Missouri, Following New York, Holds that Chapter 13 Bankruptcy Plans That Pay Legal Fees Only Are Not Allowed

September 12, 2008

You are eligible for a Chapter 7 bankruptcy discharge only every eight years. In addition, the U.S. Supreme Court in Lamie v. U.S. held that any Chapter 7 legal fees for pre-bankruptcy services must be collected by the time the bankruptcy is filed. That means if you haven’t paid your Chapter 7 bankruptcy lawyer in full by the time the case is filed, you cannot be forced to do so afterwards.

Under Chapter 13 bankruptcy, however, you CAN pay your lawyer after the case is filed.

So what happens if you can’t come up with the Chapter 7 legal fees in time to stave off a wage garnishee or bank account freeze?

For many consumers around the country, the answer has been a Chapter 13 bankruptcy. Under Chapter 13 bankruptcy you are required to file a Plan designed to pay certain creditors, but for people who are living on the edge of financial ruin and making below median income, that Plan may require $0 in payments.

In such case, people who need to file NOW or have been through Chapter 7 bankruptcy within the past eight years would file what is termed a “fee only Chapter 13 Plan.” In other words, file a Chapter 13 Plan that provides for payment of your attorney’s legal fees but nothing else.

Not anymore in Missouri, holds the case of In re Montry, Case No. 08-30413 (W.D.Mo. 2008).

A Missouri bankruptcy judge has now sent up a flare of sorts, indicating that this would not be permitted in his court because such a Plan is not in “good faith.” And though this court has no impact on New York, it’s useful to talk about it because it effectively bars consumers from seeking the relief they need - when they need it.

Section 1325(a) of the Bankruptcy Code states that “the court shall confirm a [Chapter 13] plan if . . . (3) the plan has been proposed in good faith and not by any means forbidden by law.” The Bankruptcy Code does not define “good faith,” and courts have used as standard for good faith the “totality of the facts and circumstances.”

So what does that mean? According to a 1982 case called In re Estus, the Eighth Circuit Court of Appeals suggested eleven factors courts may consider in their determination of whether a Chapter 13 case has been filed in good faith. In addition, the New York case of In re Paley, 390 B.R. 53 (Bankr. N.D.N.Y. 2008) held that “[a] plan whose duration is tied only to payment of attorney’s fees simply is an abuse of the provisions, purpose, and spirit of the Bankruptcy Code.”

The Missouri court tries to use the increased legal fees in a Chapter 13 as opposed to those in a Chapter 7 as a reason why their decision is consumer friendly. But in reality, this court - as well as the Paley court right here in New York - have slammed shut the door to consumers who need bankruptcy help but either cannot afford to pay the fees for a Chapter 7 bankruptcy or do not qualify for a Chapter 7 discharge.

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