The U.S. Trustee Program has finally blessed bifurcated Chapter 7 bankruptcies, as long as they’re done properly!

Here’s the key sentence from the bombshell memo sent to all the U.S. Trustees on June 10th by Ramona D. Elliott, Acting Director of the U.S. Trustee Program:

Absent contrary local authority, it is the USTP’s position that bifurcated fee agreements are permissible so long as the fees charged under the agreements are fair and reasonable, the agreements are entered into with the debtor’s fully informed consent, and the agreements are adequately disclosed.

So in this podcast episode, I give my overall reaction to this apparent paradigm shift in the UST’s attitude towards bifurcation. Also, it’s a five page memo with 22 footnotes, so I also want to review the USTP’s new positions on all the little things that make bankruptcy such a detail-oriented practice.

Most important, for the first time ever, the USTP is actually giving us a perfect roadmap to follow so that we can offer bifurcated Chapter 7 in bankruptcies 100% safely!

So it’s very important that in the new USTP memo, the USTP articulates for the first time its position on many of these specific issues involved in bifurcation. So all we need to do now is understand the USTP positions and act accordingly, and we’ll be able to offer bifurcated chapter 7 bankruptcies safely , without worry that our local UST will come after us.

So with that in mind, this podcast episode reviews the 14 positions that the USTP articulates in its memo, and lays out that perfect roadmap for any bankruptcy lawyer to follow!

You can listen to the episode by clicking the “play” button in the audio player above, or read a full transcript below.

You can also sign up to get an email when we release new episodes of the Bankruptcy Law Success podcast at the top of that page.

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FULL TRANSCRIPT OF PODCAST EPISODE

Hi, this is Bob Hiler of the Bankruptcy Law Success podcast, where we introduce you to successful bankruptcy lawyers, as well as powerful ideas that can transform your bankruptcy practice.

Today, I’m going to be talking about breaking news in the consumer bankruptcy world. Specifically, I’ll be talking about the bombshell memo sent to all the U.S. Trustees on June 10th by Ramona D. Elliott, Acting Director of the U.S. Trustee Program.

Here’s the key sentence from the memo:

Absent contrary local authority, it is the USTP’s position that bifurcated fee agreements are permissible so long as the fees charged under the agreements are fair and reasonable, the agreements are entered into with the debtor’s fully informed consent, and the agreements are adequately disclosed.

In other words, the U.S. Trustee Program has finally blessed bifurcated Chapter 7 bankruptcies, as long as they’re done properly!

So in this podcast episode, I want to give my overall reaction to this apparent paradigm shift in the UST’s attitude towards bifurcation. Also, it’s a five page memo with 22 footnotes, so I also want to review the USTP’s new positions on all the little things that make bankruptcy such a detail-oriented practice.

But first, my initial reaction here is: Awesome, the U.S. Trustee has finally blessed bifurcation, that’s great!

And then I thought about it for a little bit… and my second reaction was: Wow, the UST blessing bifurcation is probably going to lead to a huge boom in the number of attorneys that are offering zero down bifurcated Chapter 7 bankruptcies!

In fact, what I predict is over the next few years, almost everybody will start offering bifurcated zero down Chapter 7 bankruptcies, except in a few districts where some old school judges will try to hold back the tide.

And that’s because once somebody starts offering a zero down Chapter 7 bankruptcy in a district, it’s awful hard to compete with them without also offering a zero down Chapter 7 bankruptcy.

But it was my third reaction to all of this that I want to talk about today, because when I actually read the memo closely, I thought to myself: Wow, for the first time, the USTP is actually giving us a perfect roadmap to follow so that we can offer bifurcated Chapter 7 in bankruptcies 100% safely.

It’s actually been true for many years that the UST rarely asserts a problem with the basic concept of bifurcation in the vast majority of its enforcement actions. But still, a straight out concession that the general concept of bifurcated 7s is okay? That’s a huge deal.

More typically, the UST will assert that there are very specific problems with the methods that attorneys used to bifurcate their Chapter 7 bankruptcies. And if the UST wins an enforcement action, they typically only win on the grounds of those specific issues.

So it’s very important that in the new USTP memo, the USTP articulates for the first time its position on many of these specific issues involved in bifurcation. So all we need to do now is understand the USTP positions and act accordingly, and we’ll be able to offer bifurcated chapter 7 bankruptcies safely , without worry that our local UST will come after us.

So with that in mind, let’s review the 14 positions that the USTP articulates in its memo.

Actually, before we do that, I want to note something for the record, which is that i’m not a lawyer. I’m a marketing guy that specializes in helping bankruptcy attorneys file more bankruptcies. And over time, I have found that the #1 way to grow your bankruptcy practice is to start offering zero down bifurcated Chapter 7 bankruptcies.

Over the many years that I’ve been doing this, I’ve seen the legal service agreements for bifurcated Chapter 7 bankruptcies used by dozens of bankruptcy attorneys. I’ve also read dozens of opinions about bifurcation, and I’ve also seen how attorneys actually offer bifurcated bankruptcies in practice.

So in this podcast episode, for each of these 14 positions taken by the USTP, I’m going to share what the standard practice is now, as well as what I think the relevant precedents are. And if you’re a lawyer yourself, you can review any of these opinions I’ve mentioned and you can make up your own mind.

Okay with that, let’s get into it.

The first position that the USTP memo articulates is that you should not advance the filing fee and then get paid back for those filing fees on a post-petition basis.

Here’s how the USTP puts it exactly:

Attorneys should not advance filing fees and seek their reimbursement post-petition., Advanced filing fees are generally held to be dischargeable pre-petition obligations.

This is a strongly stated position. But to be blunt, the USTP is asserting a position here that does not appear to be settled law.

It is true that several opinions have held that advancing filing fees creates a pre-petition obligation that is discharged by bankruptcy. For instance, in In re Brown in the Southern District of Florida, which was decided in June 2021, the Brown court held that:

The court finds that a law firm’s payment of the filing fee with post-petition repayment by the debtor violates the Bankruptcy Code as well as the Florida Bar Rules. The filing fee is due upon the filing of the bankruptcy petition. Therefore, the debtor’s obligation to repay the filing fee to the firm is a pre-petition obligation that is dischargeable. A law firm that advances the fee with the expectation of repayment post petition is violating Section 526, by advising the debtor to incur a debt “to pay for bankruptcy related legal services,” violating Section 362 and assuming the debtor gets his or her discharge, violating Section 524.

There’s also a similar memorandum opinion, In re Baldwin in the Western District of Kentucky issued in October 2021. Baldwin isn’t a final opinion, but it does concur with Brown that advancing the filing fee violates the Bankruptcy Code.

However, there have been other opinions that disagree with Brown and Baldwin on advancing the filing fee. For instance, in the In re Carr opinion in the Eastern District of Kentucky in the Sixth Circuit in January 2020, the Carr court approved an arrangement where the attorneys advanced the filing fee and were then reimbursed post-petition.

Likewise, in the In re Hazlett opinion in Utah in the 10th Circuit in 2019, the Hazlett court also approved an arrangement where the attorneys advanced the filing fee and got paid back post petition. So the relevant precedents aren’t as cut and dried as the USTP seems to be implying here.

