In this episode of Bankruptcy Law Success, I interview Dan Garrison, a bankruptcy attorney who co-founded Fresh Start Funding with Matt Hartley to help other attorneys offer zero-down Chapter 7s.

I learned two things talking to Dan. First, after talking to Dan, I am much more confident that bankruptcy attorneys should go ahead and offer zero-down Chapter 7s today, as long as they do it properly as described in this interview. (I was more wary before.)

Second, I was impressed by Fresh Start’s “mid-single digit” default rate, as well as its revenue share being up to 75% of post-petition fees.

One last thing… In this interview, Dan talks about practices growing by 25-30% after implementing zero-down Chapter 7s. I think Dan is being fairly conservative. From what I’m seeing, once you figure out how to sell zero-down bankruptcies (and you figure out your marketing), you can double or triple your filings.

Some of the highlights in this interview include:

• Why bankruptcy attorneys who offer zero-down Chapter 7s see huge increases in their bankruptcy filings versus old-school “layaway plans” 
• The specific two requirements you should have prospects meet before you lend them money by doing a zero-down bankruptcy
• Exactly how offering zero-down bankruptcies helps you avoid clients who use sob stories to try to beat you down on price
• The ethical and legal reasons you should never “factor” your accounts receivables in order to offer zero-down bankruptcies (and what to do instead)
• And a whole lot more, including how you can radically reduce the risk of being the first in your district to offer a zero-down bankruptcy

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 subscribe to get an email when we release new episodes of the Bankruptcy Law Success podcast.

Bob: 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 speaking with Dan Garrison, Managing Director at Fresh Start Funding in Tempe, Arizona.

Dan, welcome to the podcast.

Dan: Thanks. I appreciate you having me on.

Bob: Great. So I heard about you guys because one of my clients sent me that article that you wrote in the ABI journal and that… If anyone wants to look it up, it’s called Liberating Debtors from “Sweatbox” and Getting Attorneys Paid: Bifurcating Consumer Chapter 7 Engagements. So, in that article you talked about the legal underpinnings of bifurcating Chapter 7. So Dan, could you maybe start by telling us what you guys are doing over there at Fresh Start Funding?

Dan: Sure. Yeah, Bob. So Fresh Start Funding was started with the premise that we really wanted to help make a fresh start affordable and accessible to everyone and the way that we try and do that is by making zero-down Chapter 7 terms work for attorneys and their clients. And we recognize the need out there in a market trend, candidly, in Chapter 7 practice that we thought was being underserved. And so we put together the capital and the technology and the operational know-how to launch a company that helps attorneys offer post-petition payment terms to the client.

Bob: Okay. And before we kind of dive into things, can you explain why a bankruptcy attorney should be really eager to start offering zero-down Chapter 7?

Dan: Sure. Yeah. There are some related reasons, candidly. The first is that there absolutely is a market trend right now towards that and the largest filers in the country, predominantly, are offering these terms. And so a lot of your listeners, I’m sure, are in markets where there’s already competitive pressure from attorneys who are signing up a lot of clients by offering these terms.

The second reason has to do with kind of the paradox that a lot of clients who walk into your listeners’ doors don’t have the money to file bankruptcy upfront and the traditional model requires them to come up with not only the filing fee but the attorney fee upfront. And so they’re either having to scramble in their period of highest financial distress to come up with $1,500 or a couple thousand dollars or more, sometimes, to pay for the bankruptcy. Or they get put on what I kind of jokingly called the layaway plan for bankruptcy, which is that they’re essentially making payments for their bankruptcy, but they’re having to make those payments before they can get relief by having the bankruptcy filed and get the stay in place and then ultimately get their discharge.

And so zero-down overcomes that problem and consequently really overcomes probably the biggest objection that we hear attorneys across the country telling us that they experience from prospective clients, which is “I just don’t have the money to file.”

The other thing, too, is that offering the traditional terms really creates a number of problems that are kind of a big headache for bankruptcy attorneys. They’ll sign them up on the so called layaway plan for bankruptcy and they’ll open up a file and get information to collect a little bit of money and then these folks for one reason or another start making payments, never fully fund the bankruptcy and so they end up with what we call ghost files with some money that, perhaps, they’ve earned, perhaps, they haven’t—there’s all kinds of ethical issues and challenges surrounding that. And it solves that problem too.

