§ 27.4 — Getting Paid: Attorneys’ Fees for Representing Debtors

Revised: March 30, 2009

[1]

Discussed in detail elsewhere,1 attorneys’ fees for representing debtors in Chapter 13 cases are heavily regulated by the Bankruptcy Code and Rules. More so than most other aspects of Chapter 13 practice, the U.S. trustee (or bankruptcy administrator) and standing Chapter 13 trustees look over the shoulders of debtors’ lawyers to monitor whether debtors are getting what they are paying for. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)2 labeled all debtors’ attorneys Debt Relief Agencies3 and imposed many new duties and responsibilities that impact the amount, collection and supervision of attorney’s fees in Chapter 13 cases.4

[2]

The amount and timing of payment of fees for debtors’ counsel in Chapter 13 cases vary dramatically among jurisdictions.5 Prior to BAPCPA, in states that required a written fee contract, debtor’s counsel was required to memorialize the fee arrangement. After BAPCPA, without regard to state law or rules of professional responsibility, every debtor’s attorney must have a written contract with every Chapter 13 debtor that includes the fee agreement and a description of the services included in that fee.6

[3]

Most debtors’ counsel charge a flat fee for the typical Chapter 13 case.7 Some contract with the debtor for compensation at an agreed-upon hourly rate. Counsel who handle Chapter 13 cases for a flat fee usually reserve the possibility that the case will become atypically complicated, requiring further compensation.

[4]

Lawyers who use the flat fee approach are required by BAPCPA to explain exactly what is included for the initial fee. Some attorneys include stay relief and claims litigation in the flat fee. Some counsel cut off the services covered by the flat fee at confirmation; others stay with the case through discharge, including postconfirmation modifications. Local practice—especially in districts where there is a “no-look” or “presumptive” fee—may affect whether representation is for the entire case or whether it may end upon confirmation.8

[5]

Some debtors’ counsel require an advance or retainer before filing a Chapter 13 case.9 The balance of the fee is usually paid after confirmation through payments under the plan. A few attorneys require full payment in advance. Many higher-volume counsel require no retainer and accept 100 percent of the fee through the plan after confirmation.

[6]

Attorneys who regularly require little or no prepetition retainer might be inclined to rethink that generosity after reading In re Busetta-Silvia.10 Busetta-Silvia was an unremarkable Chapter 13 case in which debtor’s counsel did the usual work and filed the usual fee application. The bankruptcy court found that some of counsel’s work was done prepetition and some postpetition; but all was “in connection with” the Chapter 13 case, and all the work was “reasonable, necessary and benefitted the estate and/or the debtor.”11 No party in interest objected, but the bankruptcy judge raised the issue whether counsel in a Chapter 13 case can be awarded an administrative expense for work performed before the petition. The court concluded that a debtor’s attorney cannot be compensated from the estate for work performed prepetition even in connection with the filing of the Chapter 13 case except as an ordinary unsecured creditor:

[T]he Court ought to assume that Congress intended that the prepetition/postpetition distinction be read into §§ 329(a), 330(a)(4), 503(b), 507(a)(1) and 1322(a)(2) unless there is some evidence to the contrary . . . . [W]ork done but not paid for prior to the filing of the petition results in a prepetition claim against the estate. . . . [P]repetition attorney fees, not listed in either the priority or dischargeability statute, are treated as any other unsecured non-priority dischargeable debt.12
[7]

Bankruptcy lawyers know that you can’t just throw a naked petition into the hopper and hope afterward to put together a Chapter 13 case. There is important lawyer work that has to be done before the petition is filed, at a minimum, to determine that the debtor is eligible and that meaningful debt adjustment is possible.13 These determinations require a fair amount of fact collecting and contact with the debtor before the petition can be filed.14

[8]