On the flip side, I’m a practical person. So given that the USTP has implied in its memo that it will carve out a safe harbor here, it makes sense to me to just follow the USTP’s guidance.

Of course, this USTP guideline only says that you shouldn’t “seek reimbursement post-petition” for filing fees that you’ve advanced. It’s not a flat out prohibition against advancing the filing fee.

Because of that, there are still three workarounds to the USTP’s position, if your client can’t afford to prepay the filing fee and still needs to file bankruptcy. And of course, this situation is very common for clients who are getting their wages garnished.

OK, so first you can pay the filing fee out of your attorney’s fee and not get reimbursed for it. In other words, you would advance the filing fee for the client by paying their filing fee yourself, and then you would add your client’s debt to you on Schedule E/F as an unsecured claim, and that debt would then be discharged just like any other pre-petition debt.

If you take this approach, the main caveat is that if you raise your post-petition fees by $338 so that you’re not losing money by advancing the filing fee, you then have to justify your higher post-petition fees, and you can’t include the filing fee in your reasonableness calculation.

Second, you can have the court itself advance the filing fee. After all, this USTP guideline says that you, the attorney, can’t advance the filing fee, but it doesn’t forbid you from applying to the court to have the bankruptcy court advance the filing fee.

Now to do this, you would just apply to the court to make installment payments on the filing fee. Your client would then make payments to the court until that payment plan is done.

Now the main caveat for this workaround is that because of Rule 1006(b)(3) of the Federal Rules of Bankruptcy Procedure, you can’t receive payments from the client until the payment plan to the court is completed. So here’s the text of Rule 1006(b)(3):

“Postponement of Attorney’s fees. All installments of the filing fee must be paid in full before the debtor or Chapter 13 trustee may make further payments to an attorney or any other person who renders services to the debtor in connection with a case.

Now, before you gloss over this warning, I should note that I’ve spoken to many bankruptcy attorneys who have never heard of this Rule and just want to ignore it. I get that. But after reading the In re Wright case from the Northern District of Oklahoma in 2018, I have a healthy respect for the consequences of violating Rule 1006(b)(3).

You can read the judge’s angry tirade yourself. It’s in section three of his opinion and it’s called “Debtor’s violation of Rule 1006.” I’ll link to that opinion in the transcript of this podcast episode, you can go to bklawsuccess.com/podcast.

Of course, the downside to this approach is that you can not get paid by your client until they’ve finished paying the filing fee to the court. Meanwhile, on the form to apply for the court financing your filing fee, it says that the maximum payment plan length for the court filing fee is four months.

Four months is a long time to wait, so most of my attorneys request far less than four months. For instance, you can request that the payment plan to the court last four to six weeks instead of the maximum four months. So there’d only be at a four to six week delay before you get your first payment.

Finally, if you don’t want to wait to get your first payment for working on a bankruptcy, you can also just require the client to make $338 in payments to you. And then you’d only file them once you have the $338 in hand. There’s nothing in the USTP memo that precludes that as an option, so it’s totally valid.

Okay, that wraps it up for the first USTP position, so let’s move on to the second.

The second position that the USTP memo articulates is that you can’t charge more for a financed-and-bifurcated Chapter 7 than for a traditional Chapter 7 paid with cash.

Here’s what the USTP said exactly:

Bifurcated fee agreements should not be viewed as an opportunity to collect higher fees than those collected from clients who pay in full before filing. For example, it would be inappropriate for an attorney to offer a debtor a fee of $1,500 if they pay upfront, and $2,000 if they pay over time post-petition, particularly given that fees for pre-petition work should have been paid or waived.

This “don’t charge a premium for financed cases” policy does have some legal precedent supporting it.

In the In re Allen case from the Eastern District of Missouri in November 2020, the Allen court ordered the disgorgement of the $500 premium of the bifurcated-and-financed price over the cash price.

The attorney had argued that he could charge whatever he wanted for a financed-and-bifurcated Chapter 7, so long as the amount charged passed the lodestar calculation, which is “the number of hours reasonably expended on the litigation multiplied by a reasonable, hourly rate.”

However, the attorney lost.

The attorney appealed, but the Eighth Circuit BAP in June 2021 affirmed the lower court’s opinion saying that:

Courts are not bound to apply the lodestar calculation in every case where attorney’s fees are challenged.

So at least in the Eighth Circuit, there’s a precedent that an attorney can’t charge more in attorney’s fees for a financed-and-bifurcated case. And since that’s a decision by a BAP, that opinion is a persuasive authority in other circuits as well.

Now, before this USTP memo, it seemed like there was an easy workaround to the Allen opinion, which was to charge a premium for financing bifurcated Chapter 7s, but to call it something else, like an “administrative fee.”

However, the new USTP policy seems to go well beyond the In re Allen opinion, because it seems to say that an attorney can not charge more in total fees for a financed-and-bifurcated Chapter 7. Meanwhile, the Allen opinion refers repeatedly to attorney’s fees.

So this new USTP position seems to disallow that workaround of charging more in “administrative fees.”

Counterintuitively, I think this new USTP position will hurt debtors. And that’s because the obvious new workaround to this position is to raise the price that you charge for a paid-in-cash Chapter 7 to the price you charge for a bifurcated Chapter 7.

The reason that this is the likely outcome is that for many bankruptcy attorneys that offer a zero down bifurcated Chapter 7, the majority of their filings are zero down cases.

Now to make this concrete, let’s say there’s a bankruptcy attorney who does 99% of his cases as a bifurcated Chapter 7 filing, and only 1% of his cases as paid-in-full Chapter 7s. By the way, that’s not a hypothetical, that’s one of my clients, and he told me the other day, it’s been over six months since he did a paid-in-full cash bankruptcy. Now to him, the price he charges for a bifurcated Chapter 7 filing is 99 times more important to his retainers than the price that he charges for a paid-in-full Chapter 7.

Put another way, the price that he charges for a paid-in-full Chapter 7 is almost a mythical price that no one pays. It’s kind of like how hospitals have these price lists for procedures for patients who pay in cash, but no one actually ever pays that price because almost everybody pays with insurance.

So if bankruptcy attorneys need to equalize their cash price with their bifurcated-and-financed price, I think it’s way more likely that bankruptcy attorneys are going to raise their cash price to their bifurcated-and-financed Chapter 7 price. I think it’s extremely unlikely that they’re going to lower the bifurcated-and-financed price to their paid-in-full cash price. So that’s why I think that this USTP policy will hurt debtors, because it will lead to higher prices for bankruptcy retainers.

To be clear, there’s no legal precedent that I’m aware of that says you can’t charge an “administrative fee” to clients who do a bifurcated-and-financed Chapter 7. So theoretically you could charge an administrative fee.

But again, I’m a practical person. So personally, I’d just go with the flow and raise my cash price to my higher price for bifurcated-and-financed Chapter 7s. Anyway, however you get to it, once you equalize the prices that you charge for a paid-in-full cash Chapter 7 and a bifurcated-and-financed Chapter 7, you’ll be in full compliance with the USTP’s new policy.

And then at that point, you’ll just need to make sure that you can justify your attorney’s fees on reasonableness.

