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.

Most people who file bankruptcy do so with the assistance of an attorney. Their ability to pay the attorney’s fee thus may become an issue. Based on CBP data, attorneys charge on average about $1,200 to file a chapter 7 bankruptcy, and about $3,200 to file a chapter 13 case bankruptcy. The Code allows people who file chapter 13 to pay attorneys’ fee during the repayment plan. In contrast, almost all bankruptcy attorneys require to pay their fees in full before filing the case.

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. 

Comments

[Jason Kilborn]

I haven't heard much about a very interesting empirical paper by Ed Morrison and Antoine Uettwiller exploring, among other things, why African-Americans are over-represented in Ch. 13: http://ssrn.com/abstract=2845497. They reveal that, here in the Northern District of Illinois, Chapter 13's exclusive power to compel turnover of a repo'ed car AND discharge parking and other civil tickets might well represent a "legitimate way" that the law compels African-American debtors toward Ch. 13. It may well be that Chicago officials especially rapaciously impose these kinds of burdens on African-American residents, either related to their race or not, but that alternative explanation is race neutral from the bankruptcy system's perspective. I hope the CBP will consider this and conclude, on your evidence, whether that explanation has any legs.

[Jason Kilborn]

Terrific paper, as usual from the CBP! I couldn't figure out if ch.-13-dischargeable fines/penalties was coded or not. Didn't look like it. Table 2 certainly supports the idea that the no-money-down ch. 13 filers have impounded/repo'ed cars they're trying to regain (more than double the secured debt of ch. 7 filers), but it doesn't address the presence of fines (which might be relatively small, but a few thousand dollars of fines could be--and in N.D.Ill. apparently is--a compelling reason to seek ch. 13 relief). It seems highly likely that the low-level criminal justice system has wildly disproportionate negative impact on African Americans, especially in Chicago. Could this be your hidden variable to explain the race effect--perhaps in addition to attorney steering? And the controversial (inflammatory?) attorney-steering point seems to be belied by the finding on p. 24 that no-money-down ch. 13 filers leaned heavily toward the "no attorney involvement in chapter choice" end of the scale, no? Such fascinating and enlightening empirical work!

[Pamela Foohey]

Thanks for the comments, Jason. On the Morrison and Uettwiller paper, they still find racial sorting, just less of it. I read the paper to come to the same basic conclusion as "Race, Attorney Influence, and Bankruptcy Chapter Choice." In addition, Chicago is idiosyncratic about chapter 13s and parking tickets. What makes these chapter 13 cases work well in Chicago may not translate to other districts. Nonetheless, it is an interesting paper!

On the cars and "no money down" bankruptcy, good idea. We will look into that.

Regarding attorney “say” in chapter choice, I do not think that these results "belie" the attorney influence point. Indeed, I don’t think a conclusion can be drawn from the results either way. One story is what I think is your idea that the debtor and attorney come to a decision in which the debtor had the ultimate “say” in chapter choice. An equally plausible story is that there is little to no discussion about chapter choice. For instance, the debtor might come to the attorney with a chapter in mind. In high chapter 13 districts, that chapter is more likely to be chapter 13 because that is what debtors hear about from others in their communities. The attorney simply agrees. Or the debtor might not know much about bankruptcy, and the attorney simply may offer a chapter with little discussion of alternatives. In these instances, debtors still may indicate that the attorney had little "say" in chapter choice. In the draft paper, we offer these results without much commentary. This too is something we will consider further. Thanks!

[Matthew Bruckner]

In my bankruptcy class last week, we discussed the Race, Attorney Influence and Chapter Choice article by Braucher, Cohen and Lawless. Neither that paper nor this one appears to distinguish between African Americans and black Americans. Yet my students suggested that salient differences might exist between the two groups and that these differences might account for some African Americans preference for chapter 13. In particular, several students asserted that African Americans may be atypically (relative to the rest of the population) concerned with keeping their property and that his atypical concern could result in tuning out advice to file chapter 7 and give up a house, land, etc.

Based on a quick review, it appears that respondents self-selected racial categories and that the category option was Black/African American. Did you consider disaggregating those categories?

[Bob Lawless]

Matthew, you are correct that our racial identifier is black/African-American. Our findings are generalized to anyone who would validate that selection. To the extent the hypothesis is that these are are two distinct group, lumping them together would have made it less likely we would have had the results we did. In the "Race, Attorney Influence, and Chapter Choice," the hypothesis would not explain the findings from the attorney vignette where attorneys reacted differently to "Reggie & Latisha" as opposed to "Todd & Allison." Btw, we use the same racial identifiers on the CBP as the U.S. Census.

[Attorney Richard N. Gottlieb, Esq.]

There is a very basic flaw in the logic at least as applied to "no money down" Chapter 7 cases are concerned. Because a lawyer is compelled to avoid conflicts of interest (as a matter of nearly universal state legal ethics laws) and due to the fact that a pre-petition lawyer's bill for filing, prosecuting and consummating a Chapter 7 case is a dischargeable debt, there exists an irreconcilable conflict of interest created by an attorney offering a "no money down" Chapter 7. To put it more simply, a lawyer cannot be an outstanding creditor of a debtor and represent that debtor's best interests in a Chapter 7 bankruptcy case because to do so creates a conflict of interest between a lawyer's legal responsibilities to the client and the lawyer's individual pecuniary interests to himself. It is for this reason that, in Chapter 11 cases, lawyers to whom a prior debt is owed by the Debtor, must waive the enforcement and forgive the debt in order to become "disinterested" and obtain approval for their employment as Debtor's Chapter 11 counsel. The same logic applies with respect to Chapter 7 cases even though no specific court approval is required.

