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Bankruptcy Case Analysis

In the wake of this decision, bankruptcy attorneys will have to be far more careful to ensure that they get paid for their services. The decision suggests two ways for attorneys to do that.

First, the decision effectively requires attorneys to enter into two separate retainer agreements with their clients: one for pre-petition work, which must be paid prior to filing and imposition of the automatic stay; and a second one after filing, for post-petition work, which should be paid prior to discharge.

The court stated, “Those [debtors] who cannot prepay in full can tender a smaller retainer for prepetition work and later hire and pay counsel once the proceeding begins … Legal fees incurred after filing in such situations receive administrative priority; that prospect (plus some prefiling retainer) should be enough to summon legal assistance.”

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7th Circuit Court of Appeals

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Counsel should then make sure that the payment schedule is such that all fees will be paid prior to discharge. If the debtor retains nonexempt assets, the attorney fees are an administrative priority, and attorney fees will come before other creditors’ claims.

However, this assumes sufficient assets to do that. The question is what an attorney can do to protect himself if that isn’t possible.

It appears that the only way an attorney could protect himself in that instance is for the debtor to reaffirm the debt. In its discussion of whether sec. 329 retains any purpose, even if legal fees are subject to discharge, the court stated, “if the debt is reaffirmed during the proceeding, … the judge must ensure reasonableness.”

Nevertheless, although attorneys are not helpless in collecting fees if they represent the most destitute of debtors in bankruptcy, the decision definitely makes the collection of fees more difficult.

– David Ziemer

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David Ziemer can be reached by email.

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