What’s a lawyer to do if Busetta-Silvia relegates the prepetition portion of counsel’s fees to ordinary unsecured status? The bankruptcy court in Busetta-Silvia gave these less than satisfying suggestions: “Counsel can do a considerable amount of the work postpetition and thus have an administrative claim . . . . Other solutions include obtaining payment beforehand from the debtor’s friends or family members.”15 Another possible solution would be to separately classify the prepetition fees, then argue strenuously that full payment is fair discrimination for § 1322(b)(1) purposes.16

[9]

The logic of Busetta-Silvia might incline debtors’ attorneys in Chapter 13 cases to increase the portion of their fees demanded in advance of filing. The alternative suggested by the court of postponing more work into the postpetition period is simply not practical in Chapter 13 cases. Delaying the heavy lifting until after the petition serves no productive purpose in a Chapter 13 case. Filing the petition and then collecting information and preparing the schedules and statement will delay the processing of Chapter 13 cases and is not consistent with congressional intent that Chapter 13 be an efficient mechanism for individual debtor rehabilitation. In the somewhat analogous situation of attorneys’ fees for debtors’ counsel in Chapter 7 cases, the U.S. Court of Appeals for the Ninth Circuit invoked the “doctrine of necessity” to insulate counsel’s fees from discharge.17

[10]

In most jurisdictions, there are local rules, guidelines or customs that control the amount and method of payment of Chapter 13 attorneys’ fees.18 Some jurisdictions permit debtor’s counsel an initial portion of the fee, either a fixed dollar amount or a percentage of the total fee, and then future installments dependent upon the debtor’s payments into the plan. A few courts permit attorneys’ fees in Chapter 13 cases as a percentage of payments made into the plan, with or without a limit or relationship to the actual services rendered. Still other courts treat Chapter 13 cases more like Chapter 11 cases and require fee applications and hearings in each case.

[11]

In most jurisdictions, there is a custom or tolerance for Chapter 13 attorneys’ fees up to some specific amount—sometimes called a “presumptive” or “no-look” fee.19 The Chapter 13 trustee and counsel who regularly represent debtors in Chapter 13 cases know the magic amount and know that a fee request up to that amount will not be challenged in the typical case. Fees in excess of the tolerated level are treated differently and may require separate application with itemization and a hearing.

[12]

That debtors’ counsel often are willing to accept fees through the plan is a major attraction of Chapter 13 for debtors unable to pay a lump sum in advance of filing under another chapter. Counsel risks the debtor’s nonperformance by accepting attorneys’ fees through the plan. 11 U.S.C. § 1326(a)(2) provides some protection in the event a plan is not confirmed—debtor’s counsel can claim an administrative expense recovery from any money held by the trustee pending confirmation.20

[13]

Fee disputes in Chapter 13 cases most often develop after confirmation when the debtor needs to add claims, battle a creditor, or modify the plan, and counsel refuses to continue to represent the debtor without further compensation. The best defense to such problems is a clear prefiling understanding of what the debtor is entitled to for the agreed-upon fee. After BAPCPA, this clear understanding must be included in a written contract.21

[14]

Prior to 1994, nothing in the Bankruptcy Code suggested that debtors’ attorneys’ fees in Chapter 13 cases were to be treated differently from debtors’ attorneys’ fees under other chapters. The Bankruptcy Reform Act of 1994 rewrote § 330 of the Code, to contain the following specific provision with respect to debtors’ attorneys’ fees in Chapter 13 cases:

In a . . . chapter 13 case in which the debtor is an individual, the court may allow reasonable compensation to the debtor’s attorney for representing the interests of the debtor in connection with the bankruptcy case based on a consideration of the benefit and necessity of such services to the debtor and the other factors set forth in this section.22
[15]

This 1994 amendment makes explicit that debtor’s counsel in a Chapter 13 case can qualify for fees from the estate for representing the debtor’s interests, notwithstanding that the benefits of that representation are not necessarily shared by creditors or the estate. The 1994 amendments to § 330 did not dramatically change the amount or method of payment of debtors’ attorneys’ fees in Chapter 13 cases.23 An efficient and effective Chapter 13 counsel should be well paid. That counsel may handle a volume of cases should not work a penalty in attorneys’ fees if counsel represents each debtor well.

