Does a change in the Chapter 13 law that provides for "adequate protection" payments to vehicle lenders put the debtor’s interests in conflict with the debtor’s lawyer? As the final language to the BAPCPA changes to the Bankruptcy Code were being negotiated by lawmakers and lobbyists, a very interesting provision was included, most likely at the insistence of lobbyists for vehicle finance companies.
Chapter 13 now provides that debtors may include "adequate protection" payments to vehicle lenders such that the lenders receive payments prior to the confirmation of a Chapter 13 case. These adequate protection payments can be made directly by the debtor to the lender or, as is the case most often, through the trustee’s office from the trustee payment receipts.
For example, a debtor may owe $25,000 on a vehicle purchase in which the contract payment is $450 per month. His Chapter 13 trustee payment may be $550 per month with $400 of that payment payable to the lender prior to confirmation as an adquate protection payment. Such an arrangement seems reasonable, but is it really?
Here is the ethical issue that debtors’ lawyers face. Individuals facing bankruptcy – whether Chapter 7 or Chapter 13 – usually have very little cash on hand. The filng fee for Chapter 13 in particular is now $274 and further increases are predicted. Debtors’ lawyers therefore usually collect the filing fee and some small payment towards the attorney’s fees prior to filing a case. In my office, for example, I usually ask for at least $600 in up front attorney’s fees + the filing fee for a total of $874. My experience has been that most debtors have to struggle to come up with $874. Then there is the $50 that the debtor has to pay for pre-bankruptcy counseling. Many lawyers charge the filing fee only or perhaps the filing fee and $200 or $300.
The Chapter 13 plan used in the Northern District of Georgia allows attorneys to set a "reasonable fee" both for cases that are confirmed and for cases that are dismissed prior to confirmation. A plan may provide for $4,500 or $5,000 in fees if the case is confirmed and, say, $3,500 if the case is dismissed. The fees charged in your case may be higher or lower depending on the complexity of your case and the lawyer you choose.
As Chapter 13 debtors’ lawyers well know, much of the work done in a Chapter 13 case occurs prior to confirmation. In the current climate, cases may be reset two or three times and plans and petitions may be amended repeatedly.
If most of the money being paid in to a plan ends up in the hands of vehicle lenders, very little remains to pay a lawyer who may have expended fifteen or twenty hours, only to see his client’s case fail because of a job loss, an illness or circumstances beyond the lawyer’s control. On the other hand, if the lawyer sets the adequate protection payment very low, the lender may object and the debtor may not have the option of converting his case to Chapter 7. Secured lenders in Chapter 7 will usually refuse to reaffirm secured debt claims if the debtor is delinquent. Six months of a low adequate protection payment will result in several hundred to several thousands of dollars in payment delinquencies, leaving the debtor at risk for repossession.
To put this another way, this adequate protection provision forces debtors’ lawyers to choose between getting paid a fair fee for their work or maximizing the adequate protection payment to preserve their client’s ability to convert to Chapter 7 or to dismiss the Chapter 13 case without drastic consequences.
Now, a cynic would argue that lawyers are free to charge a higher up front payment – it is there decision to charge little or nothing up front. Unfortunately, the marketplace says otherwise. What is happening and will continue to happen is that solo practitioners and small firms are being driven from the market. High volume filers will be the only ones left who can take the risk of filing Chapter 13′s. With no disrespect directed to high volume filers who certainly have their place in the market, there are many complex Chapter 13 cases that need personalized attention.
In my view this adequate protection procedure has the (un)intended consequence of further closing the door to debt relief under Chapter 13.
Technorati Tags: adequate protection payments, conversion to Chapter 7, bankruptcy northern district of georgia, car lenders in bankruptcy
Filed under Chapter 13 issues, Reaffirmation and negotiation by 
If you have read my blog at all, you know that I have been quite critical of many of the changes brought about by the BAPCPA changes to the bankruptcy law. In general these changes have make the process of filing bankruptcy more complicated and more expensive. Sometimes, I have to decline representation in cases with complications because the potential client cannot afford to pay me for the time it would take to untangle his/her mess.
Lest you think that I am alone in my attitude about the current bankruptcy law, take a look at this blog post by South Carolina bankruptcy lawyer Däna Wilkinson on the Bankruptcy Law Network blog. Däna entitles her post "Top Ten Wastes of Time After BAPCPA" and she discusses the wastes of time for both debtors and their lawyers.
In my view the whole median income/means test income calculation using gross income numbers from the six months prior to filing is the biggest waste of time. Why should your eligibility for Chapter 7 today be a function of your income over the past six months. At least in the Northern District of Georgia, bankruptcy judges have been open to the idea of tossing out the six month lookback if your current income situation has changed.
These medican income/means test calcuations can take several hours and, at the end of the day, the results tell us nothing about the debtor’s current capacity to pay creditors. But, because I have to spend my time processing the numbers, my fees have gone up. What a waste of time for no good purposes.
Close behind the median income/means test requirement are the credit counseling/financial managment course requirements. Basically these required education courses offer very little useful information to a bankruptcy filer, but they do add around $100 to the cost of filing – $50 for the certificate to get in and $50 for the certificate to get out. If there is a point to this surcharge, it escapes me.
Take a look at Däna’s article – it would be interesting to hear from both debtors and debtor’s lawyers – what do you think?