Of course, if you want to fight this new USTP policy you can, just by maintaining a premium of your bifurcated-and-financed price over your paid-in-full cash price. Just to make sure to disclose everything, so that it’s obvious that you’re not trying to pull one over on the USTP. And be ready to litigate this policy in court.

OK, so that’s it for position number two.

Let’s move on.

The third position that USTP memo articulates is that you have to be careful when using a third party company to finance bifurcated fee agreements.

Here’s what the USTP said:

[A]rrangements that employ outside parties to finance bifurcated fee agreements, including, but not limited to factoring, assignment of the attorney’s accounts receivable, and direct lending to clients, warrant significant additional scrutiny.

Well, that’s a scary sounding sentence because of the last four words: “warrant significant additional scrutiny.” But before we get scared off, let’s note that the USTP had the opportunity here to flat out forbid third-party financing and it didn’t. Plus, multiple courts have either blessed third-party financing or passed on their opportunity to forbid the practice.

So it’s still allowable to finance bifurcated fee agreements using a third-party company, as long as you do them legally. And the main test to pass here is whether the attorneys are sharing their fees with a non-attorney, which is forbidden by Rule 5.4 of the ABA Model Rules of Professional Conduct governing the “Professional Independence of a Lawyer.”

These ABA Model Rules have been adopted by most state bars with only minor edits. So here’s how Rule 5.4 begins :

A. A lawyer or law firm shall not share legal fees with a non lawyer, except that…

Now, to interpret this Rule in the context of legal financing, there’s a Formal Opinion from 2018 by the New York City Bar that reviews this topic. And the article is called “Litigation Funders’ Contingent Interest in Legal Fees,” and it covers this exact sort of situation.

This Formal Opinion says that legal financing is legal only when that debt is recourse, so the borrower is personally liable for the debt:

A lawyer may not enter into a financing agreement with a litigation funder, a non lawyer, under which the lawyer’s future payments to the funder are contingent on the lawyer’s receipt of legal fees or the amount of legal fees received in one or more specific matters.

To see why, let’s compare two debt scenarios in which you, as a lawyer, agree to do a bankruptcy for $2,000, and that creates an accounts receivable owed to you of $2,000.

Next, let’s say that I, a non lawyer, lend you $1,000 against that $2,000 accounts receivable.

To see if this loan violates the rule against attorney fee sharing, we need to look at whether the loan is non-recourse or recourse.

First, let’s look at a non-recourse debt. That means that if you default, you will assign the collateral of the $2,000 account receivable to me. But you won’t owe anything else to me as a result, because you haven’t personally guaranteed that loan. So if your client never makes a payment on that accounts receivable, I as a lender will never receive a penny from the client or from you, the attorney.

Now that New York City Bar Formal Opinion says that a non-recourse loan like this is fee sharing with a non lawyer, because I, the non lawyer lender, am only getting paid if you, the lawyer, gets paid. Thus, your future payments to me, the lender, are totally contingent on the amount of legal fees that you receive for this bankruptcy. So that’s why a non-recourse loan results in illegal fee sharing.

Second, let’s look at a recourse debt that you’ve personally guaranteed that you will pay back. Then, even if you never get paid by your bankruptcy client, I, as the lender, will still get paid by you anyways, since you’ve guaranteed my payment. Thus your future payments to me, the lender, are not contingent on the amount of legal fees that you will receive for this bankruptcy.

Since the lender gets his money, whether or not the client pays, this is not illegal fee sharing.

Now with this recourse /non-recourse dichotomy in mind, let’s evaluate the three financing methods that the first sentence of this USTP position spells out.

The first financing method is factoring, which is when you sell your accounts receivable by selling them outright to a third party lender at a discount.

Notably, factoring typically refers to an outright sale of the accounts receivable. Also under a traditional factoring agreement, attorneys do not guarantee payment of these receivables.

So the result is that if clients do not pay, the factor will not receive any money, and the factor can’t go after the attorney to be made whole. The problem here is that the lender makes more or less money as the attorney’s clients pay or don’t pay. Accordingly, many courts have ruled that traditional non-recourse factoring constitutes illegal fee-sharing with non attorneys.

The second method is assignment of the attorney’s accounts receivable. Here the attorney receives funds from a third-party lender, advanced under a recourse line of credit, for a percentage of the accounts receivable.

And then to secure that loan, you as the attorney will collaterally assign your accounts receivable to the lender, and then the lender collects the assigned accounts resealable.

Now some third-party lenders will require this loan to be recourse to the borrower and some do not. Again, what seems to matter here is whether the lender gets more or less money as the clients pay or don’t pay. If it’s a recourse loan, then even if clients do not pay, the lender still gets paid by collecting from the lawyer. Thus, borrowing from a recourse lender protects attorneys from the assertion that they violated Rule 5.4 of the Model ABA code, or more important, protects them from the assertion that they violated the version of that ABA Rule that was adopted in the state in which they practice.

This is not a theoretical concern. In the In re Baldwin memorandum decision in the Western District of Kentucky in 2021, the Baldwin court wrote that:

This court is concerned with the fee splitting between [the attorney] and [ the bifurcation financing company]. There is no mention by [the attorney] in the Disclosures regarding a portion of the fee going to [the bifurcation financing company].

The court then observes that this sort of fee sharing can bias an attorney:

The Kentucky Rules of Professional Conduct on fee sharing are the same as those cited in the Wright case in Oklahoma. [That Kentucky Rule] states, “a lawyer or law firm shall not share legal fees with a non lawyer.” The Supreme Court commentary on the above rules states: “The provisions of this rule express traditional limitations on sharing of fees. These limitations are to protect a lawyer’s independence and judgment.”

To immunize yourself against such a charge, if you’re financing a bifurcated Chapter 7 with a recourse third-party lender, it makes sense to explain to the court exactly why fee sharing with a recourse lender does not violate the rule against fee sharing with a non lawyer. The place to do this is on your Form B 2030 and you can disclose the following five things:

1. Whether amounts drawn on the line of credit are recourse or non-recourse
2. Whether fees charged by the third party lender are recourse or non-recourse
3. There can be considerable ambiguity around the terms recourse and non-recourse, so you may want to explain exactly why your loan is a fully recourse obligation
4. Explain how the fee to the third-party lender is calculated, as it is often calculated as a percentage of the attorney’s fees
5. Explain your theory of why this does not constitute fee sharing by an attorney with a non lawyer under the local version of Rule 5.4 of the Model ABA Rules of Professional Conduct or as sharing of compensation under Section 504 of the Bankruptcy Code.

To be clear, there may be other ways of protecting yourself against charges of fee sharing by an attorney with a non lawyer, besides making sure that you’re using a fully recourse line of credit. If you’re relying on a different concept to protect yourself, just make sure to disclose that on your B2030.

The third and last financing method that the USTP mentions is “direct lending to clients” that involves “outside parties to finance bifurcated fee agreements.” So this can’t be referring to when an attorney directly lends to clients and directly collects those fees over time because then there would be no outside parties involved.

Instead, the USTP might be referring to when an outside party directly lends to bankruptcy clients to pay for post-petition bankruptcies To be honest, I’ve never seen this sort of arrangement before in the wild, so to speak, so I’m just going to skip over it here.

