Personal Bankruptcy: The Priority of Attorney’s Fees

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 The Priority of Attorney's Fees

In general, the order in which attorney’s fees are paid will depend on the chapter of bankruptcy for which the debtor has filed. The following list provides some examples of various chapters of bankruptcy along with the corresponding priority of when an attorney’s fees must be paid by a debtor:

  • Chapter 7 bankruptcy: Chapter 7 bankruptcy is the most common chapter of bankruptcy filed by individual consumers or those who have personal debts. In such cases, all non-exempt assets will be sold to pay off a debtor’s creditors. The creditors will be paid off in order of priority and until there is no money or balance left. 
    • As for attorney’s fees, these often vary based on a number of factors including the jurisdiction, local court guidelines, and the reputation or experience of an attorney. Again, while this also may depend on several factors, attorney’s fees for managing Chapter 7 bankruptcy cases typically need to be paid up front.
  • Chapter 11 bankruptcy: Chapter 11 bankruptcy can be used to declare bankruptcy by either individuals, partnerships, or large businesses like corporations. A business may need to file for Chapter 11 bankruptcy, if they are too big or owe too much in debt to qualify for Chapter 13 bankruptcy. Given the complexity of Chapter 11 bankruptcy cases, this chapter of bankruptcy tends to be more expensive than the others. 
    • In addition, an attorney must seek approval from the bankruptcy court in order to be paid. The attorney must prove that the attorney’s fees they are seeking are “reasonable and necessary” under the circumstances. This is a standard that is set by the federal U.S. Bankruptcy Code. So long as the court approves their request for fees, a client may need to pay as much as several thousand dollars.
  • Chapter 13 bankruptcy: Chapter 13 bankruptcy is normally reserved for individuals and small business owners who need more time to pay down their debts. Those who file for Chapter 13 bankruptcy will be required to create a repayment plan that must be completed within three to five years, unless a debtor asks the bankruptcy court for an extension. 
    • Similar to the attorney’s fees for a Chapter 7 bankruptcy case, the amount will depend on a broad range of factors, including the location and the reputation of the attorney who is hired to handle the case. Thus, some attorneys will charge an upfront fee, others will require their clients to pay a large retainer, and many will incorporate the fee as a recurring bill that is part of their Chapter 13 repayment plan.

In some instances, a debtor may be able to request that remaining unpaid attorney’s fees be discharged since they are filing for bankruptcy. Again, this will largely depend on the chapter of bankruptcy that a debtor is filing for because there are some cases where a debtor will be required to pay their bankruptcy attorney first. 

As for the attorneys representing a debtor’s creditors, the creditor’s attorneys will need to be paid in accordance with the priority of the creditor’s debts. This is in direct contrast to a debtor’s attorneys who will either be paid up front, in installments over a certain period of time, or not at all if a debtor manages to get the remaining balance of their attorney’s fees discharged.

Lastly, if you are filing a petition for Chapter 7 or Chapter 13 bankruptcy, then you may be able to negotiate a fee arrangement with the bankruptcy attorney that you hire to take on your case. Most bankruptcy attorneys will either bill using a flat rate fee or will charge on an hourly basis. 

When Is the Bankruptcy Court Paid?

Aside from attorneys who demand their fees to be paid up front, the bankruptcy court is generally the first to be paid. This is because the debtor cannot file their paperwork to declare bankruptcy without paying the mandatory court filing fees. 

The only exception to this rule is if a creditor intentionally forces a debtor to file for bankruptcy. In such a scenario, then the burden of paying the bankruptcy court will become the responsibility of the creditors.

There is also a schedule of payments that sets the order for when each party to a specific chapter of bankruptcy is paid, however, it is usually the bankruptcy court who is paid first—with the exception of upfront attorney’s fees. If the bankruptcy court is not paid, then there will be no way for the debtor to declare bankruptcy. In other words, there will not be a case.

When Is the Bankruptcy Trustee Paid?

The timing, amounts, sources, and so forth of when the appointed bankruptcy trustee is paid will depend on the chapter of bankruptcy and whether the bankruptcy court approves their application to be paid a fee. 

