Bankruptcy Lawyers Get Paid More for Being Bad Lawyers

I’m bound to catch some flack from my colleagues in the bankruptcy bar for this article, but if anyone out there has a valid rebuttal to my points, I’ll be the first one to welcome it.  Let’s face it: in the current Chapter 13 regime, the quality of work a lawyer does has absolutely no relationship to how much he gets paid.  In fact, there’s a better chance that the quality of representation has an inverse relationship to the amount of fees a bankruptcy firm generates.  Why?  A little thing called the No Look Fee.  Only bankruptcy lawyers know what the No Look Fee is, so an introduction to the Chapter 13 fee system is in order.

 

How Chapter 13 Fees are Awarded

Section 330 of the Bankruptcy Code requires the Bankruptcy Court to approve any fees sought by the debtor’s counsel.  Theoretically, this means that the debtor’s lawyer files a written fee application with the court, stating what sort of work was done and by whom.  The Court theoretically reviews such applications, and approves the ones that are proper and either denies or reduces fee applications that are not justified.

In reality, though, there are simply too many Chapter 13 cases for the court to put a genuine review into every single fee application.  So they issue a standing order that establishes a standard fee for the basic services that tend to go along with every Chapter 13 case.  In the Southern District of Alabama, the No Look Fee is currently $3,000.

Now, this makes perfect sense in a world where every bankruptcy is necessary and every bankruptcy lawyer works to ensure that each debtor gets the most benefit from each case and that every debtor completes each case.

But that world is not here.

Why that Doesn’t Work

See, the no-look fees turn lawyering – a necessarily customized service that demands a detailed look into each client’s particular needs – into a fungible commodity.  The bankruptcy paperwork and process is nearly the same for every case, so if you can attract enough clients, you can just meet them once for a 30 minute interview, pass them off to a paralegal for all the paperwork, and then run them through the system to generate your $3,000 and move onto the next client.

This system awards lawyers that file the most bankruptcies with the least amount of actual lawyer work, not the most well-considered and well executed bankruptcies.  A debtor who gets $1,000 worth of lawyering still pays $3,000.  And so does a debtor who gets $10,000 worth of lawyering.  A debtor whose attorney answers every phone call pays the same fee as a debtor who only deals with the paralegals and secretaries.

And it gets even worse.  Bankruptcy lawyer fees have no relation to the benefit received by the debtor.  If a debtor files a Chapter 13 case with an initial monthly payment of $500, and that payment is increased to $650 because of several questionable debt collector claims, the attorney should fight those claims to save their client money.  But there’s no penalty if the lawyer doesn’t, and no bonus if the lawyer does.

And if the debtor cannot afford the increased payment, and their case gets dismissed, the debtor’s lawyer doesn’t lose a dime.  So if the debtor pays his lawyer $3,000 for a bankruptcy that failed because of the lawyer’s laziness or inattention, the bad lawyer suffers no penalty.  The good lawyer who prevents this from happening similarly gets no benefit other than the satisfaction of knowing he’s a decent person.

In fact, the reverse is true.  See, if your Chapter 13 case is dismissed, you can often file a second bankruptcy shortly thereafter to try again and make it work.  So when a debtor’s Chapter 13 case is dismissed, guess who calls the debtor in for a meeting to discuss filing a second case?  That’s right, the bad lawyer whose laziness got the case dismissed in the first place.  So they file a second bankruptcy, and the first thing that gets paid in that case is the second attorney’s fee, regardless of whether or not that second case actually helps the debtor or gets dismissed like the first one.

The result: the good lawyer who worked to make sure his client’s bankruptcy succeed gets paid $3,000.  The bad lawyer who let his client’s bankruptcy case get dismissed gets paid $6,000.

But, surely there aren’t lawyers out there who would intentionally work their clients for multiple fees, right?

WRONG.  I have work experience both inside and outside bankruptcy mills, and I know how their clients are dealt with.

 

So what do you do about it?

The system needs to be reformed, and it must start with the courts.  Chapter 13 attorneys should have some skin in the game from the minute their client walks into the door until they’ve gotten their discharge papers.  If the no-look fee is $3,000, then only $1,000 should be paid at confirmation, and the rest should be spread out over the remaining years of the plan.  At least $500 should depend on the client receiving a discharge.  No look fees should not exist only for filing, but for hearings and matters that benefit the client and are truly necessary.  For instance, a motion for relief caused by a client’s failure to make mortgage payments should be grounds for an additional fee of, say, $200.  An objection to claim that reduces a client’s monthly payment by $100 should be grounds for an additional fee as well.  And so on.

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