But I will note that because the USTP never mentions direct lending to clients by attorneys as warranting significant additional scrutiny, it seems to be giving a safe harbor to attorneys who do directly lend money without involving an outside party. So while it seems very possible to safely involve an outside party when financing bifurcated bankruptcies, the USTP seems to be saying that it’s even safer to not involve an outside party.

So if you have a ton of moolah in your bank account, and you want to finance this stuff yourself and you don’t need to rely on a third party lender, then the USTP is saying “go for it.”

Okay, so that wraps up the third position.

The fourth position the USTP memo articulates is that you have to disclose as much as possible to the courts when using a third-party company to finance bifurcated fee agreements.

Here’s what the USTP says:

The particulars of arrangements under which a third party finances the debtor’s post-petition attorney’s fees must be fully disclosed under Bankruptcy Rule 2016(b), including the details of the company’s relationship with the entity provided the financing.

This disclosure can be done on your Form B2030 and can be achieved by disclosing the eight following things.

1. How the loan is secured, whether with a lien or another asset
2. How the attorney draws upon the line of credit with a third party
3. Who is collecting the payments from debtors and/or guarantors
4. The order in which payments are applied to (A) any unpaid filing fee, ( B) the fee charged by the lender, and ( C) the advances to the attorney under the line of credit
5. Whether the lender reports to credit bureaus
6. Any fees charged by the third-party lender and how the amount of those fees is calculated
7. Whether the loan and/or the fees are recourse or non-recourse, and
8. Whether the amount charged by the third party lender is absorbed by their attorneys or not.

In conclusion, if you’re bifurcating and you’re not disclosing all these things on your Form B2030, I would definitely be losing sleep until I fixed that. But if you’re doing bifurcated Chapter 7s and you’re disclosing these things, I wouldn’t be losing any sleep.

OK, that’s it for the fourth position, so let’s move on to number five.

The fifth position the USTP memo articulates is that they don’t want you to pass along any financing costs from third party financing.

Here’s how the USTP puts it:

The nature of these arrangements may incentivize overcharging because the attorney generally receives only a percentage of the total fee charged or otherwise incurs financing costs. It is improper for an attorney using third-party financing to pass along the cost of that financing to their clients.

As discussed earlier, the USTP is asserting something here that doesn’t seem supported by the relevant case law, even in the Eighth Circuit where the Ridings v Casamatta decision is a BAP precedent.

In addition, in 2018, the ABA issued Formal Opinion 484 that blesses a wide variety of scenarios in which a third-party financing company provides financing to legal clients. In addition, this Formal Opinion, more generally condones passing financing expenses onto clients, as long as you obtain informed consent from your client.

So it seems like a stretch to say that passing on financing expenses is “improper.” But that’s the hard line that the USTP is taking here.

To deal with this USTP position, you really have two options, depending on whether or not you want to fight the USTP.

First, if like me, you don’t think it’s worth swimming upstream against a USTP position, then in your Form B2030 disclosures, you can point out that (1) there is no price difference between your cash price and your financed-and-bifurcated price, ( 2) exactly what your third party financing company charges in terms of fees, and (3) that you’re absorbing this cost and not passing it onto the client.

And second, if you do want to fight the USTP, then you can disclose on your B2030: (1) the exact price difference between your cash price and your bifurcated-and-financed price, (2) to eliminate Ridings v Camasatta as a relevant persuasive authority, or as a binding precedent in the Eighth Circuit, explain how the higher financed-and-bifurcated price is not for attorney fees, per se, but for an administrative fee, and (3) that you are either passing on the full financing cost to the client or that you’re passing out a portion of it.

You know, taking a step back, I’ve already talked a lot today about disclosures to the court, but my take is that disclosures to the court are vital, so much so that if you’re not embarrassed by how long your Form B2030 disclosures are, you’re probably doing it wrong.

OK, that’s it for the fifth position, so let’s move on to the sixth.

The sixth position that the USTP memo articulates is that you need to manage conflicts of interest between you and your client.

Here’s how the USTP articulates this position:

Third party financing arrangements may also create unwaivable conflicts of interest between the attorney and their clients, and may violate applicable state ethical rules.

This sentence is footnoted with a citation to the Brown opinion in the Southern District of Florida, which ruled on this very issue:

The court has determined that it will not allow any attorney to factor its legal fees. This creates an inherent conflict of interest between the attorney and the debtor and it violates Rules Regulating the Florida Bar 4-5.4, 4-1.8 and 4-1.7.

We’ve already discussed the first of these rules, which involves attorney sharing fees with non-lawyers. Florida’s Rule 4-5.4 is actually adopted from Rule 5.4 of the Model Code of the ABA, which we’ve already discussed. And because a traditional factoring relationship does not involve a fully recourse loan, some judges interpret legal factoring as a violation of this prohibition against sharing fees with non lawyers. This appears to be the Brown court’s interpretation.

The Brown opinion also mentions Florida’s Rule 4-1.7 and 4-1.8 governing conflicts of interest from “prohibited and other transactions” and “current clients,” respectively. The court did not specify which conflicts of interest they were referring to, but even if we don’t know exactly which conflict of interests the Brown court is referring to, other court opinions have discussed these conflicts.

For instance, in the Hazlett opinion in Utah, the UST charged that there was:

A conflict of interest in both creating a non-dischargeable debt through the use of a post-petition fee agreement and a conflict arising from the attorney’s desire to maintain a favorable relationship with [the bifurcation financing company] while representing the client.

Here are seven more potential conflicts of interest where the bankruptcy attorney wants one thing and the client wants another.

1. Bifurcation requires a complicated two-part agreement involving complex legal topics about which a prospect may want legal advice. However, the bankruptcy lawyer has an obvious conflict of interest that prevents them from offering legal advice about their own legal agreements to prospects.
2. Bankruptcy lawyers want to get paid for their services and they naturally want clients to sign the post petition agreement. But if the client can get a free bankruptcy by not signing the pre-petition agreement, they’d obviously prefer that.
3. Clients hire bankruptcy lawyers to discharge pre-petition debts. Meanwhile, executing a post-petition agreement creates an obligation for the client to make post-petition payments for post petition services, and that obligation cannot be discharged.
4. If you’re using a third-party lender, you want the client to make their payments so the lender doesn’t come after you, if it’s a fully recourse loan. Meanwhile, the client may not be able to make the payments.
5. Clients are protected by attorney-client privilege, but you have to share at least some limited information with your third-party lender so that they can underwrite the loan and collect payments.
6. If a client does not sign a post-petition agreement, you will file a motion to withdraw. Meanwhile, the client doesn’t want you to do that.

And finally…

7. If you start collection actions against the client, you will also be required to withdraw. And again, the client wants their bankruptcy, so they don’t want you to withdraw.

However, we have a weapon we can use against many conflicts of interest. And that weapon is explicitly referred to in the most important sentence of the USTP memo. I’ll read that sentence again:

Absent contrary local authority, it is the USTP’s position that bifurcated free agreements are permissible so long as that … the agreements are entered into with the debtor’s fully informed consent…

The ABA Model Rules defines “informed consent” this way:

“Informed consent” denotes an agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of, and reasonably available alternatives to, the proposed course of conduct.

So to get written informed consent, in your contract you just have to describe the conflict as we just did for eight different conflicts. And then use some magic words to get your clients fully informed consent like:

By signing this agreement, you acknowledge that you understand this explanation and give your informed consent to waive this conflict.”

