With the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) came numerous amendments to the U.S. Bankruptcy Code.  Of great significance was the inclusion of a calculation of monthly income required for individual consumer debtors to determine their eligibility for relief under chapter 7 of the Bankruptcy Code, commonly referred to as the “means test,” and provided for in 11 U.S.C. § 707(b)(2)(A) and (B). The failure of an attorney to accurately disclose a client’s monthly income and expenses on the means test can have devastating consequences on the debtor and may result in potentially sanctionable actions against the attorney pursuant to the Bankruptcy Code and the Rules of Professional Conduct.

11 U.S.C. § 707(b)(4)(C) provides that the signature of an attorney on a pleading is a certification that the attorney has performed a reasonable investigation into the circumstances that gave rise to the pleading, and that it is well grounded in fact. Further, 11 U.S.C. § 707(b)(4)(D) provides that the signature of an attorney on the petition shall constitute a certification that the attorney has no knowledge after an inquiry that the information filed in the schedules — which will necessarily include a means test where applicable — filed with the petition is incorrect. Thus, there is an affirmative duty on the attorney to investigate the information provided by the client when preparing pleadings and schedules, including the means test and the monthly income and expense reports that make it up.

Additionally, Federal Rule of Bankruptcy Procedure 9011 places an affirmative duty on attorneys to make a reasonable investigation under the circumstances of the facts and the law before submitting any paper to the court. [2] This rule is intended “to protect the integrity of legal proceedings” and to protect against pleadings filed for improper purposes or that are not grounded in fact or law or a reasonable extension of the law. [3] Courts have found the duties required pursuant to 11 U.S.C. § 707(b)(4)(C) and (D) to be equivalent to the duty required in Rule 9011. [4] A reasonable investigation of the facts presented to the court requires the attorney to make an affirmative investigation and independently verify the facts to ensure their accuracy and truthfulness, and not simply accept the client’s assertions at face value. [5]

When obtaining information from the client on current income and expenses to be used for calculating the means test, the attorney should require the client to provide documentation of the stated income and expenses to ensure accuracy and truthfulness. This documentation can be in the form of bank statements, paystubs and actual invoices. The failure of an attorney to verify the correctness and truthfulness of the information provided in the means test could result in the presentation of false statements to the court concerning the truthful income and expenses of a client, potentially resulting in the attorney being sanctioned.

In addition to the potential consequences to an attorney who fails to verify the accuracy of the income and expenses presented to the court on the means test, the debtor faces the possibility of a denial of discharge pursuant to 11 U.S.C. § 727(a)(4)(A) for making a false oath in connection with the income and expenses reported on the means test. For instance, in In re Fontaine, the debtor failed to disclose his wife’s income and misrepresented his household size on the means test. This, coupled with the omissions of income on his schedules and statement of financial affairs, warranted the denial of his discharge. [6] Similarly, discharge was denied to debtors who underreported their income and inflated their monthly expenses on the means test. [7] Thus, the importance of accuracy and truthfulness in completing the means test is important to both the attorney and the debtor.

Getting paid in a consumer bankruptcy practice can feel like nighttime in Westeros: dark and full of terrors. [1]

Debtors typically see bankruptcy as a last resort and often don’t contact an attorney until they are out of time and money, usually while facing existential issues with strict timelines. Depending on your jurisdiction, stopping certain actions can be all but impossible without filing for bankruptcy. Yet, the retention and compensation of a bankruptcy attorney is subject to serious complexities. Often, the choice of chapter is made by what the client can afford to do now, not what’s best.

The complications of compensation in chapter 7 are an amalgamation of legislative intent, judicial interpretation and quasi-regulation from overseeing bodies. [2] Consider the client’s expectation, based on a common client/attorney relationship. A divorce client will contact an attorney to assist and protect them throughout the process. The two will discuss the case, and the attorney will typically quote a retainer to be billed hourly or a flat fee. The client has every legal means available to them to pay for the representation, and the parties can work out complications that arise. The fee is agreed to by the parties and no one else really looks at it. The method of payment of the fee is irrelevant so long as it is legal tender and doesn’t breach rules of professional conduct. The parties can structure the representation as they see fit. Lastly, if the client fails to pay or perform, the attorney can generally withdraw.