[16]

Bankruptcy Rule 1006(b)(3) prohibits “further payment to an attorney or any other person who renders services to the debtor in connection with the case” until the filing fee is paid in full. Under prior versions of this Rule, debtor’s counsel could not accept a retainer if the debtor intended to pay the filing fee in installments under Bankruptcy Rule 1006(b)(1).24 Bankruptcy Rule 1006(b)(3) was amended—first by an Interim Rule,25 and then by formal adoption effective December 1, 2008—to recognize that a debtor may pay the filing fee in installments, as permitted by Bankruptcy Rule 1006(b)(1)–(2), even when a fee has been paid to an attorney or petition preparer.26 As amended, a retainer or other fee may be paid, but no further fee is permissible until the installment fee has been paid in full.27

[17]

Because there is no Code requirement that debtor’s counsel in a Chapter 13 case be approved by the bankruptcy court, counsel can seek fees without first obtaining court approval of the hiring.28 However, a common objection to attorney fees in Chapter 13 cases is failure to comply with statutory and Rule-based requirements for disclosure of fees.29 Failure to disclose and improper disclosure subject the attorney to disgorgement and other sanctions.30

[18]

There are times when Chapter 13 debtors need special counsel—for example, when the debtor is involved in litigation in a nonbankruptcy court. Any additional counsel must seek approval to represent the debtor, or perhaps the trustee, including approval of the fee arrangement.31


 

1  See §§ 100.4 [ Special Provisions for Attorneys’ Fees ] § 73.8  Special Provisions for Attorneys’ Fees, 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6  Debtors’ Attorneys’ Fees before BAPCPA, 442.1 [ Attorney Fees after BAPCPA ] § 73.9  Attorney Fees after BAPCPA, 482.1 [ Administrative Expenses, Sorta ] § 95.25  Administrative Expenses, Sorta, 486.1 [ Total Priority Debts and Divide by 60 ] § 97.1  Total Priority Debts and Divide by 60 and 515.1 [ Debtors’ Attorneys’ Fees ] § 136.7  Debtors’ Attorneys’ Fees after BAPCPA.

 

2  Pub. L. No. 109-8, 119 Stat. 23 (2005).

 

3  See 11 U.S.C. § 101(12A), discussed in § 366.1 [ WARNING! You Are a Debt Relief Agency ] § 4.1  WARNING! You Are a Debt Relief Agency.

 

4  See §§ 442.1 [ Attorney Fees after BAPCPA ] § 73.9  Attorney Fees after BAPCPA and 515.1 [ Debtors’ Attorneys’ Fees ] § 136.7  Debtors’ Attorneys’ Fees after BAPCPA.

 

5  See §§ 100.4 [ Special Provisions for Attorneys’ Fees ] § 73.8  Special Provisions for Attorneys’ Fees, 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6  Debtors’ Attorneys’ Fees before BAPCPA, 442.1 [ Attorney Fees after BAPCPA ] § 73.9  Attorney Fees after BAPCPA and 515.1 [ Debtors’ Attorneys’ Fees ] § 136.7  Debtors’ Attorneys’ Fees after BAPCPA.

 

6  See 11 U.S.C. § 528(a)(1), discussed in §§ 366.1 [ WARNING! You Are a Debt Relief Agency ] § 4.1  WARNING! You Are a Debt Relief Agency and 515.1 [ Debtors’ Attorneys’ Fees ] § 136.7  Debtors’ Attorneys’ Fees after BAPCPA.

 

7  The use of flat fees and “presumptive” fee amounts is discussed in §§ 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6  Debtors’ Attorneys’ Fees before BAPCPA and 515.1 [ Debtors’ Attorneys’ Fees ] § 136.7  Debtors’ Attorneys’ Fees after BAPCPA.