So your contract should get informed consent for at least these eight conflicts of interest I just reviewed.

OK, that’s it for the sixth position. Let’s move on to the seventh.

The seventh position the USTP memo articulates is that fees for pre-petition services must be paid pre-petition or waived.

Now this position very much maintains the status quo, and it basically says that you shouldn’t be collecting post-petition for a service performed pre petition. And that’s a position that everyone agrees with, even in the Ninth Circuit with its weird In re Hines precedent that says that you’re allowed to collect post petition for a service that was contracted for pre-petition, but performed post petition.

OK, so here’s the exact language that the USTP used in its memo:

It is the USTP’s position that fees earned for pre-petition services must be either paid pre-petition or waived, because the debtor’s obligation to pay those fees is dischargeable.

So this is a commonsense position that pretty much everyone agrees with, so I won’t spend much time on it.

The only subtle detail here that I’ll mention is that I’ve seen many attorneys forget that certain things always happen pre petition, and are hence considered pre-petition expenses, like the credit report fee or the pre-filing credit counseling course. As a friendly reminder, because those are pre petition expenses, you simply can’t try to collect for those things post-petition.

OK, that’s it for the seventh position, so let’s move on to number eight.

The eighth position the USTP memo articulates is that you have to do your due diligence before you file, even if you waive your fees for pre-petition work.

Here’s what the USTP says exactly:

This is particularly important to ensure– and to clearly document –that debtors receive appropriate pre-petition consultation and legal advice, including with respect to exemptions and chapter selection. Debtors who enter into bifurcated fee agreements should receive the same level of representation as debtors who enter into traditional fee agreements. Bifurcation must not foster cutting corners in properly preparing the case for filing by eliminating tasks that should be performed pre-petition or postponing all or some of those services until after the petition is filed to ensure that the attorney can bill for those services post-petition.

To break this down, the USTP is saying that you must follow at least four guidelines while doing your pre-petition work. So let’s go through each of these guidelines to see what you have to do to comply with each.

The first guideline is that you need to give the debtor good legal advice about their various exemptions. And the second guideline is that you need to select the right bankruptcy chapter for the debtor.

Frankly, for a good bankruptcy attorney, advising a debtor about exemptions or the right bankruptcy chapter should be very easy, once you’ve collected the appropriate information from the debtor. So that means that in the pre-petition phase, you must collect enough information from debtors to give them the good legal advice that the USTP requires.

So you need to obtain and review the client’s documents. This typically includes getting their tax returns, pay stubs, and sometimes their bank statements. Also in some jurisdictions, you may also need detailed documents on cars and homes.

Of course, these sorts of documents don’t reveal things like preference payments paid in cash, potentially fraudulent transfers, or medical debts that aren’t on the credit report. So it also makes sense to have clients complete a detailed intake questionnaire that flushes out things like that.

Finally, to make sure you have an accurate list of the debtor’s debts, you need to run a credit report before you file the debtor’s bankruptcy petition. You’re going to need a credit report anyway, so that you can file the creditor matrix with the skeletal petition without having to pay an additional filing fee.

Now I’ve heard a lot of attorneys bulk at paying money out of their own pockets to run clients’ credit reports before receiving a cent from those clients. However, you can avoid that expense if you want. You can have prospects get their own free credit reports on their phone, either at annualcreditreport.com or via an app like Credit Karma.

Or if you do prefer to run the client’s credit report yourself to auto-populate your creditor matrix, you can make sure that the prospect is serious about bankruptcy by requiring them to sign your pre-petition services agreement before you run their credit report. So that way, at least you’re not running credit reports for window shoppers.

You can also require clients to pay to run a credit report pre-petition, but if you do that, remember you have to be paid pre-petition for that. Again, you cannot collect post-petition for a pre-petition expense like running a credit report.

The third guideline is that you can’t push pre-petition work to the post-petition phase just to bulk up your post-petition bill.

Here the USTP is worried that once you start offering bifurcated Chapter 7s, you’ll have an incentive to push work that you normally do pre-petition ( like basic due diligence) to the post-petition part, to make your post-petition fees look more reasonable. However, in my experience working with dozens of bankruptcy attorneys offering zero down bifurcated Chapter 7 bankruptcies, the problem that I’ve seen is precisely the opposite.

What happens instead is that too many bankruptcy attorneys having ingrained work habits from doing traditional non bifurcated bankruptcies, and they never update their work checklist when they start offering bifurcated Chapter 7s.

So even when a bifurcated Chapter 7 client comes in, many attorneys will just fire up Best Case or whatever their bankruptcy software is, and they’ll just start preparing the petition during that first consultation.

The problem here is that if you’re doing a bifurcated Chapter 7 and you’ve already prepared the petition before you file the client’s petition, you won’t have much work to be done post-petition to justify the post-petition fee.

So, what you can do instead is re-engineer your bankruptcy workflow for bifurcated Chapter 7s.

To do this, start by writing down all the tasks that you currently do for a traditional Chapter 7.

Then create two lists and start moving each task into a pre-petition checklist and a post-petition checklist. And then, respect the bifurcation by not doing work that you should be doing post petition in the pre-petition phase.

And whatever you do, do not fill out the statements and schedules pre-petition. You’ve got to save that for the post petition phase.

The fourth guideline is that fees for post-petition services must be rationally related to the services actually rendered post-petition, so that a flat post petition fee is not a disguised method to collect fees for pre-petition services.

The USTP’s fourth guideline cites the 2021 In re Brown case in the Southern District of Florida, which states that:

The court agrees that in determining the reasonableness of the flat fees charged by the law firms, the court should not consider services that would not possibly arise in the case, such as dealing with student loan issues when the debtor does not have student loans.

In other words, you cannot include a service in your reasonableness calculation, that’s actually impossible. So to give another example, if the debtor doesn’t own a vehicle, you can’t include a potential vehicle reaffirmation in your reasonableness calculation, even if you’re ready, willing, and able to do a vehicle reaffirmation for every debtor.

However, if the USTP is endorsing the “you can’t include impossible tasks in reasonableness calculations” standard from that one sentence of Brown, it seems like it would also be endorsing the previous sentence in the Brown opinion, which states that:

The court holds that it will review the reasonableness of the post-petition flat fee charged by each of the law firms by taking into account not only the work that was done, but also the services that might have been required in the case for which there would have been no additional charge.

Now this previous sentence is a flat out gift to bankruptcy attorneys trying to demonstrate reasonableness, because it says that if you charge a flat fee, you can include in your reasonableness calculations services that might have been required in the case, even if they weren’t actually required.

So going back to our example, if your debtor owns a vehicle, when trying to justify the reasonableness of your flat fee, you can include the value of a vehicle reaffirmation. And you can include this even if the debtor didn’t reaffirm their vehicle, as long as they own a vehicle.

The point of the USTP’s fourth guideline is that you have to be able to justify your flat fee based on the situation of each specific bankruptcy client, rather than a hypothetical average client.

If you’re worried about this guideline and you want to stress test the reasonableness of your flat fee, you can do your own reasonableness analysis of your flat fee for a no asset Chapter 7, where the client has no house, no car, and no assets to exempt. And you can make sure that you can justify your fee, even if you don’t have any extras to include.