But there is also the practical problem as well: If, as is the case, the debt owed to the lawyer in a "no money down" Chapter 7 case, is dischargeable, by what mechanism, consistent with current ethics law, would a lawyer be able to compel payment of the debt from such a Debtor client? The answer is that there exists no such legal mechanism and as such the concept is fundamentally flawed both ethically and practically. My "two bits".

[keith lundin]

Another fine contribution from CBP. Perhaps a bit harsh? The "substantial increase" in no downpayment chapter 13 cases in the 8 years from 2007 to 2015 was from 10.5% of attorney-represented debtors to 14.2%. I trust you that is "statistically significant" but not five-alarm stuff. The no downpayment group actually had two and a half times more secured debt than your chapter 7 pool, were 25% more likely to own a home and had 40% less unsecured debt -- all factors that good debtors' counsels would consider in the chapter selection process that favor the chapter 13 alternative but are lost in your "they are more like chapter 7 debtors" conclusion. The extra secured debt would make saving money for an up front lump sum chapter 7 fee more difficult, wouldn't it? While you are about indicting debtors' attorneys for those more expensive chapter 13 cases, where is your analysis of the "collection" factor? Chapter 7 attorneys collect all of that $1200. No chapter 13 lawyer comes close to collecting all of the promised $3200. The "good business/bad ethics" that you say distorts chapter selection needs more nuanced analysis. Someday, perhaps the CBP will consider a metric for "success" or "moneys worth" in consumer bankruptcy other than discharge. How many of your no downpayment chapter 13 debtors stopped a garnishment, kept a house, a car or a job without getting a discharge? Compare those numbers to the Chapter 7 debtors. Of course you are right -- there is enormous inefficiency in consumer bankruptcy. But the worst of it isn't about discharge (or attorneys fees); its about politics. BAPC(RA)PA comes to mind. kml

[Ed Boltz]

How apt of a comparison is it between the discharge rates of Attorney Fee Only plans and "regular" Chapter 13 cases?

Using the $3200 average fee and the maximum 10% Trustee Commission, that would require a monthly payment as low as $60.00 or so. (Since these are presumed to be viable Ch. 7 cases, there shouldn't be either a Disposable Income or liquidation requirement.)

This assumption may be incorrect, but it would seem likely that a plan that required only $60.00 a month would be more likely to succeed than a higher one that included on-going mortgage payments and an arrearage, car payments, taxes or any of the other secured or priority claims.

[Ed Boltz]

I've suggested many times ways that the goal of increasing discharges in Chapter 13 cases could be accomplished if courts ( and Ch. 13 Trustees) read the "best interests of creditors and the estate" in 1307(c) to to encompass the proposition that a discharge of debts through conversion of an non-performing Ch.13 case to Ch. 7 is in the best interests of creditors and the estate.

It helps creditors by providing a final distribution (or lack thereof) in satisfaction of debts, stopping them (because, Lord knows they can't stop themselves) from collecting bad debts. It helps the estate because non-exempt equity gets liquidated and exempt equity is freed for productive use again.

Ch. 13 Debtors should still be allowed to choose dismissal (particularly where there is non-exempt equity), but the presumption should be conversion not dismissal. This would tie the representation of the debtor in an involuntary converted case to the original Ch. 13, making it part and parcel of the representation.

Then debtors would be free of debts and, if a second Chapter 13 filing was still needed, there would be neither a limited term automatic stay nor (except if there were nondischargable debts, like student loans) an Applicable Commitment Period, allowing the second case to be shorter, if affordable.

[Ken Doran]

The fundamental DNA of current bankruptcy law is a small business asset case, and in some ways the Code deals poorly with no-asset consumer cases, which are of course now drastically more common. The law should treat reasonable debt for the purpose of enabling the filing -- usually attorneys fees, perhaps occasionally other services -- as a separate and non-dischargeable category. Any such provision would of course be subject to abuse control regulation.

[Hughes]

Seems to be most, if not all bankruptcy filings should have the "no money down" option. It's a bit ironic that it takes a significant amount of money to legally declare "I don't have enough money."

I know that's an over simplification and bankruptcy attorneys must get paid for their work. However, if procedures can be set in place to allow most consumer bankruptcy filings to be filed with a "no money down" option, perhaps everyone could benefit, including the bankruptcy attorneys themselves (with increased volume of clients).

[Fraud Guy]

Anecdote is not data, but having just gone through a Chapter 7 a few years ago, some of the choice is determined by the attorney. Three of four we consulted with were certain we only qualified for a Chapter 13 due to our gross income (which would have cost us more per month than our income), but a third showed that with net negative assets and income we qualified for a 7 regardless, and went through that with minimal pain (though some major distress).