So a whole host of reasons and, ultimately, I think the most important one is that it’s been our experience—and Matt, my partner, operated one of the largest, if not the largest, practice in Arizona and one of the top practices in the country—and once he started doing zero-down a few years ago, I mean he saw his practice just explode. There’s just an enormous amount of growth that came out of it. So I think there’s a lot of compelling reasons to consider zero-down.

Bob: Yeah. I really like the last reason. Are you comfortable kind of putting numbers around the kind of growth that, maybe not that Matt saw, but that some of your clients have seen?

Dan: Yeah, it’s not unusual to hear clients talk about increasing their practices by 25-30 percent once they get the marketing in place. I mean, this isn’t something that you flip a switch and just because you’re offering zero down terms, the next day you’re going to see an explosion of growth. But once you invest in changing the messaging on your website and your ads and so forth…

And also start bringing in some clients who then start spreading the word of mouth advertising for you, because just as a sideline, another thing we notice is that attorneys who offer zero down tend to increase their referral business, too. The folks that they help tend to spread the word that there’s an alternative out there where you don’t have to pay upfront.

And so I can tell you, anecdotally, we were just looking at volumes of some of our clients just in the last month because, of course, we keep a finger on their pulse all the time. And two of our clients that I looked at this morning have been with us for several months and both of them had, far and away, their largest months just this last month and saw increases of even bigger numbers than I mentioned a moment ago. And I don’t want to mislead anybody because everybody’s experience, I suppose, is going to be somewhat different. But there does seem to be a pattern in this that folks experience increases in their business.

Bob: Well, as I was explaining to you before we started, I generate leads for bankruptcy attorneys using Google AdWords. And I can put some numbers around this as well, which that when we switch the messaging to a zero down bankruptcy offer, the ads themselves get twice the response at the same cost.

Dan: Yeah. We’ve actually talked to attorneys about that too—that your ad dollars tend to be more effective or your cost of acquisition for clients tends to be lower. Because if you’re differentiating yourself in the market with zero down terms, and there’s still very much an opportunity in a lot of markets to do that right now, those pay-per-click costs practically go down quite a lot.

Bob: Yeah. So I’m seeing double the clicks and double the leads because the conversion rate also contributes. So we’re seeing twice as many leads, and then we’re also seeing the same-day conversion rate double. So that when the leads go in for the appointment, the same-day conversion rate is double what it was. And so that’s at least a four times increase. So I think that your 25 to 30 percent increase numbers are extremely conservative.

Dan: Yeah. Well, and you hesitate to throw the pie-in-the-sky numbers out there, but I do think the potential is higher. And we’ve experienced the same thing that you mentioned there just a moment ago too, that not only are you bringing more folks in the door and probably doing it more cost effectively, but the closing rate to actually have these folks engage you tends to go up.

Because largely, they said the biggest objection you tend to get to a client engaging you is either the fact that they don’t have the money or if they’re forced to come up with the money upfront, they tend to become more price-sensitive and look at the service more as a commodity than they tend to look at it when you’re offering terms. Especially when you couple with that one of the things that we do, which is we’re actually connected to all the credit bureaus, and so we report those payments over the 12-month post-petition period to the credit bureaus. So we become a big part of these folks starting to reestablish their credit by making pretty low payments.

Bob: That raises an issue that, actually, I want to talk about, which is: how do you handle late payments or people who stop paying? You’re talking about reporting positive payments to the credit reporting agencies… The flip-side is that if someone has a late payment or they don’t pay, do you report that or how do you handle that?

Dan: Yeah, the credit bureaus, by and large, have rules that say if you’re going to sign up to report to us, you have to report the good, the bad and the ugly. So, I mean, we certainly just issue what’s called the Metro 2 report to TransUnion, Experian and so forth and report the payment activity.

But what’s behind that that I think helps a lot in really our intent to try and help people re-establish their financial lives, is that we’ve got a very friendly constructive A/R management process. And I use that last term very intentionally because we don’t run a collection business here. When an attorney signs up with us, not only do we provide the financing to the attorney so that they can afford to provide payment terms to their clients, but we take over the headache of managing payments for them.

And I got numbers that I bat around about this all the time. If you file 10 cases a month on 12 month payment terms, you’re going to end up with 120 clients that you’re collecting from a month. And we’ve got a lot of clients who take weekly payments from their clients, and so you’re looking at 500 payments per month that you have to collect, which is a big headache.