Also, if you want to charge higher fees for a client with a more complicated situation, you can adopt a pricing menu, where you charge more or less depending on whether the client wants to do certain extra things like a vehicle reaffirmation or a vehicle redemption, or maybe stopping a wage garnishment.

OK, that wraps it up for position number eight, so let’s move on to position number nine.

The ninth position that the USTP memo articulates is that attorneys must disclose exactly what services will be performed pre-petition versus post-petition as well as the corresponding fees for each phase.

Specifically, the USTP says that it will examine the following bullet point when determining whether an enforcement action is appropriate:

Whether the attorney has clearly disclosed the services that will be rendered pre-petition and post-petition, and the corresponding fees for each segment of the representation, including that certain listed services may not arise in a particular case.

Basically, here, the USTP wants you to list in your pre-petition and post-petition contracts exactly what services you’re offering. They also want you to list the fees that you’re charging for each phase.

In addition, the USTP appears to want you to add a disclaimer that certain services that you’ve listed may not arise in a particular case.

For instance, as we just discussed, if you list in your contracts that your flat fee includes an optional service, like reaffirming a vehicle, that service wouldn’t be relevant to a debtor who didn’t own a vehicle.

So in that list that you have of all the services that you provide, you need to know which of those services are required. And then by inference, the other services would be categorized as optional. And that seems to be what the USTP wants to see here.

OK, that pretty much wraps it up for number nine…

The tenth position the USTP memo articulates is that attorneys can’t just walk away from clients who only sign the pre-petition agreement.

Here’s the next rule that the USTP says that it will examine when determining whether an enforcement action is appropriate:

Whether the attorney has disclosed their obligation to continue representing the debtor, regardless of whether the debtor executes a post-petition agreement unless the bankruptcy court permits the attorney’s withdrawal.

This practice addresses the concern that clients will be left unrepresented in the event that an attorney files a bankruptcy petition for her client who then doesn’t sign the post-petition agreement.

This practice was originally codified in the Walton v Clark and Washington PC opinion, in the Middle District of Florida in May 2012:

Under the modified two contract procedure, the firm agrees to continue representing the client during the two week cooling off period. And if the client opts to retain another firm or continue pro se, the firm will continue to represent the client until the court enters an order allowing the firm to withdraw. In order to leave no doubt, the court will require the firm to include in its Rule 2016 statement that the firm will represent the client until the court enters an order allowing the firm to withdraw from representation.

To be frank, I’ve talked to a lot of bankruptcy attorneys who do not yet offer bifurcated Chapter 7 bankruptcies, and just about all of them seem incredibly worried that this practice means that they’re going to have to represent clients for free, even if the client doesn’t sign the post-petition agreement.

But in practice, none of my attorney clients who actually offer bifurcated Chapter 7 bankruptcies are worried about this. And that’s because it’s just not an issue in real life.

Also, from a legal perspective, the main tool that judges have to require attorney to continue working on a bifurcated case is a Local Rule that prohibits limitations on the scope of representation, which is also called unbundling.

For instance, the In re Prophet case in South Carolina dealt with Local Rule 9011-1b, which reads in part:

The law firm/attorney which files a bankruptcy petition for the debtor shall be deemed the responsible attorney of record for all purposes, including the representation of the debtor at all hearings, and in all matters arising in conjunction with a case.

In this case, the lower bankruptcy court ruled that this Local Rule meant that if you represented the debtor in the pre-petition part of the bankruptcy, you also had to represent that debtor in the post-petition part of the bankruptcy. In other words, once you’re in for a penny, you’re in for the whole pound.

At the same time, that South Carolina bankruptcy court also held that the same Local Rule also meant that bifurcated bankruptcies were illegal in South Carolina. That’s because an attorney requiring payment for a post-petition contract would create an impermissible conflict of interest, because if this is the crazy way that you’re going to interpret a limitation against unbundling, the client signing a pre-petition agreement means that they get the post-petition part for free.

To be blunt, this argument sounds absurd to me. And, happily, this argument also sounded absurd to the district court judge to which this opinion was appealed, and it was struck down. So the higher Prophet court ended up agreeing with the Hazlett opinion out of Utah, which held that a bifurcated bankruptcy does not violate limitations on the scope of bankruptcy as long as “The law firm is willing to complete the representation, and it’s only by the debtor’s election that the case proceeds pro se.”

What I’m getting at here is that judges can’t hold that bifurcation is illegal because of a prohibition against unbundling, while simultaneously using a prohibition against unbundling to force attorneys to do the post petition part of a bankruptcy for free.

So if bifurcated bankruptcies are legal, bankruptcy attorneys don’t seem to have a legal reason to worry that they’ll be forced to do a bunch of bifurcated bankruptcies for free.

Now, practically because of this USTP position, and also because of some legal precedents, you might want to consider the following language in three places in your agreements.

1. You can note that if the client does not sign the post petition agreement, you will file a motion to withdraw, which creates a conflict of interest because the client may not want you to withdraw.
2. To avoid any potential issues with unbundling, you can have the client agree that you are ready to do the post petition part of the work as long as the client signs the post petition agreement. And this is just to be consistent with the sound logic of the Hazlett opinion and the Prophet district court opinion.
3. And third, we’ll get into this more later, but you need to have a right of rescission or a grace period in your contract. If the client does rescind or alternatively, they don’t sign the post-petition agreement before the grace period ends, you need to say that you will file a motion to withdraw.

OK, so that’s it for the 10th position, so let’s move on to position number 11.

The 11th position that the USTP memo articulates is that bankruptcy attorneys must offer a way out for bankruptcy clients who change their mind.

Here’s the next rule that the USTP says it will examine when determining whether an enforcement action is appropriate:

Whether the agreement includes clear and conspicuous provisions providing the debtor with an option to rescind the agreement.

Notably in its memo, the USTP didn’t give guidance on how long the debtor should have to rescind their post petition agreement. In that In re Brown case in Florida, it does mention a 14 day rescission period :

The post petition agreement, if it is signed immediately following the petition, must include a 14 day rescission period and describe the consequences if the debtor rescinds the agreement.

Meanwhile, when you’re doing a bifurcated bankruptcy, the bankruptcy court gives you 14 days after filing a skeletal position to file the full statement and schedules. So a 14 day rescission period raises the danger that you’ll file the full statement and schedules for a client who then rescinds their signature on your post-petition agreement and you just ended up working for free.

This is a theoretical possibility, but again, I don’t know, a single bankruptcy attorney to whom this has happened.

In any case, outside of a few districts with relevant case law, there’s nothing holy about a rescission period of 14 days. In fact, my attorney clients use a much shorter rescission period, usually three days.

Actually, I’m pretty sure they’d all be fine with a rescission period of seven days, or even 10 days. And as long as it’s less than 14, that makes it convenient because then they can just not file the full statement and schedules until after the rescission period is completed.

For the purpose of completeness, I’ll also mention that the same Brown case says that you can also offer a grace period during which you do not require debtors to sign the post-petition contract, and instead you’re giving them a certain amount of time to sign. Here’s how the Brown court put it:

Alternatively, the debtors should be given a 14 day window after the petition is filed in which the sign the post-petition agreement.