Technorati Tags: credit briefing, financial management, means test, median income test, bankruptcy law network
The United States Trustee’s Office has released new median income/means test numbers applicable to bankruptcy cases filed on October 15, 2007 and thereafter. The new median income table for bankruptcy cases can be found by clicking on the link.
Here are the new median income numbers for Georgia families:
| Family Size | Old Median Numbers (February 1, 2007 – October 14, 2007) | New Median Numbers (October 15, 2007 – February 12, 2008 (anticipated) |
| 1 | $37,588 | $38,086 |
| 2 | $50,376 | $50,001 |
| 3 | $55,293 | $57,254 |
| 4 | $66,508 | $66,711 |
In looking at this table, it appears that the change in the median income figures is less, on a percentage basis, than previous adjustments. Higher median income numbers make it easier to fit into Chapter 7, so this October 15, 2007 table will not help most debtors. In fact, the median income figure for a household of two has declined, meaning that a bankruptcy filer in a two person household will find it more difficult to fit into a Chapter 7 post October 15, 2007 than he would if he filed prior to October 15, 2007.
Technorati Tags: median income figures for bankruptcy cases, median income test, means test, USDOJ
Filed under Chapter 7 issues, Means Test issues, Median income test issues by
In Chapter 13 cases filed in the Northern District of Georgia, both the IRS and the Georgia Department of Revenue receive notice of your filing. In my office, I include both the IRS and Georgia as "notice creditors" in every case filed.
Recently, I have had to deal with problems arising from "estimated liability claims" filed by either the IRS or Georgia in Chapter 13 cases.
The problem arises in the case of a debtor who did not file a tax return in a prior year because of very low or non-existent income. I have had a number of clients tell me that their accountants or tax preparers advise them that the debtor did not need to file a tax return for years in which the debtor earned little or no income.
I do not know if this advice about not filing returns is correct or not as I am not a CPA or a tax preparer. What I do know, however, is that if you did not file a return in a prior year, there is a good chance that the IRS or Georgia will file an estimated liability claim for those tax years in your Chapter 13 case.
This estimated liability claim will often be calculated based on your earnings for recent years. In other words if you earned zero in 2003, but earned $50,000 in 2004, 2005 and 2006, then the IRS will assume that you earned around $50,000 in 2003 and they will estimate your liability for that period as well. Their estimated liability claim will include tax liability, interest and penalties.
If the IRS files an estimated liabilty claim based on unfiled returns, your Chapter 13 case will include unanticipated priority tax debt and there is a good chance that the Chapter 13 trustee will not agree to recommend confirmation of your case because your tax debt is actually unknown.
I am currently working on several cases where we have had to ask for reset after reset to give the debtor time to file a return showing zero earnings and for the IRS to amend its claim.
If there are any years in which you did not file tax returns, I think it would be wise for you to consult with your tax preparer prior to filing Chapter 13. I am now recommending to my clients that they advise their tax preparers about this estimated liability problem and file a return showing zero income so that their Chapter 13 plans will not be in jeopardy.
Technorati Tags: chapter 13 and taxes, estimated tax liability claims in bankruptcy, proof of claim, Georgia Department of Revenue, IRS claims
Filed under Chapter 13 issues, Tax issues, Trustee objections in Chapter 13 by
"How do I recover from bankruptcy?" This question comes up in every new client interview or client meeting that I conduct. There is no no universal answer to this question, but here are a few thoughts:
- Become a more educated consumer. Bad financial decisions often lead to debt problems that can overwhelm you, thereby leading to a bankruptcy filing. If you are filing or if you are close to filing, take a few minutes to step back and think about how you ended up in your financial predicament. What would you have done differently? Moving forward take advantage of the financial resources on the Internet, most of which are free. Examples of helpful sites include
NADA – shows car prices
Consumer Feedback Central – a blog post with 100 feedback sources
Bankrate.com – comprehensive financial resource
The Motley Fool – easy to understand investment advice
Clark Howard’s web site – consumer guru Clark Howard offers advice about living on the chap and avoiding ripoffs. - Resolve to cut your overhead. Start by creating a household budget. Include a "rainy day" saving account in your budget and avoid major purchases that strain your budget. Obviously, houses and car purchases are the two biggest areas that you can control. Work towards a goal of having a paid off car and a paid off house. Monthly overhead that you cannot change will eat you up, both financially and mentally.
- Avoid unnecessary purchases and learn to spot sales pitches. Good salespeople train themselves to sell to you by allowing you to convince yourself to make a purchase. A very useful book that describes many of these techniques is called Influence by a social psychologist named Robert Cialdini. If you understand how you are being influenced you may be less likely to fall prey to sales pitches for unnecessary purchases. Some of the types of unneeded purchases that I see a lot in bankruptcy court include:
- time shares – almost always a bad deal
- large furniture purchases – if you are on a budget, you will pay 10 cents on the dollar for used furniture
- fancy vacuum cleaners – almost always a wasteful purchase
- expensive new computers – if you use your computer for school homework or to email, a one or two year old computer will serve your purchases. You will pay $200 to $300 instead of $1,500 to $2,000
- big screen televisions – personally, I watch very little television – perhaps a baseball or football game on occasion and the news every once in a while. My children are only allow to watch tv on weekends. Most successful people I know watch very little television. If you find yourself watching hour after hour during the week, consider alternatives like reading a book, taking a walk or finding a part time job. There is nothing positive that will happen in your financial life if you watch four or five hours of TV every day
Got any other ideas or helpful resources? Let me know.
Filed under Consumer protection, Post bankruptcy credit rebuilding by