Bob: Yeah, it’s a lot of work.

Dan: We’ve got the technology and the staff and the economy of scale to do that. But what happens, to get to your question, when somebody misses a payment—and it’s not uncommon for that to happen—is that one of our staff’s in touch with them to find out what’s going on. A lot of times we discovered that folks have changed jobs or they’ve been sick and they’ve missed a week of work and so the paycheck was short of what they normally expect it to be. Or any number of other circumstances, unexpected medical bills, for instance.

And so what we do is we approach it with the idea of: “Hey, we’re here to try and get you back on track. What do we need to do to help you get back on top of this?” And we can restructure payment arrangements. The one thing, for instance, that we’ll do if we find out that somebody has changed jobs and they’ve gone from a twice monthly pay period to an every Friday pay period… We’ll restructure the payment plan so that we’re taking the payments out on a weekly basis on Friday or Saturday after they get paid, and make it really easy for them.

And, within reason, if somebody needs us to forbear payment, we’ll do that. Because our aim is not to put them into delinquency, it’s to try and work with them to keep them on top of the payment. So it’s a very friendly process. Consequently, we have a really really high collection rate. We’re managing defaults in the mid-single figure percentage range right now, which is, I think, really quite successful.

Bob: Yeah, that’s fantastic. Congratulations.

Dan: Thanks.

Bob: So taking a step back, you kind of talked about how you make money, which is that you give advances to the bankruptcy attorneys and then you collect the money. Well, actually, instead of me describing it, could you explain the pricing structure of how things work with Fresh Start Funding?

Dan: Yeah, so Fresh Start offers a line of credit to attorneys. So we structure the financing as a line of credit versus factoring, which is an important distinction because, as I’m sure you know, Bob, there are states out there that have bar opinions and things frowning on factoring for a number of ethical reasons. So ours is structured as a line of credit.

We make advances on that line of credit each time an attorney has a zero-down post-petition engagement with a client that they want to upload through our client portal for financing. And what we do is we advance a total of 75 percent of that fee to the attorney and it comes in two chunks.

We give an initial advance very quickly of 60 percent, and we have about a one- or two-day underwriting cycle typically to approve the contract if everything’s in order. And then if it’s approved on Tuesday, it funds on Friday. If it is approved by Friday, it funds on Tuesday. So we’re very quick on our funding cycles.

And then the other 15 percent is credited to a holdback account, and that holdback serves as sort of a cross-collateralized safety net, if you will, for both the attorney and us against payment delinquencies. And we set a cap on that holdback based on half of the highest volume of business that the attorney generates in the prior six months and it’s initially set at $3,000. So once the attorney accumulates enough money in the holdback reserve to exceed the cap, then we’re making monthly distributions of the excess to the attorneys. Again, by ACH transfers… The 15th of the month, that it happens for us.

And so, effectively, if the attorney’s clients are making their payments, they’re going to get the biggest chunk of their advance right upfront within a few days and then they’ll start seeing a flow of payments monthly thereafter.

And for the financing charge, we’re not only extending the actual financing and the time value of money for the 12 months, but we’re doing all the payment management, absorbing all the merchant processing and transaction fees, we’re reporting to the credit bureaus, we provide really strong support to the attorneys to get them set up and doing zero-down the proper way, which I’m sure we’ll talk about in a few minutes, and then a lot of ongoing support including marketing support.

And, Bob, you’ll love to hear this, given the business that you’re in, but we try to leverage Matt’s experience in really building very quickly a very successful practice in helping folks focus their messaging. And it’s interesting because our experience is probably similar to yours, that there are a lot of attorneys out there that don’t actually understand landing pages and Google AdWords campaigns, and really how to try and convert the marketing dollars they have into clients. So we try to help with that.

Bob: Yeah. That’s fantastic. Just a couple of quick follow-up questions on the way that your financing works. You talked about advancing on a line of credit. How do you handle… For the attorneys’ fees… So, if somebody has a Chapter 7 with a $1,500 fee, you’d advance say 60 percent of that, but what about the $335 for the filing fee and the $20 credit counseling fee and maybe some people charge a $20 PACER fee. How do you handle that?

