When one files for bankruptcy, how do they pay their bankruptcy attorney? The answer to that question depends on the type of bankruptcy the person has filed.
- Chapter 7 Bankruptcy: A chapter 7 bankruptcy is a liquidation proceeding where the debtor’s non-exempt assets are sold by the Chapter 7 trustee and the proceeds are distributed to creditors in order of priority. The creditors are paid until there is no more money left.
- Chapter 11 Bankruptcy: Chapter 11 bankruptcy is available for small business owners, however, it can be expensive and complex. In a Chapter 11, the business owner is permitted to continue in operation and seeks to restructure. Chapter 11 is available for business owners who want to reorganize but owe too much to qualify for Chapter 13 bankruptcy.
- Chapter 13 Bankruptcy: Chapter 13 bankruptcy is an option often used by small business owners and individuals. Only individuals may file Chapter 13 – businesses are not permitted. In Chapter 13, the debtor’s income is garnished until a certain level of money is paid off. The remaining debt is discharged.
Unpaid attorney fees are generally dischargeable, since the debtor is considered to receive a "fresh start." However, depending on the type of bankruptcy filed, the attorneys involved in the bankruptcy directly may have priority and get paid first.
Attorneys for creditors are paid according to the priority of the creditor debts. Debtor’s attorneys are typically paid up front.
When Is the Bankruptcy Court Paid?
The United States Bankruptcy Court is always paid first. The debtor must cover the filing fees necessary to file for bankruptcy. An exception exists if creditors force the debtor into bankruptcy. When this exception occurs, the creditors must pay the Bankruptcy Court.
When Is the Bankruptcy Trustee Paid?
The cost of administration in a bankruptcy case includes referee fees, trustee fees, clerk fees, witness fees, and accountant fees (if approved by court). The cost of administration also includes "reasonable attorney fees." Services rendered by an attorney must be for the bankruptcy case and directly related to the bankruptcy case.
Reason attorney fees are first paid to the bankruptcy trustee before being paid to the attorney. A trustee is a person appointed by the bankruptcy court. The trustee represents the creditors of the debtor as a group. The trustee is always paid, even if the creditors are not.
How Are the Creditor’s Attorneys Paid?
The attorney for each creditor may want to be paid according to when and if the creditor is paid. However, the priority of an attorney’s fee is determined by the priority of the creditors.
Secured creditors, such as the mortgage or car lenders, are always paid. Secured creditors are often paid before, or at the same time, as bankruptcy trustees.
Priority unsecured debts get distributed, such as taxes, attorney fees, administrative expenses, trustee fees, insurance, and domestic support obligations. Lastly, unsecured creditors such as creditors for credit card companies get paid.
How Is the Chapter 7 Debtor’s Attorney Paid?
The Chapter 7 debtor typically pays his or her attorney before the case commences. In some cases, the debtor’s attorney may accept being paid after the case is over. This will differ on a case by case basis. As implied above, the attorney fees of the debtor are discharged as a result of the bankruptcy. Thus, Chapter 7 bankruptcy attorneys insist on being paid first to avoid the legal complications of being unable to collect after the bankruptcy is over.
How Is the Chapter 11 or Chapter 13 Debtor’s Attorney Paid?
In a Chapter 11 or Chapter 13 bankruptcy, the debtor’s attorney is not paid up front. Chapter 11 and Chapter 13 are referred to as repayment bankruptcies. Therefore, it is possible for the debtor’s attorney to be included in the repayment plan to all creditors. Although the debtor’s attorney isn’t protected by the priority of attorney’s fees, the courts are mindful that the attorney should be paid for their legal counsel.
Courts want to ensure that good attorneys continue to practice in the area of bankruptcy and protect the interests of creditors. They issue complicated disbursement orders so that secured creditors and attorneys get paid approximately at the same time.
Do I Need a Bankruptcy Attorney?
Bankruptcy cases can be very complicated. If you are considering filing for bankruptcy, contact a bankruptcy attorney today to help you review your options. Knowing whether to file Chapter 7, Chapter 11, or Chapter 13 bankruptcy can have a huge impact on how your debts are settled.