Does a change in the Chapter 13 law that provides for "adequate protection" payments to vehicle lenders put the debtor’s interests in conflict with the debtor’s lawyer? As the final language to the BAPCPA changes to the Bankruptcy Code were being negotiated by lawmakers and lobbyists, a very interesting provision was included, most likely at the insistence of lobbyists for vehicle finance companies.
Chapter 13 now provides that debtors may include "adequate protection" payments to vehicle lenders such that the lenders receive payments prior to the confirmation of a Chapter 13 case. These adequate protection payments can be made directly by the debtor to the lender or, as is the case most often, through the trustee’s office from the trustee payment receipts.
For example, a debtor may owe $25,000 on a vehicle purchase in which the contract payment is $450 per month. His Chapter 13 trustee payment may be $550 per month with $400 of that payment payable to the lender prior to confirmation as an adquate protection payment. Such an arrangement seems reasonable, but is it really?
Here is the ethical issue that debtors’ lawyers face. Individuals facing bankruptcy – whether Chapter 7 or Chapter 13 – usually have very little cash on hand. The filng fee for Chapter 13 in particular is now $274 and further increases are predicted. Debtors’ lawyers therefore usually collect the filing fee and some small payment towards the attorney’s fees prior to filing a case. In my office, for example, I usually ask for at least $600 in up front attorney’s fees + the filing fee for a total of $874. My experience has been that most debtors have to struggle to come up with $874. Then there is the $50 that the debtor has to pay for pre-bankruptcy counseling. Many lawyers charge the filing fee only or perhaps the filing fee and $200 or $300.
The Chapter 13 plan used in the Northern District of Georgia allows attorneys to set a "reasonable fee" both for cases that are confirmed and for cases that are dismissed prior to confirmation. A plan may provide for $4,500 or $5,000 in fees if the case is confirmed and, say, $3,500 if the case is dismissed. The fees charged in your case may be higher or lower depending on the complexity of your case and the lawyer you choose.
As Chapter 13 debtors’ lawyers well know, much of the work done in a Chapter 13 case occurs prior to confirmation. In the current climate, cases may be reset two or three times and plans and petitions may be amended repeatedly.
If most of the money being paid in to a plan ends up in the hands of vehicle lenders, very little remains to pay a lawyer who may have expended fifteen or twenty hours, only to see his client’s case fail because of a job loss, an illness or circumstances beyond the lawyer’s control. On the other hand, if the lawyer sets the adequate protection payment very low, the lender may object and the debtor may not have the option of converting his case to Chapter 7. Secured lenders in Chapter 7 will usually refuse to reaffirm secured debt claims if the debtor is delinquent. Six months of a low adequate protection payment will result in several hundred to several thousands of dollars in payment delinquencies, leaving the debtor at risk for repossession.
To put this another way, this adequate protection provision forces debtors’ lawyers to choose between getting paid a fair fee for their work or maximizing the adequate protection payment to preserve their client’s ability to convert to Chapter 7 or to dismiss the Chapter 13 case without drastic consequences.
Now, a cynic would argue that lawyers are free to charge a higher up front payment – it is there decision to charge little or nothing up front. Unfortunately, the marketplace says otherwise. What is happening and will continue to happen is that solo practitioners and small firms are being driven from the market. High volume filers will be the only ones left who can take the risk of filing Chapter 13’s. With no disrespect directed to high volume filers who certainly have their place in the market, there are many complex Chapter 13 cases that need personalized attention.
In my view this adequate protection procedure has the (un)intended consequence of further closing the door to debt relief under Chapter 13.
[tags] adequate protection payments, conversion to Chapter 7, bankruptcy northern district of georgia, car lenders in bankruptcy [/tags]