Dan: You know, we can walk attorneys through how they can wrap that up into the financing with a couple of provisos. So if the attorney is actually fronting that fee for the client, which a lot of our clients do, then once they get the advance, they reimburse themselves the fee and they’re fine. If, on the other hand, they’re filing an application to pay the filing fee in installments for the debtor, then the rules are really clear that before they can accept any money against their fees, they have to pay the filing fee.

So for our clients that want to wrap the filing fee into the financing and who want to file an application for installment payment for the debtor, we’re just very clear with them that when we make the initial advance, you need to take care of the filing fee or you’re going to be in violation.

Bob: Great, so another issue that really comes up a lot is one that you just kind of referred to, which is that the U.S. trustee…

There’s a bunch of active lawsuits out there… One is the U.S trustee is suing Ashcraft in Riverside, California. There’s another decision In re Wright. So there are these guidelines that are emerging for safe harbors and how to structure bankruptcy to pass reasonableness tests so that you’re not having to disgorge fees and facing financial ruin. Do you have any advice for bankruptcy attorneys on how to structure that? How to think about that?

Dan: Sure. We kind of looked exhaustively at the case file when we wrote the ABI article that was published back in June and we keep a finger on that pulse as you can imagine consistently, right? So we followed the Ashcraft case and we’ve seen cases in Maryland, in Kansas City, in Oklahoma that have come up over the last little while where folks have gotten crosswise with the U.S trustees. And by and large, there are patterns to those that teach us things about how we are to structure engagements and that the fundamental key to it is bifurcating the engagement appropriately.

And that means having a clear pre-petition agreement with the debtor that lets them know that you are splitting the engagement into two pieces. You’re still offering all the typical bundle of services that you would in Chapter 7, you’re just doing some minimal work pre-petition, which is generally all your due diligence to make sure that they qualify for a 7, that a 7 is in their best interest, and then getting the case going in a skeletal or rushed kind of a fashion. And then setting up a post-petition engagement agreement with the client to handle the rest of the case.

And the key from our perspective is informed consent meaning that you have to be very clear with the client about the nature of the bifurcated engagement, the options (if there are any) that they have. So, for example, if you’re still offering traditional engagements if they can come up with your fee, they need to know that alternative. If you’re charging more for a bifurcated engagement than you would for a traditional prepaid engagement, you need to explain that and make sure that they’re making an informed choice about engaging you to split the case into the two pieces.

The other thing is, along the same lines, as disclose disclose disclose to the client, we really feel so strongly you need to disclose to the court, too. So we provide sample language to our clients that we really strongly recommend they use for the Rule 2016, form-B 2030 disclosure, that lays out exactly the nature of the bifurcated engagement and if they are using a company like ours for financing, that that piece of it exists, too.

And then there’s an intellectual debate about what to do with schedule J, and I think technically the answer is that you really aren’t obligated to put a post-petition installment payment on schedule J, any more than you would the car payment for the car they go out and buy the day after they filed the bankruptcy. But we do recommend to our clients from a practical perspective that they include the payment on schedule J because we’ve gotten feedback from U.S. trustees and their staff attorneys that they prefer to see it that way.

So we package all that up, we’ve got some really simple training videos, got sample documentation that we provide all of our clients. Because I will tell you, aside from our interest in growing our own business, we’re also very very interested in raising the standard of practice and helping people avoid the mistakes that have gotten some of these attorneys in trouble, which candidly, Bob, have not a lot to do with offering zero down or a bifurcated engagement. They kind of trip themselves up by failing to disclose or by getting really greedy about the amount of their fees for a zero down, or failing to really get the informed consent of their client. There are some common pitfalls that we see.

Bob: Yeah. One of the things that I see is that, in reviewing some cases—I’m not a lawyer, but I can read—is that if someone is going to get an advance of say 60 percent on their fee, then the first thing that they do is they break out their calculator and they say, “Oh, I actually need to raise my prices 66 percent and if I do that then I’ll be getting 60 percent of… If my regular fee is $1,000, if I charge $1,666, then 60 percent of that is back down to $1,000, so I’ll be making the same amount of money per case.” And that’s when you start facing the reasonableness test…

Dan: Yeah. Well there’s actually two related problems that we see really commonly. The first is attorneys not respecting the true bifurcated nature of the agreement. So they say, well, if I’m offering zero down and I really want to make $2,000 on a case, I’m going to just charge $2,000 for the post-petition engagement. And there’s nothing necessarily wrong with charging $2,000 for the post-petition engagement if that’s what your market will bear and if that seems reasonable in your district for doing it. But the key is you really need to look at the work you do pre-petition and the work you do post-petition. And if the prevailing fee in your jurisdiction is $2,000, you really should be allocating a piece of that value to the pre-petition portion of the engagement. And then you need to choose: “Am I going to charge the client a $100 or $200 for the pre-petition fees and then the rest are in the post-petition engagement. Or am I going to waive that pre-petition fee so that I can truly offer zero down?”

