Personal Bankruptcy: The Priority of Attorney's Fees
How do bankruptcy attorneys get paid if the client is broke? In a personal bankruptcy, the debtor’s property is turned into cash, and creditors are paid until there is no more money left. Unpaid attorney’s fees are generally dischargeable, since the debtor is supposed to be given a “fresh start.” However, the attorney involved in the bankruptcy is given priority.
Distributions follow an order of priority. First, any unpaid portion of the United States Bankruptcy Court filing fee is paid off. Next, administrative fees are paid.
The cost of administration in a bankruptcy case includes referee’s fees, trustee’s fees, clerk’s fees, witness fees, and accountant fees (if approved by court). The cost of administration also includes “one reasonable attorney’s fee.” Services rendered must specifically be for the bankruptcy, and directly related.
Next or at the same time, secured creditors are paid, such as the debtor's mortgage or car lender. There can be conflicts between secured creditors and trustees / attorneys over the payment of fees. Courts want to balance to insure that good attorneys continue to practice in the area of bankruptcy, while at the same time protecting the interests of creditors. They issue complicated disbursement orders so that secured creditors and attorneys get paid approximately at the same time.
Next, priority unsecured debts get distributed, such as taxes, attorney’s fees, administrative expenses, trustee’s fees, insurance, and domestic support obligations. Lastly, unsecured creditors such as credit cards get paid.
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Last Modified: 11-05-2008 04:38 PM PST
