By Reni Gertner
The Daily Record Newswire
A growing number of non-bankruptcy lawyers are finding themselves listed as creditors when their clients file for bankruptcy.
“I’m seeing an increasing number of cases where the debts to be discharged are legal fees,” said Carl Starrett, a consumer bankruptcy attorney in El Cajon, Calif.
Many lawyers are unfamiliar with the bankruptcy rules and may be surprised to find out their legal fees are like any other unsecured debt.
In the vast majority of Chapter 7 cases, those fees will end up being completely discharged.
And “in the small percentage of Chapter 7 cases where assets are liquidated and distributed to creditors, pre-petition attorney fees may be recovered on a pro rata basis, but only if the attorney files a timely claim with the court,” said Jay Fleischman, a consumer bankruptcy attorney at Shaev & Fleischman in New York.
How to collect
If your client files for Chapter 13 bankruptcy, you will want to file a proof of claim for payment.
While it may be tempting to collect unpaid fees pre-petition, be aware that a payment over $600 within 90 days before the date of filing may be considered a “preference payment” that the trustee can recoup.
Family law attorneys should be particularly concerned about the risk of a client going bankrupt because divorce and financial hardship often go hand-in-hand.
One way they can make their fees non-dischargeable is to characterize them as part of a support obligation.
“If the state court order says these fees are awarded for the lawyer’s services pursuant to custody, alimony, maintenance or child support, then they are non-dischargeable, as opposed to fees incurred for equitable distribution, which could be discharged in Chapter 13,” said Stuart Gelberg, a debtors’ attorney in Garden City, N.Y.
Another option for a family lawyer is to make sure his or her fees are payable to the ex-spouse — not to the attorney — because that way they are non-dischargeable, he said.
Family law attorneys sometimes also take a lien on the marital home or other assets for payment of their fees, said Marlene Eskind Moses of Moses & Townsend in Nashville, a family law attorney and president of the American Academy of Matrimonial Lawyers.
Personal injury lawyers working on a contingency fee basis may be protected by the fact that their fee is secured by the underlying claim, but they have to take steps to avoid losing that fee.
This is because the injury claim becomes part of the estate and the lawyer would have to seek approval and essentially get hired by the trustee to continue the claim on behalf of the estate.
In addition, litigation proceedings by the debtor are generally subject to the automatic stay.
“If you’ve got a deposition of a client coming up and the client files for bankruptcy, you need to be aware that continuing any ... litigation is potentially problematic and potentially a violation of the stay,” said Fleischman.