But you need to respect that distinction. And then the second problem is the one that you were referring to, which is folks look at it and they say or see that Fresh Start Funding law firm offers 75 percent to finance their engagement. And so they just gross-up their fee so they’re making the same amount of money and that’s just not the way to do it. There are good rational supportable arguments for charging a reasonable additional amount for a bifurcated engagement, because, for instance, you’re offering payment terms which is a big value to the client.

Bob: Sure.

Dan: And you’re incurring the risk and the time value of the money in doing that. There is also some additional work that typically goes into a bifurcated engagement because you typically have two meetings with the client where you might otherwise only have one, and you have a separate engagement agreement, you have additional disclosures with the court. So, you know, if you keep those things in mind and you respect the nature of the bifurcation, and you’re sensitive to what the market will bear in your jurisdiction, you could probably put together a supportable rationale for charging a bit more.

But as my mom used to say, “pigs get fat and hogs get slaughtered.” And so a lot of the attorneys we see that are kind of falling into these ethical traps across the country are doubling and tripling their fees for offering zero down and that’s just not going to work.

Bob: Another thing that I noticed… A friend sent me a decision yesterday from the bankruptcy court in Delaware. And in that decision, the judge said that, “It may be that a reasonable interest rate may be applicable on a given case. But the fee here was not based upon a stated interest rate as a flat fee payable over time,” which sounds to me like they’re OK with you charging like a non-usurious interest rate.

Dan: Yeah. And the judge is used to hearing those arguments in the context of like Chapter 11 cases where—and that was the world I kind of operated in for 23 years as a Chapter 11 debtors’ attorney—and so we would put together a plan and we would have to justify a plan rate of interest. I think if consumer bankruptcy attorneys approach the issue with that same kind of business-minded and market-sensitive approach and don’t get greedy in the situation, I think we’ll be fine.

Bob: I do have a bunch more questions about bifurcation, but I am kind of curious—I looked on your LinkedIn… And I sent you a friend request, by the way—whatever that’s called—connection request. So I saw that you started your career in corporate bankruptcies and then you started The Turnaround Team, consumer bankruptcy law firm. And so I was kind of wondering why did you make that jump from 11s to 7s and 13s.

Dan: Well, so it’s interesting. I did start out my career in BigLaw, as a partner with a couple of big national firms, and my practice really was Chapter 11 debtor practice. And I didn’t leave Chapter 11 to do consumer work. What I did was I recognized the need that I could fill and how I could leverage the platform I built with my other law firm, which was a business law firm called Andante Law Group, and so I started Turnaround Team as sort of a sister firm that I owned, and I was doing both. And I had folks that were primarily doing the consumer side and then I had a number of folks who were working with me on the corporate side. So I straddled those two worlds for a number of years.

Matt, my partner, he started out in BigLaw as well, and then he went into private lending for a number of years during the boom cycle and then became sort of a restructuring consultant in the bust cycle. And several years ago, he started a consumer bankruptcy firm as his primary business, Hartley Law Center, and he grew that into a practice that was filing 60 to 100 cases per month. And that was his sole business.

And Matt and I have known each other for close to 20 years. We were both at a couple of large firms briefly together over the years. And, so, when we kind of connected the dots, both of us had recognized this market opportunity. And, really, I think saw that we had a chance to bring in some pretty considerable business experience and a real good foundation in sophisticated business practice to bear in the consumer bankruptcy world and it’s worked pretty well. So we’ve come into it with a customer service mindset and focused on technology and staffing and corporate culture and all the kinds of things you might expect to try and build a company that really can be a good partner to attorneys across the country.

Bob: Well, you say that… I’m in my mid-40s, I wasn’t really focused on corporate culture for the first company I started. So I mean these are definitely things that you focus on after you’ve had a little bit of experience, right?

