Ban on specialized Chapter 13 filing overruled by appellate court

On behalf of Ellett Law Offices , P.C. posted in 1. Chapter 13 on Wednesday, March 28, 2012
Having a lawyer by your side during bankruptcy proceedings is absolutely vital. You are already stressed out enough by your financial situation, and legal counsel affords you the knowledge and insight needed to complete your bankruptcy proceedings without any undue anxiety. For such legal services, the bankrupt party must pay their attorney — but through a Chapter 7 bankruptcy, the insolvent party cannot use bankruptcy estate funds to pay a lawyer.
It’s a Catch-22: how do you pay your attorney while going through bankruptcy? One way is through a Chapter 13 filing. Chapter 13 bankruptcy allows the filer to restructure their debts and establish a new payment plan that is within their means. The filing must be approved by a court, but it greatly helps many people who struggle with outstanding debt.
For the purpose of paying your lawyer, though, a “fee-only” Chapter 13 filing can give an insolvent party the financial freedom necessary to pay off both their attorney and their creditors. This is where the filer pays the bankruptcy estate a certain figure each month for a minimum of three years. From that estate, the filer’s creditors and legal fees are paid, as well as the fee of a trustee.
“Fee-only” filings are usually reserved for special circumstances, but they serve an important function. Recently the First Circuit of the U.S. Court of Appeals overturned the rulings of a federal district court and a bankruptcy court, both of which rejected a man’s “fee-only” Chapter 13 bankruptcy plan. The two lower courts ruled that such a plan was forbidden, but the First Circuit said it was unlawful to say that all “fee-only” bankruptcies were filed in “bad faith.”
Source: Wall Street Journal, “First Circuit Lifts Ban on ‘Attorney Fee-Only’ Bankruptcy Plans,” Joe Palazzolo, Mar. 23, 2012
Tags: Chapter 13, debt, fee-only bankruptcy