For example, in Chapter 7 bankruptcy, the bankruptcy trustee will be paid an administrative fee (as long as the court does not waive it) and/or a percentage of the property and assets sold to pay off a debtor’s remaining debts. This is known as a commission.

On the other hand, a bankruptcy trustee in a Chapter 13 case will be paid in accordance with the guidelines set by the bankruptcy court. The amount is typically set by the federal government and is currently no greater than 10% of a debtor’s Chapter 13 repayment plan. However, this number can fluctuate due to inflation as well as because of a repayment plan or if a debtor decides to convert to a different chapter of bankruptcy. 

Additionally, the appointed bankruptcy trustee in a Chapter 13 bankruptcy case will normally be paid on a yearly basis much like an annual salary. It is important to note that a bankruptcy trustee is also liable for distributing the debtor’s funds to the appropriate creditors. Thus, while a bankruptcy trustee is paid prior to all other interested parties, they will not be permitted to keep all of a debtor’s money for themselves. 

How Are the Creditor’s Attorneys Paid?

Fees for a creditor’s attorneys are usually paid as soon as the creditor collects on their debt. However, the creditor has discretion to determine how and when their attorney is paid. For example, secured creditors, such as mortgage lenders, are typically paid either before or at the same time as a bankruptcy trustee. Thus, a creditor’s attorney will then be paid either along with the creditor or once the creditor receives a debtor’s payment.

As for creditors that are considered unsecured creditors like credit card companies, the order of priority and way in which an attorney is paid will generally be included in their contract with a debtor. Thus, in some instances, an unsecured creditor may be able to file a claim against the debtor to pay their attorney’s fees as well. In which case, it will qualify as an administrative fee and may need to be paid at the same time as when their debts are paid off. 

How Is the Chapter 7 Debtor’s Attorney Paid?

As mentioned above, a Chapter 7 debtor’s attorney will normally be paid up front and before the case is even initiated. In some cases, however, a debtor’s attorney may agree to wait to be paid until after the Chapter 7 bankruptcy case is settled. Again, this will vary based on an attorney, the circumstances of a case, and on the laws of a particular jurisdiction or specific chapter of bankruptcy.

In some instances, an attorney may never receive attorney’s fees if their clients’ debts are discharged due to declaring bankruptcy, which can make it very difficult for them to collect their fees. Hence, why so many attorneys who work on Chapter 7 bankruptcy cases demand that a client pay their fees up front.

How Is the Chapter 11 or Chapter 13 Debtor’s Attorney Paid?

As previously discussed, an attorney who is hired to oversee a Chapter 11 case must file a request to be paid a fee that is “reasonable and necessary” in light of the circumstances. This is a standard that is set by the federal U.S. Bankruptcy Code. 

Depending on the complexity of the case, this can be as high as hundreds of thousands of dollars, such as if a large corporation is filing for Chapter 11 bankruptcy. However, a court will still need to approve the amount before an attorney can receive the amount of fees that they request.

A Chapter 13 debtor’s attorney will be paid in periodic installments as part of their three or five year Chapter 13 repayment plan. Some attorneys may also ask that a retainer fee be paid up front to begin the work, while others may only require their clients to pay for court costs, such as filing fees.

Although these fees will still come from the debtor’s account, the actual payment will be made by the bankruptcy trustee who was originally appointed to the case when the debtor filed their petition for bankruptcy. This is because the bankruptcy trustee is responsible for distributing debts to all creditors, including for attorney’s fees.  

Do I Need a Bankruptcy Attorney?

Regardless of the chapter of bankruptcy that you are declaring, it is strongly recommended that you consult with a local bankruptcy lawyer before filing a petition for bankruptcy with the court. Both the laws and procedures required to file for bankruptcy can be extremely confusing to understand without the help of a legal professional. 

An experienced bankruptcy lawyer can explain the differences between each chapter of bankruptcy and can provide advice on which chapter may be best based on your personal financial situation. Your lawyer can also represent you in court at various bankruptcy proceedings related to your case as well as can discuss your rights as a debtor under U.S. federal bankruptcy law.

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