 

8  See §§ 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6  Debtors’ Attorneys’ Fees before BAPCPA and 515.1 [ Debtors’ Attorneys’ Fees ] § 136.7  Debtors’ Attorneys’ Fees after BAPCPA. See, e.g., In re Brooks, No. 99-11125 cab, 2000 WL 35723252, at *3 (Bankr. D. Vt. Dec. 23, 2000) (unpublished) (Brown) (Debtor’s attorney’s motion to withdraw after confirmation is denied; even though attorney has not been paid in full for prepetition fees, those fees may be paid through plan upon proper application. “This is not to say that there are never instances where an attorney is not fully compensated for the fair value of services rendered to a chapter 13 debtor. Unfortunately, this will occur from time to time in any type of case. However, I find that, on balance, the need for chapter 13 debtors to be assured of continuous representation by their legal counsel throughout the chapter 13 case outweighs the attorney’s right to withdraw during the case for non-payment of fees, particularly in light of the many safeguards in place to ensure that the attorney who diligently computes the fee, keeps careful records, seeks additional fees when necessary and has the attorney’s fees paid through the plan, will generally be paid in full in a timely fashion.”).

 

9  See, e.g., In re Laferriere, 286 B.R. 520 (Bankr. D. Vt. 2002) (Retainer for legal services in contemplation of a Chapter 13 petition that was not filed is subject to review and disgorgement under Bankruptcy Rule 2017 when the debtors file a Chapter 7 case more than a year later and counsel fails to reveal retainer in Bankruptcy Rule 2016 disclosure.).

 

10  300 B.R. 543 (Bankr. D.N.M. 2003).

 

11  300 B.R. at 545.

 

12  300 B.R. at 545–48.

 

13  Prefiling investigation by debtor’s counsel became more important and time consuming as a result of changes to the Code by BAPCPA. See §§ 360.1 [ Summary of Part 9 and Introduction to BAPCPA ] § 2.1  Brief History of Chapter 13 before 2005371.1 [ Eligibility of Repeat Filers after BAPCPA ] § 23.2  Eligibility of Repeat Filers after BAPCPA.

 

14  See §§ 27.1 [ Use of Preinterview Forms ] § 29.1  Use of Preinterview Forms31.1 [ Special Information Needs ] § 33.1  Special Information Needs In Business Cases.

 

15  300 B.R. at 550–51.

 

16  See § 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1  Power to Classify Unsecured Claims: Tests for Unfair Discrimination.

 

17  Gordonn v. Hines (In re Hines), 147 F.3d 1185 (9th Cir. 1998). But see Bethea v. Robert J. Adams & Assocs., 352 F.3d 1125 (7th Cir. 2003) (Rejecting the “little surgery” done upon the Code under the guise of the doctrine of necessity.).

 

18  See §§ 100.4 [ Special Provisions for Attorneys’ Fees ] § 73.8  Special Provisions for Attorneys’ Fees, 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6  Debtors’ Attorneys’ Fees before BAPCPA, 442.1 [ Attorney Fees after BAPCPA ] § 73.9  Attorney Fees after BAPCPA and 515.1 [ Debtors’ Attorneys’ Fees ] § 136.7  Debtors’ Attorneys’ Fees after BAPCPA. See, e.g., Law Offices of David A. Boone v. Derham-Burk (In re Eliapo), 298 B.R. 392 (B.A.P. 9th Cir. 2003) (Attorneys signing the “Rights and Responsibilities Form” agree to accept fees subject to the maximums in the guidelines for the Northern District of California and agree not to accept more than $500 as a prepetition retainer absent court approval.); In re Moore, No. 02-03960, 2003 WL 22946433, at *1 (Bankr. D. Haw. May 28, 2003) (unpublished) (Local guidelines for attorney fees in Chapter 13 cases permit debtor’s counsel to opt in or opt out; attorney who opts out “can seek reasonable compensation that is not constrained by a fixed limit, but must file and obtain court approval of a compensation application.” Opting-out attorney is not subject to limitation that attorney receive “the lesser of 50 percent of the monthly plan payment or $250 of each plan payment.”).

