How Will I Pay for a Bankruptcy if I'm Broke? How Much Will My Chapter 7 Bankruptcy Cost?

There's an old joke among lawyers: a bankruptcy attorney walks into a cocktail party, and the divorce lawyer asks, "How does a bankruptcy lawyer get paid?", to which the response is, "Up front."

There's a certain amount of truth buried in that joke. A consumer bankruptcy lawyer doesn't want a fee owed to him to be discharged along with all the other debt, so he or she has a tendency to get paid in full prior to the filing. For that matter, a commercial bankruptcy lawyer has a similar concern, so he may want a ten million dollar retainer.

Some bankruptcy lawyers take tiny payments over a long period of time. I do not. Because invariably, in my experience, when I take a tiny payment stream from a potential client, something terrible (lawsuit, garnishment, getting fired, foreclosure) happens to them long before their fee is paid, and they know I'm not exactly their lawyer yet, and I know I'm not exactly their lawyer yet, and yet both of us are unhappy and confused about our status.

So instead, I take retainers from my clients because, as Abraham Lincoln said, that's how a client knows he has a lawyer and a lawyer knows he has a client.

And the written retainer agreement is just as important, because it sets out exactly the scope of what I've agreed to do. If I have to jump in front of a bus for a bankruptcy client, that costs extra. As set out in the written agreement.

The one area I can't help with is finding the money for the retainer. I can make a lot of debt go away, and help the debtor keep most (or all) of his stuff. I can't do that trick with the loaves and the fishes. The client can beg or borrow the money from mom. That's fine, although if she borrowed it from mom, mom is then a creditor, and must be listed on the schedules, and also as the source of the dough on the 2016(b) disclosure statement. And mom will be discharged along with the other creditors, and that's fine, because daughter or sonny boy can pay back dough to loving parent post-filing.

Or the kids can get a GIFT, not a loan, from parents, at which point they don't need to list mom as a creditor.

Or the client can sell a non-exempt asset (the other car, for instance) for fair market value. Selling a non-exempt asset or an exempt asset to find money to hire a bankruptcy lawyer is fine, although that sale (a "transfer") must show up somewhere in the statement of affairs, and the proceeds must be accounted for just like any other pre-petition transfer, and the amount paid to the lawyer must be reasonable, as reasonable is defined in that jurisdiction. There is a substantial geographic differential.

Or a potential client can pull money out of a retirement vehicle to pay bankruptcy counsel; that may well have a tax consequence.

Speaking of taxes, a client will sometimes wait for a tax refund, and use that to pay the bankruptcy lawyer.

For that matter, once a potential client makes a final determination that they will be filing, they probably won't keep paying on their credit cards, because that's a lot like throwing money out the window, IF they know that they'll be filing. Obviously, it's a bad idea to stop paying on debts relating to a car or house you want to keep, at least in most cases. But the money that was being spent on credit card payments can be used to accumulate a retainer for a bankruptcy filing.

Some people think they can use a credit card to pay a bankruptcy lawyer; that doesn't make a lot of sense to me, because credit card use within 90 days of filing is presumptively nondischargeable, and it seems squinky.

Over the years, I have suspected that some clients have used credit cards to pay OTHER expenses, freeing up money to pay a bankruptcy lawyer, and then not filed for 120 days after they used the credit cards, but there are only 29 hours a day and 12 days a week, and I can only suspect some things.

On the other hand, if mom wants to take a cash advance and pay for daughter's bankruptcy, that's fine, done right. Mom remains liable for the debt, and presumably pays it, so there's no bad deed done as to the credit card company.

If a potential client makes it into my office and can't possibly afford me, and has no assets to speak of, and no relatives or friends from whom they can borrow money for a bankruptcy filing, AND no particular legal complications that show up in our discussions, and has very, very modest debt, I may refer the potential client to the self-help center at the United States Bankruptcy Court. On the other hand, because there are different volunteers there from time to time, results may differ. Kind of like a barber college.

The presumptively reasonable fee for an uncontested Chapter 7 bankruptcy in the District of Arizona, the last time I checked, was around $3,500, and some lawyers will charge as little as $999, plus costs, for a small uncontested Chapter 7 (although they may charge for add-ons; read any retainer agreement carefully). Several of those consumer debtor lawyers are friends of mine, and if I think there is a good chance they can handle a case for some folks who are entirely up against it, I'm happy to refer them over if they can't afford more credentialed representation, AND their debt is very modest AND there are no serious complications.

If there's a business involved, or the debt is greater than a million dollars, I personally may charge more than $3,500, depending on the case and the amount of work I can see in the case (if the name of the business was "Ponzi Schemes R Us", I'll always charge a good deal more).

Note that the filing fee of $299 for the Court is extra, and the client normally pays for their own pre- and post- mandatory credit counseling. Heidi, my paralegal, keeps me up to date on which of those approved mandatory counseling services is the least expensive for my clients to suffer through online.

I'm certain that brand new lawyers who have never filed a Chapter 7 bankruptcy for a client before will be willing to file for much less, and lawyers who have just gone to work for bankruptcy "mills" will take your case for whatever dollar amount their bosses tell them to take.

I personally set my fees only after I visit with a potential client and look at their face, because I want to know the person or couple I'm representing.

And I think it's VERY IMPORTANT that a client have an opportunity to meet with me prior to making any retention decision, because if they can't stand me or I can't stand them, they really need other counsel.

And I set my fees on a case by case basis, although my fees are comparable to other lawyers in Phoenix with comparable experience, credentials and ratings.

Note that Chapter 13 cases are more expensive than Chapter 7 cases, but since the debtor is trapped for a minimum of three years in a payment plan to creditors, the legal fees in a Chapter 13 bankruptcy are (or should be) the least of their worries.

Should you file a bankruptcy case without a lawyer? Well, there are all sorts of kits, and online services, and non-lawyer "bankruptcy petition preparers", and so on. And they might work for you, and they might not. If you read all the books about bankruptcy that I've reviewed in this blog and at Amazon.com, you'll be better able to determine whether such a service might be appropriate for you.

On the other hand, if you file a bankruptcy by yourself, and it doesn't work very well, and your case has been dismissed, or your discharge has been denied, or the presumption of abuse has arisen in your case, assume that it will cost a LOT more to fix the problem. If the problem can be fixed. And honestly, you may just be outa luck for a repair job, because the 2005 Amendments to the Bankruptcy Code are not very forgiving to debtors.

Think about it. You can take your Mercedes to a dealer, and get a pretty predictable result, and it will cost a pretty decent price. Or you can take the same car to a backyard mechanic, and he might fix it, and he might mess it up. Or you can take it to somebody who charges very, very little indeed, and has a new toolbox and a diagram. Or you might try to fix it yourself, with your "I'm a Mechanic, Just Like Daddy!" Automobile Tool Kit.

After somebody jams up the transmission pretty good, will it cost more or less to get it fixed at the dealer? If it can be fixed?

Just sayin'.

P.S. I was at a first meeting of creditors this week, and got to watch a lovely couple who made a decision to use a "filing service"; they lost three vehicles and a ton of dough to the trustee. Not a remarkably good result, I thought.