A judge's gavel rests on a book of law.

A judge's gavel rests on a book of law. (Dreamstime/TNS)

It’s tough to file for personal bankruptcy when you’re flat broke.

That’s why a number of South Florida bankruptcy law firms are offering clients “no-money-down” or “low-money-down” plans to help ease their long trip back to financial health when they file for Chapter 7 under the U.S. Bankruptcy Code. The provision allows people to wipe the slate clean of mounting credit card and similar debts.

The fee arrangements, which involve two separate payment agreements between the lawyers and their clients, could become critical this year for troubled consumers who are burdened with household debts accumulated during the COVID-19 crisis. It could be the difference between getting help in the courts, or not.

“The problem we were having is we had clients come to us and their wages are being garnished, their assets are being frozen and every paycheck that goes by they’re losing it to a creditor,” said Fort Lauderdale attorney Chad Van Horn of the Van Horn Law Group. “Some people are broke-broke. They really don’t have the money.”

Another firm — Semrad Law Firm in Miami — has a subsidiary called DebtStoppers whose TV commercials tell hard-pressed consumers they can get their Chapter 7 bankruptcy cases started without paying anything in advance.

But earlier this year, the U.S. Trustee for the Southern District of Florida, whose role is to ensure compliance with bankruptcy court rules and procedures, complained to the chief judge that both firms had stepped out of bounds with their fee agreements and payment options for clients.

Among other things, the trustee objected to the firms’ use of so-called “bifurcated” fee agreements with clients — one signed before a bankruptcy petition is filed with the court, the other for services performed by the lawyers afterward. One concern was that the law firms were charging too much money for legal work after a case was filed.

In a motion to Chief Bankruptcy Judge Laurel M. Isicoff, the trustee also complained that the firms’ fees in three cases ranging from $1,200 to $1,900 were not “reasonable.”

But Isicoff, in a 41-page ruling, concluded the two-pronged method of payment should stand. She also found that the firms had not overcharged their clients.

The judge, however, wanted the firms to be more explicit in their agreements with clients about the services they intend to perform, as well as when and for how much money.

No complaints

None of several Van Horn clients interviewed by the South Florida Sun Sentinel last week offered any sense of confusion or misunderstanding about the cost of services they received from the firm, or how they were to pay for them through the two agreements they signed with the firm.

One successfully disposed of her debts through Chapter 7, while another expects his case to be resolved in August.

Raine Dyer, 48, a former college admissions representative, completed her case a year ago.

“They did do a payment arrangement with me which was very helpful at the time,” she said of her agreement with the firm.

Bankruptcy, she said, was her only financial alternative after losing her job and breaking off a personal relationship.

“At that moment for me, that was the option, yes,” she said.

Now she’s interviewing for jobs and keeping a tight lid on spending,

“I was a big fashion girl,” she said. “I don’t want to go down that road. You live and learn so you aren’t in that position again.”

Ralph Bumgardner is a retired high school guidance counselor from Michigan and Broward County resident who is waiting for his case to conclude.

“There is a payment plan that they have which is easy for people who are indigent and need to get this process over with,” he said.

“In my own situation, I’m 77 years old and made lots of financial mistakes and reached the point where I needed dental implants, hearing aids and needed to go into assisted living,” he said. “This enabled me to do those things that I hope to accomplish.”

“I had thought about it for maybe six months,” Bumgardner added. “I always thought there was an embarrassment attached to bankruptcy, and they assured me other people have done this to their advantage. It kind of gives you some idea that you’re not alone.”

How it works

Generally, law firm clients sign a single agreement to cover services to be performed throughout their cases.

When clients first meet with their lawyers, the discussion is a free consultation. Then, the attorney will quote them a fee to guide them through the Chapter 7 case. The cost can range from $1,200 to $2,000, according to lawyers and court papers. That includes the filing fee and various costs related to submitting financial schedules and meeting with creditors. As soon as the lump sum is paid, the firm will file the case.

But not everyone has the money to pay their lawyer a lump sum.

The advantage of “low money down” prior to the filing allows a hard-pressed client to quickly get his or her case into court, The filing involves submitting some basic forms about the person’s finances. The lawyers, however, are not allowed by law to pay for a client’s filing fee, which in South Florida is $335.

Once the case is filed, the client signs the second agreement to pay for the remainder of the work, which includes a meeting with creditors.

“This is one of our most important issues — how do you pay for consumer bankruptcies?” said Robert Lawless, a professor at the University of Illinois College of Law. He has served as the reporter for the American Bankruptcy Institute’s Commission on Consumer Bankruptcy, which reports to Congress.

“There needed to be a pathway for people to pay for the attorney fees through some sort of payment plan,” Lawless said of the opinion. “The basic idea is, ‘yes there should be some structure available for people to pay for their Chapter 7 bankruptcies.”

In her opinion, Isicoff said there are four ways for a person filing Chapter 7 to pay their lawyer:

•The filing can be delayed until all of the fees are paid up front.

•The lawyers can file the case without getting paid in full up front and hope the client will voluntarily pay additional fees after the filing.

•The attorney can divide the legal services into two parts.

•The client can file a Chapter 13 case, which requires a repayment plan to creditors. In that case, legal fees can be paid after the case is filed.

But people deep in debt and who lack cash face a dilemma if they can’t find a lawyer to help them, Isicoff wrote.

Access to the court

“Without access to counsel, a consumer Chapter 7 debtor must either file a case with no help or, perhaps even worse, file with the assistance of a bankruptcy petition preparer, many of whom charge more than lawyers, and who are prohibited from providing any legal assistance,” she said.

Alan Crane, a bankruptcy attorney with Furr & Cohen P.A. in Boca Raton, said the clash over the separate payment agreements is a national issue.

“It’s somewhat still new and unsettled throughout the country,” he said. “It was sort of a test case for the lawyers, the trustee and the judges to give guidance on whether these agreements were acceptable under the bankruptcy code and under what circumstances.”

“The judge is trying to serve a need,” Crane added.

Part of the need is to ensure consumers understand their rights when they first step into their lawyers’ offices. Among other things, one is the right to hire another lawyer after their case is initially filed, said Patricia Redmond, a bankruptcy lawyer with Stearns Weaver Miller in Miami.

Van Horn said the opinion gives clients “a piece of mind this is a legal practice people are doing. No longer is it like a gray area. It’s very clear what the judges of this district think of this.”

There are also more detailed disclosures to clients about what’s contained in their pre-petition and post-petition agreements.

“We believe our agreements were in line with [the law] anyway,” Van Horn said. “Effectively we got exactly what we needed here.”

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