 

19  See §§ 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6  Debtors’ Attorneys’ Fees before BAPCPA and 515.1 [ Debtors’ Attorneys’ Fees ] § 136.7  Debtors’ Attorneys’ Fees after BAPCPA.

 

20  See §§ 315.1 [ In Cases Filed before October 22, 1994 ] § 143.1  In Cases Filed before October 22, 1994, 316.1 [ In Cases Filed after October 22, 1994 ] § 143.2  In Cases Filed after October 22, 1994, 338.1 [ In General ] § 153.1  In General, 402.1 [ Disposition of Preconfirmation Payments ] § 44.7  Disposition of Preconfirmation Payments after BAPCPA, 534.1 [ Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) ] § 143.3  Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) after BAPCPA and 541.1 [ Consequences of Dismissal ] § 153.2  Consequences of Dismissal Added or Changed by BAPCPA.

 

21  See 11 U.S.C. § 528, discussed in § 366.1 [ WARNING! You Are a Debt Relief Agency ] § 4.1  WARNING! You Are a Debt Relief Agency.

 

22  11 U.S.C. § 330(a)(4)(B), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 224, 108 Stat. 4106 (1994). See § 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6  Debtors’ Attorneys’ Fees before BAPCPA.

 

23  See §§ 100.4 [ Special Provisions for Attorneys’ Fees ] § 73.8  Special Provisions for Attorneys’ Fees and 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6  Debtors’ Attorneys’ Fees before BAPCPA. The same cannot be said of BAPCPA. See § 515.1 [ Debtors’ Attorneys’ Fees ] § 136.7  Debtors’ Attorneys’ Fees after BAPCPA.

 

24  See §§ 36.6 [ Application to Pay Filing Fee in Installments ] § 36.29  Application to Pay Filing Fee in Installments and 38.3 [ Filing Fee and Option to Pay in Installments ] § 37.5  Filing Fee and Option to Pay in Installments.

 

25  Interim Bankruptcy Rules were distributed to the bankruptcy courts in 2005 to manage changes to the Code by BAPCPA. Those Interim Rules became formal Bankruptcy Rules after undergoing the normal rule-making process, effective December 1, 2008.

 

26  See § 4.2  Bankruptcy Petition Preparers for discussion of bankruptcy petition preparers.

 

27  See § 385.1 [ Filing Fees, Installments and Waiver ] § 37.6  Filing Fees, Installments and Waiver after BAPCPA.

 

28  In re Harris, 298 B.R. 319 (Bankr. E.D. Tenn. 2003).

 

29  See 11 U.S.C. §§ 329 and 330; Fed. R. Bankr. P. 2016(b). See, e.g., In re Arnold, No. 07-80636-G3-11, 2008 WL 2224932 (Bankr. S.D. Tex. May 27, 2008) (Letitia Clark) (Attorney who begins to represent pro se debtor must promptly disclose fees and file application under § 330; since this was not done, attorney must disgorge and hold fees in trust pending filing of fee application.).

 

30  See §§ 294.1 [ Debtors’ Attorneys’ Fees ] § 136.6  Debtors’ Attorneys’ Fees before BAPCPA and 515.1 [ Debtors’ Attorneys’ Fees ] § 136.7  Debtors’ Attorneys’ Fees after BAPCPA. See, e.g., In re Olsen, 397 B.R. 379 (Bankr. N.D. Ill. 2006) (Black) (Attorney who altered trustee’s payoff letter to obtain increased fee is in civil contempt of court, is required to refund entire fee, is required to reimburse trustee’s legal fees, and is barred from practice in bankruptcy court for six months.).

 

31  See, e.g., Environmental Litig. Group, P.C. v. Crawford (In re Price), Nos. 05-04807-TOM-13, 07-00017, 2007 WL 1125639 (Bankr. N.D. Ala. Apr. 16, 2007) (unpublished) (Mass tort law firm must seek approval of employment, on behalf of either debtor or trustee. Section 327(c) applies, and special counsel must be approved for employment.).