, some of us blogged about the writings from the last CBP iteration in 2007. In 2013, the CBP was relaunched as an ongoing data collection effort. The CBP’s current co-investigators – myself, Bob Lawless, Katie Porter, and Debb Thorne – recently posted “No Money Down” Bankruptcy, the first article analyzing data from the Current CBP (data from 2013-2015), combined with 2007 CPB data. The article focuses on the timing of when debtors are required to pay their bankruptcy attorneys to report on the increasingly prevalent phenomenon of debtors paying nothing in attorneys’ fees before filing chapter 13.
This nationwide phenomenon raises questions about how people are accessing bankruptcy and the extent of the benefits they receive from the system. The phenomenon also explains some prior findings about the intersection of race and bankruptcy filings. And it adds to our knowledge about regional disparities in the percentage of people who file chapter 7 versus chapter 13 bankruptcies.
Chapter choice is crucial, in part because chapter 7 and 13 bankruptcies differ in the relief achieved. Almost all chapter 7 cases end in a discharge of debts, while only around one-third of chapter 13 cases end in discharge. To examine how money influences chapter choice, we divide bankruptcy filings into three types: (1) chapter 7, in which the debtor pays the attorney’s fee up front; (2) “no money down” chapter 13, in which the debtor pays nothing before filing; and (3) “traditional” chapter 13, in which the debtor pays some or all of the fee prior to filing.
Although “no money down” bankruptcy could be a winner for both debtors and attorneys, our analysis of the CBP data suggests that such is not true. The data show that “no money down” chapter 13 attracts a distinct subset of debtors who have finances similar to those debtors who file chapter 7. If “no money down” consumers had filed chapter 7, they likely would have received a discharge. However, in not paying their attorneys up front, “no money down” debtors pay $2,000 more in fees and have their cases dismissed at a rate 18 times higher than if they had filed chapter 7.
People who file with “no money down” are distinct from other chapter 13 filers not only based on their finances. The two most significant predictors of whether a consumer files a “no money down” case are a person’s place of residence and a person’s race. Debtors from judicial districts with high chapter 13 filing rates are more likely to file “no money down” cases, and African Americans are more likely to file “no money down” chapter 13s than other similarly situated debtors. We could not identify legitimate ways that these two factors correlate with a debtor’s need for the substantive legal benefits of chapter 13. Instead, the phenomenon of “no money down” filings appears to explain much of the racial disparity in chapter 13 filing rates.
Our data cannot reveal how people are choosing to file with “no money down.” As we note in the article, attorneys and debtors in good faith may propose and accept the “no money down” option because it solves their money. Regardless of how debtors decide to file these cases, however, the result is that money and not the totality of the client’s needs is driving how people enter the bankruptcy system. “No money down” bankruptcy thus reduces the efficiency of bankruptcy law, produces unequal results, and distorts the delivery of legal help.
Given these results, we suggest reforms to how attorneys collect fees from consumer debtors: amending the Code to allow for attorneys’ fees to be paid in installments during chapter 7 cases, and revising standing orders regarding fees to require more judicial scrutiny of “no money down” cases. Until such is possible, it falls to attorneys, trustees, and judges to ensure that all debtors have an equal opportunity to receive bankruptcy’s benefits.