Now, from a sales perspective, I would definitely only offer the right of rescission because I would prefer to ask for the retainer at that first meeting, rather than opening the door for the prospect to wait three to fourteen days before they sign. But just in terms of complying with the Brown opinion, you can either offer a right of rescission or a grace period.

And given that several courts have blessed a grace period, it seems likely that the USTP would have no problem with a grace period approach either, even though they don’t explicitly say that here.

OK, so that’s it for the 11th position, so now let’s move on to the 12th position.

The 12th position that the USTP memo articulates is that bankruptcy attorneys must disclose as much as possible to the client about bifurcation.

OK, so here’s the next rule that the USTP says it will examine when determining whether an enforcement action is appropriate:

Whether the attorney has clearly disclosed that the client is being provided the option to choose a bifurcated fee agreement, any difference in the total attorney’s fee between the bifurcated fee agreement and a traditional fee agreement, and the client’s options with respect to the post petition fee agreement.

OK, so the USTP really packed a lot into a single bullet point, so let’s break down this bullet point into three separate guidelines.

The first guideline is that the attorney needs to clearly disclose that the client is being provided the option to choose a bifurcated fee agreement.

Once again, there are legal precedents here. And once again, an early relevant legal precedent is the Walton v. Clark & Washington, P.C. case from the Middle District of Florida in 2012. This case ruled on the legality of a bifurcated Chapter 7 bankruptcy that used two segregated contracts, namely the pre-petition contract and the post-petition contract, that each listed their own services and costs. Apparently, these contracts weren’t super clear about their disclosures, so the court required that:

The firm move the “Two-Contract procedure” disclosure from the end of each contract to a separate cover page. In addition, the firm has agreed to have their clients sign and acknowledge that they have received and read the two contract procedure disclosures.

Putting a “two-contract disclosure” onto a separate cover page was also the approach used by attorney Weekes in the seminal In re Hazlett case in Utah in 2019 which Judge Anderson ruled on favorably. Likewise, attorneys Delores Dennery and Christian Dennery used a separate “Dual Option Contract” disclosure in the In re Carr case in the Eastern District of Kentucky in 2020, which Judge Wise also ruled on favorably.

With that said, the recent 2021 Brown decision in the Southern District of Florida did not require a separate cover letter, despite describing the practice in its summary of the Walton opinion.

It doesn’t sound like this USTP guideline actually requires the use of a separate “cover page” disclosure. The plain language is that you must have “clearly disclosed that the client is being provided the option to choose a bifurcated fee agreement.”

It sounds like a well-written pre-petition and post-petition contract could absolutely accomplish this purpose of disclosing the option to choose a bifurcated fee agreement to the client.

However, if you’re worried about this disclosure, you can create a one-page PowerPoint slide that literally describes the two options that you’re offering, namely a cash option and a bifurcated-and-financed option, and list all the terms. You can then have clients just initial that page. After all, this disclosure isn’t a legal contract, it’s just a cover page. So it doesn’t have to be full of legalese. It just needs to be consistent with your two segregated agreements.

The second USTP guideline here is that you have to note ” any difference in the total attorney’s fees between the bifurcated fee agreement and a traditional fee agreement.”

We previously discussed how the USTP prefers bankruptcy attorneys not charge a higher price to clients who finance a bifurcated Chapter 7 versus clients who pay all in cash. But if you charge a premium for bifurcated 7s, the USTP wants you to disclose any price difference to potential clients. So in your contracts, you can just list the two prices for clients that choose either the cash option or the bifurcated-and-financed option.

OK, the third USTP guideline here is that you have to disclose “the client’s options with respect to the post-petition fee agreement.”

This appears to be a reference to the “three option disclosure,” which has been added to every pre-petition agreement since the seminal Walton via Clark & Washington case in 2012.

Here’s how the Walton court describes the procedure for the bifurcated Chapter 7 bankruptcy that it ruled on.

Under the modified procedure, the pre-petition fee agreement describes the two contract procedure in detail and sets forth the client’s three options for post-petition legal services. Those three options are (i) the client can proceed pro se, (ii) the client can retain the law firm, or (iii) the client can retain another firm.

So the third guideline is telling you to list those three options to your client in your pre-petition contract. That’s an easy one.

OK, that wraps it up for the 12th position. Let’s move on to the 13th position.

The 13th position that the USTP memo articulates is that you have to properly disclose everything to the court.

Here are the USTP’s exact words:

All attorneys representing debtors must promptly file disclosures of the particulars of their fee agreements and the amounts they’ve been paid under Section 329(a) of the Bankruptcy Code and Bankruptcy Rule 2016(b).

This sentence is footnoted and that footnote has this ominous warning:

The default remedy for failure to make proper disclosures under Section 329(a) is return of all fees. See…

And then it gives a couple of examples.

Now the principle behind this position is that you should disclose anything unusual that you’re doing.

In practice, that means for bifurcated cases, at a minimum, you should disclose the following 17 things to the court via the B2030.

I’ll go through these as quick as I can:

1. The total amount that the debtor has agreed to pay for legal services, including the amount for post-petition services.
2. The amounts paid to the attorney prior to the filing of this statement.
3. A list of the legal services that you agreed to render to the client.
4. A list of the legal services that you explicitly exclude from your flat fee contracts.
5. That you offered the debtor two options for payment: a cash upfront price and a bifurcated-and-financed price.
6. The difference between those prices, if any.
7. The option that the debtor chose.
8. The existence of two separate fee agreements, that is, a pre-petition agreement and a post petition agreement.
9. When those agreements were signed relative to the petition filing date.
10. That pre-petition fees were waived, if appropriate.
11. The order in which pre-petition payments were applied to (A) the filing fee, if any are outstanding, ( B) the pre-petition fees, if any, and (C) the post petition fees. And this is just to demonstrate to the U.S. Trustee and to the judge that you would never dream of violating Rule 1006(b)(3), which requires that you must pay the court filing fee before you take a penny for yourself.
12. If you’re using a third-party company to provide financing, you should also disclose that.
13. Also disclose whether the line of credit is secured by a lien against the accounts receivalbe for legal services that you’re providing.
14. The details of who is collecting for the client, including whether you’re collecting the fees or your financing company is collecting the fees.
15. An explanation of why paying back the financing company a fee based on a percentage of your fees does not constitute fee sharing by attorneys with non-attorneys.
16. That you’ve disclosed as much as possible to the clients to obtain their informed consent to bifurcate their case.

And 17. If you’re sharing limited information about your client with your financing company so that they can collect from the client, you should disclose to the court that you’ve disclosed that to the client.

Okay. So that’s the list of 17 things.

So that wraps it up for the 13th position. And now let’s move on to the 14th and final position.

The 14th position that the USTP memo articulates is that you have to put the monthly payment to the attorney on Schedule J.

Here’s how the USTP puts this, and they actually stuffed this into a footnote:

Post-petition attorney’s fees installment payments should be disclosed as monthly expenses on the debtor’s Schedule J. This allows courts and the USTP to quickly evaluate whether the debtor can actually afford the attorney’s fees charged under the post petition contract, which is a factor in determining whether the bifurcated agreement is in the debtor’s best interest.”

On its face, this position is very easy to comply with, because all you’re doing is adding your installment payment as a monthly expense on Schedule J.