Dan: Yeah, well, I’ve got a lot of gray hair. I’m in my early 50s and I’ve actually been kind of a serial entrepreneur as has Matt. And so I’ve had a chance to learn through the school of hard knocks what works and what doesn’t. I’d say probably a decade ago, I really got attuned to the idea that companies work better when you have a mission that you really believe in and then you make your employees and your clients all believe in as well, because then we’re all rowing the boat in the same direction.

Bob: And it’s really amazing how the mission… It almost doesn’t matter what the mission is, people just love having a mission.

Dan: Yeah. Well, we have a set of corporate values too that we feel real strongly about. The first one of which is that we’re going to have fun. The rest of them deal with excellence and integrity, serving with compassion, so serving our clients (the attorneys), but also serving, sort of vicariously, the debtors as well, which is why our corporate mission statement is “Making a fresh start affordable and accessible to everyone.”

Oddly enough, our mission statement focuses more on the end user, the debtor population, than it does the attorneys. But what we’ve discovered is that most consumer bankruptcy attorneys get into this practice area at least in part because they like helping flesh and blood people and they like knowing that they’re doing good. And it’s been really appealing, I think, to a lot of our clients to know that that’s where our hearts are as well.

Bob: Yeah. One of my clients was just recently telling me that he texted one of his clients to say, “Hey, your Chapter 13 plan was confirmed. I told you it’d be $500, it turned out it’s $507 a month. Just wanted to let you now.” And she brought them back and said that she was crying and she was so happy, and thank you so much… It made me think two things: One, l was glad that he’s my client because he’s really in the business for the right reasons. And two, how do I get it so that… My clients never call me crying with tears of joy even when I send them amazingly cheap leads and they’re all converting well. And I’m like, maybe I’m in the wrong business!

Dan: There is something really gratifying knowing that you’re helping good people turn their lives around and despite some of the prevailing political sentiment—and I don’t mean the current administration, I just mean generally for years and years—that the folks who file bankruptcy have abused credit and things like that. We find that most folks who reach that unfortunate conclusion that they need to file Chapter 7 have almost always had something really bad and really unplanned happened in their lives, like the loss of a job, or a devastating health issue, a ugly divorce, or a combination of those things.

Bob: So how long does it take to get started if I’m a bankruptcy attorney out there listening to this podcast and… Well first off, what’s the best way to get in touch with you guys?

Dan: So there’s a couple of ways that you can get in touch with us. We’ve got an 800 number for attorneys to call, which is (800) 915-6545. Or they can also email us at info AT freshstartfunding DOT com. And in terms of getting started, we’ve really worked hard especially over the last handful of months in streamlining the process. So if they call up and talk to Matt or I or one of our sales staff and they’re interested in getting going, we’ve automated the contract-signing process, so that’s very streamlined.

And then we have just rolled out a new on-boarding program that consists of a series of really short videos that are 3 to 5 minutes apiece, each one of which covers a topic that folks need to be conversant with. And then we conduct a live training call on Webex with the attorney and their staff, so that they can actually see firsthand how our client portal works and see how you upload the documents to it.

And then that’s reinforced with the fact that we have a video of that that they can refer back to, and we have live support available to them as well. And if someone’s interested in getting going and can turn around the finance agreement to us fairly quickly, watches the videos in a fairly compressed period of time—they’re not as exciting as binge-watching Game of Thrones, but you know they’re not bad videos—we could get somebody going within a week very easily.

Bob: Wow.

Dan: And then, honestly, what we typically find…

Bob: Can I anticipate what you’re going to say? Because I have the same problem where… It’s like… I can get an ad campaign going for someone like probably in 24 hours, it would be a little tough but I can do it. But it’s always the attorney that is not reading the landing pages, not reviewing things, not reviewing the ads, and that’s why it takes… it can take up to two weeks but it’s usually because of the attorney.

Dan: Yeah. Very similar to what I was going to say. And even more so, I will tell you that the piece that generally slows attorneys down, if they’re not already doing zero-down, is converting their marketing campaign, because even if we can get them set up in our system and get them trained and be sitting here by our computers ready to process their contracts, but until they change their marketing to get word out that they’re offering zero down, they’re not going to see, really, that explosive change in their practice.

