In the past, some brave lawyers have filed Chapter 13 bankruptcies that propose to pay only attorney’s fees through the bankruptcy plan. Appeals courts in other parts of the country have previously held that filing Chapter 13 bankruptcy for the sole purpose of paying attorney’s fees was an abuse of the bankruptcy process. Their reasoning is that a Chapter 7 bankruptcy is the appropriate chapter to file when no distribution to creditors is anticipated. The problem with Chapter 7 is that all attorneys’ fees must be paid up front. Once a Chapter 7 is filed, fees owed to the bankruptcy lawyer would be uncollectable because of the automatic stay and eventual discharge of debts. Lawyers have worked around this problem by filing a Chapter 13 bankruptcy, which allows for attorney’s fees to be collected by a trustee and distributed to the lawyer after the bankruptcy filing.
The Fifth Circuit recently heard a case with similar facts and cleared up this issue for lawyers in Mississippi, Louisiana and Texas. In Sikes v. Crager, a debtor filed a bankruptcy that listed unsecured debts totaling approximately $7,000.00 and an income of $1,076.00 per month. The trustee in her case objected, arguing that the attorney’s fee was too high and that the plan was filed in bad faith. According to the trustee, the debtor’s case should have been filed as a Chapter 7 to get an immediate discharge.
The Fifth Circuit ultimately found that the debtor reasons for filing Chapter 13 were legitimate. It would have taken the debtor a year to save up enough money to pay Chapter 7 attorney’s fees. Further, a Chapter 7 would have prevented the debtor for filing another case for at least 6 years if she incurred additional medical debt. While bankruptcy courts will still look to the “totality of the circumstances” to determine whether a Chapter 13 is filed in good faith, this case will probably give more lawyers courage to file “fee only” Chapter 13 cases.