There are three subtleties to this position, though, that I want to get into for a bit.

First, while this position agrees with the Wright and Hazlett opinions, it does contradict the Brown opinion, which states that:

Schedules I and J reflect information as of the petition date. As of the petition date, a Chapter 7 debtor does not have an obligation to pay an attorney a fee post petition.

In other words, the Brown court is saying that you do not have to put the monthly payment to the attorney on Schedule J.

Now, to be honest, the position taken in the Brown opinion does make logical sense to me.

However, once again, I’m a practical person and if it were me, I wouldn’t want to spend my life and career fighting the USTP. So if you want to go along with the USTP position, then just put the monthly installment payment on the Schedule J. And of course, if you want to fight the USTP position, then you can not put the monthly installment payment on the Schedule J.

But that actually brings us to the second subtlety here, which is that some U.S. Trustees try to treat installment payments from a bifurcated bankruptcy as if we’re dealing with a reaffirmation of a pre-petition debt, which needs to be approved by the court. Specifically, they take the income as measured by a debtor’s Schedule I, and they subtract the expenses as measured by a debtor’s Schedule J, and whatever remains must ostensibly be positive.

In other words, they’re trying to apply the same “undue hardship” test to the post petition agreement between the attorney and the debtor as they would to an agreement reaffirming a pre-petition debt, which is covered by Section 524(m)(1).

And here’s that text:

Until 60 days after [a reaffirmation] agreement of the kind specified in subsection (c) is filed with the court (or such additional period as the court, after notice and a hearing and for cause, orders before the expiration of such period), it shall be presumed that such an agreement is an undue hardship on the debtor if the debtor’s monthly income less the debtor’s monthly expenses as shown on the debtor’s completed and signed statement in support of such agreement required under subsection (k)(6)(A) is less than the scheduled payments on the reaffirmed debt. This presumption shall be reviewed by the court.”

Again, I’m not a lawyer. However, I have not seen a statutory authority for applying the undue hardship test to post petition contracts for bifurcated bankruptcies.

After all, after filing a Chapter 7 bankruptcy petition, debtors have every right to go out and incur any debt that they want. You know, if the debtor doesn’t need a judge’s blessing to go out and open a credit card after filing a Chapter 7, why would a debtor need that same judge’s blessing to sign a post-petition agreement?

Logically, applying the undue hardship test only makes sense here if the post petition agreement between the debtor and the attorney is indeed a reaffirmation agreement of a pre-petition debt.

But, of course, a post-petition agreement is not a reaffirmation agreement of a pre-petition debt. It’s an entirely new and separate agreement.

So as long as the debtor is free to sign a post petition agreement for post-petition work, then a bifurcated chapter 7 would not be subject to the undue hardship standard under Section 524(m)(1).

In other words, if bifurcation is allowed, the post-petition agreement should not be treated as a pre-petition agreement to be reaffirmed. And this issue would be moot.

In any case, because of this issue, I’ve seen in some post petition contracts that attorneys ask potential clients to attest that they believe that the bifurcated-and-financed payment option is their best choice, and further that they believe that they can make the required payments. So that’s another option that you might consider.

Okay, so the third subtlety here is weird, but for completeness, I’ll include it. It’s the second half of the USTP footnote, and it says:

However, we do not take the position that Rule 2016(b) requires that attorneys using bifurcated agreements file a supplemental compensation disclosure each time they receive a post petition payment, provided that the terms of the post-petition agreement have been previously disclosed and there have been no material changes.

This is one of those weird comments that doesn’t make sense until you come across the relevant case law. And here the US Trustee Program is indirectly citing its new favorite case, In re Brown.

In that case, decided in 2021, the Brown court described a request from the U.S. Trustee for serial B2030 amendments that matches what the U.S. Trustee Program described in the footnote we just discussed.

Here’s the quote from the Brown opinion:

The UST argues that the Form 2030 fee disclosure must be amended and disclosure needs to be made each time the law firm receives payment -meaning every month if payments are due monthly.

Now, I’m not sure what legal theory would require a serial amendment of B2030s, but thankfully for the collective sanity of bankruptcy attorneys who bifurcate, the Brown court did not go along with this request.

Here are the exact words the Brown opinion used:

The court finds that this level of disclosure is not necessary so long as the form is amended when the post-petition agreement is signed, and that the amended form discloses the payments that will be made monthly.

So the USTP seems to be backtracking here in this memo from the request that the Southern District of Florida US Trustee made in that Brown case.

So it’s saying here that we do not have to do any kind of serial amendment of Form B2030s for a bifurcated bankruptcy for every payment.

And for that thank goodness.

So that’s the 14th and final position the USTP articulated in this memo.

This podcast episode is now over an hour long. So if you stuck with me so far, congratulations and thank you. Looking back at everything we’ve talked about with these 14 USTP positions, I have three major conclusions. And for the record, I’m still not a lawyer, but that shouldn’t matter because I’m not going to make any legal conclusions here. I’m simply making three simple logical deductions.

First, it’s pretty clear that the USTP no longer is fighting the what of bifurcated Chapter 7 bankruptcies. It’s only fighting the how.

And when it comes to the how, the recent USTP memo has given us a perfect map to comply with their rules.

Now if you want, you can fight these rules, but if you don’t want to fight these rules, you can just “go along to get along” and follow these rules

Second, whether or not we agree with each of the positions that the USTP has taken here, the positions they outline seem workable in the real world.

What I mean is that it seems like a bankruptcy attorney following these rules can comply with these rules and make a lot of money.

Actually, I can confidently say that bankruptcy attorneys that follow these rules are already making a ton of money, because a lot of my clients are making a great living offering zero down bifurcated Chapter 7s right now.

And that brings us to the third and biggest conclusion, which is that bifurcated Chapter 7s means that the bankruptcy industry no longer has to wait for a so-called “tsunami” of bankruptcy filings to come after the pandemic. We’ve been waiting for that tsunami for two and a half years, and that tsunami hasn’t come.

Frankly, I’ve given up on the tsunami and I’m pretty sure you have too.

The good news here is that you can create your own mini tsunami of bankruptcy filings by starting to offer zero down bifurcated bankruptcies in your practice.

That’s because zero down bifurcated bankruptcies are so much more appealing to your prospective clients.

By offering zero down bifurcated Chapter 7s, many of my clients have gone from an average of maybe five filings a month to 10 to 20 filings a month . . Some bankruptcy attorneys might consider 20 filings a month a “tsunami,” but I think all bankruptcy attorneys would at least call that a mini tsunami.

So I think now is a great time to start thinking about adding zero down bifurcated Chapter 7s to your bankruptcy practice. Frankly, with the legal risk in offering them being so low and the economic benefit being so high, I think most everybody will start offering them soon. And if you’re not, it’s going to be very hard to compete against another bankruptcy attorney that does offer it.

Now, if you want help starting to offer zero down bifurcated bankruptcies, I can help. You can visit my website at bklawsuccess.com and click the contact button and send me an email and I’ll get back to you. Or you can friend me on LinkedIn, I’m Bob Hiler, H-I-L-E-R, and send me a message.

Whatever you decide, good luck to you! I think this is going to be a huge year for changes in the consumer bankruptcy world.