In contrast, the attorney/client relationship for a consumer bankruptcy attorney is restricted. The process still starts with the client making initial contact, but everything else will be subject to scrutiny. In a Chapter 7 case, the attorney generally cannot quote something other than a flat-fee arrangement. This is because the Bankruptcy Code prohibits post-petition payments of attorney fees arising from pre-petition retention agreements. [3] This makes sense, because the case is meant to discharge debt. But ultimately, the outcome is severe due to precedent that classifies debtor attorney compensation as nonpriority dischargeable debt. [4] That means that the client–who typically has little or no disposable funds–must come up with the full fees for the attorney to take the case from start to finish. That’s unusual for consumer clients. These clients often must file their case quickly to avoid devastating financial consequences. There’s no time to raise money to file chapter 7, and they generally cannot incur additional debt to pay their attorney. [5]

The attorney faces an ethical issue. It’s no secret that most consumer bankruptcy practitioners are small or solo firms. They need cases to keep the lights on, and they perform an essential function in their communities and the economy. Yet, they are expected to be fortunetellers because their fee is intended to be for “all services essential to the successful completion of the case.” [6] As every attorney knows, your client often hasn’t told you everything. In other matters, compensation for the undisclosed issues is handled through the hourly billings or adjustments in the agreement, but that isn’t an option for debtor’s counsel in Chapter 7? What is that attorney to do? They must anticipate the worst and quote accordingly. However, that fee must be reasonable, despite the necessity of potentially overquoting to protect against unexpected work. Indeed, the U.S. Trustee inspects all consumer chapter 7 cases to ensure “that debtors are properly and adequately represented by their attorneys, who in turn are negotiating the terms of their fee arrangements.” [7] The combination of requiring the upfront payment of all anticipated work and the client’s limited means generally results in frustration. To provide the client with a solution, attorneys often turn to chapter 13.

There are plenty of reasons why chapter 13 is beneficial for a client. It’s a financial Swiss-army knife for catching up on a mortgage, reducing a car payment and more. [8] But for many filers, they simply have no choice because they need to pay their attorney fees over time. That sounds straightforward, but it is a difficult ethical position for the attorney.

First, they are recommending a remedy that isn’t the ideal outcome for the client. A chapter 7 client is usually discharged and on with their life within six months of filing, [9] while a chapter 13 client will be in the case for 36 to 60 months. [10] A chapter 7 client generally will repay little to no debt in the case. [11] Their cost is often limited only to the fees and costs of filing the case. A chapter 13 client will nearly always repay some debt. Without other cause, a chapter 7 client has a strictly better outcome than a chapter 13 client, as chapter 7 is faster and requires less payments to their adversaries.

Second, the attorney is prioritizing their fees over the client’s outcome. They both know this should be a chapter 7, but the best outcome is out of reach within the mandated time frame. While there is a rational basis for that decision, it should still cause the attorney anxiety. Their fees are the obstacle, and the solution is ultimately a windfall. You see, the fees quoted in chapter 7 are almost always less than the attorney will receive in chapter 13. Not only do they have to prioritize getting paid over the client’s needs, but they get paid more for doing so. That’s great from a business perspective, but it goes against the spirit of professional ethics. [12] This is not to say that the additional fees aren’t justified, though; chapter 13 generally requires substantially more from both parties.

It's those additional requirements that make up the last reason for why this all feels like potential conflict. Those requirements result in more failed cases. ABI reports that chapter 13 success rates vary from 40-70% depending on the state and law firm. [13] By contrast, chapter 7 has about a 95% success rate. [14] The chapter 13 success rate may be influenced by the number of cases filed that should have been in chapter 7. Those cases have less cause to be in chapter 13, because the case isn’t saving an important asset like a vehicle or home, [15] and the client often doesn’t have the means to ensure success in the case.

Recently, the U.S. Trustee has taken steps to allow for “bifurcated” fee agreements, allowing the initial filing to be done at a flat rate and via a subsequent agreement post-petition. [16] While this is a step in the right direction, it is hollow for a few reasons. First, the guidelines still warn that disgorgement of fees is possible if the structure isn’t to their satisfaction. [17] This complicates the process, because each office handles things differently. Second, the risk is ultimately borne by the attorney. Finally, these arrangements are based on the client paying the fees after they have gotten their initial relief. Although the client wants a discharge, they receive the feeling of that relief with the automatic stay. The motivation for the filing, and its accompanying stress, are gone when the first post-petition payment is due. Plus, there is no certainty that the client will pay. Remember how nonpayment is grounds for withdrawal in those other matters? Not in bankruptcy; if that client doesn’t pay for your post-petition representation, the attorney is likely stuck. [18]

For true progress to occur, a solution must be found that allows for the ethical and economic protection of the attorney in the process as well. Until we prioritize the clients’ true needs, obtaining a discharge with their attorneys’ security, debtor and counsel will have to settle for the next best thing.