So with that said, we don’t really compete with a guy like you who does it 24/7, but we try to provide some marketing assistance to our clients to help them pivot. And the quicker they’re able to change their landing page and change the Google AdWords campaigns and things like to get the word out, the quicker we typically see them get up and going.

Bob: Sure. I mean, I would say on the marketing side of things, they don’t need to update their entire website. They could just update their AdWords and their landing page and get going there and then over time they can change their front page or whatever as well.

Dan: This will probably be music to your ears, Bob. I’m guessing a lot of attorneys out there still have a fairly low-tech digital brochure-style web page. And as you know all too well, engagement really is driven by a simple landing page with really clear messaging and multiple points of engagement to really get them clicking through and calling fast. And it’s also been our experience that form fills and things like that aren’t nearly as effective as live calls. And so if they’re willing to listen to some good advice from guys like you and potentially a little bit from folks like us as well and then make those changes, that’s when they’re really going to see big changes in their practice.

Bob: Sure. One of the big trends that I’m seeing in terms of bankruptcy lawyers redesigning their home page is this idea of doing a reverse home page. Are you familiar with that concept or have you heard of it?

Dan: No, tell me about that.

Bob: So instead of kind of putting the navigation at the top of the page, you could actually put it at the very bottom and you just start just by saying, “Hi, this…” I’m going to make something up, “Hi, this is Bob Hiler. I’m a bankruptcy attorney and I offer the zero down bankruptcy and you can start right away and blah blah blah… that’s why I’m so great…” And then you say, “I’m here. You can do one of three things: you can call me, you can read my blog or whatever.” But that’s at the very very bottom, maybe even below a form fill.

So the idea is that people don’t just come to your page, they click over to the blog and they click over to this.. the about page and then they forget what they’re doing and someone calls them and then… It’s really focused on the conversion.

Dan: We weren’t using that terminology but we actually preach a lot of the same principles that you don’t want to provide too many opportunities for people to kind of get lost on your website going through a blog or reading FAQs. A little bit of that stuff is helpful because you’ve got to give them a reason to engage with you, but you really want to drive them towards the engagement point, whatever it is, the live call or request form or whatever it happens to be.

Bob: Yeah. If you do that, for the listeners out there, you can get two-thirds to 80 percent of your leads actually being phone calls, which convert much better than emails. And by the way, if listeners out there or if you even want to check it out, just google “upside-down home page.” I screwed up the name, I said “reverse home page.” It’s “upside-down home page” and you’ll see the subtitle “the highest converting home page design I’ve seen” and I’ve tried it and it really does work.

Dan: That’s great. I got a nugget for my toolbox today, too.

Bob: Very good. One of the things that I’ve seen with—not you, not your firm in particular, but I’ve seen just out there talking to attorneys—is that attorneys will say, “Oh, I used to work with…” And they’ll name one of your competitors, maybe.

So what’s clearly happening out there is that the attorney is kind of learning how bifurcation works, getting kind of training wheels by working with one of your competitors. And then they’re like, “Why am I giving up (say) 40 percent or whatever, some percentage of my income, why am I giving out that percentage to a factoring company when I could just collect the money myself?” And then they kind of take that money in-house.

So, I wanted to flip that question over to you. Like if someone were to work with you, why shouldn’t they just steal your legal materials, learn how to do bifurcation, and then kind of change the locks on you after a couple of months?

Dan: Sure. And you’re going to be surprised by my answer. But as you say it—and this is an important distinction in my world—we don’t factor, we finance.

Bob: Yes.

Dan: So, that’s important. But to answer your question, we actually are perfectly happy in having people work with us to learn how to do this correctly, and if they can figure out a way to generate enough capital and cash flow to float the payment terms themselves and they can build the infrastructure to manage the payments effectively so that the defaults don’t go through the roof, and do that by themselves, they should do that.

In fact, we tell our clients when they come on with us, “We don’t expect you to finance every case with us, and in fact, you shouldn’t.” If you’re a good business person and you get an opportunity to collect a fee upfront from a client like during tax season when people are trying to bankruptcy-plan around their anticipated tax refund or something like that, or they get a little inheritance or something like that, absolutely, collect the fee upfront.

And I think the smartest of our clients, ultimately, will stop using us, if they can manage their expenses and plan effectively so that they start squirreling away enough capital to offer terms themselves… But let me give you some math to kind of illustrate the challenge around that because it’s a big one. And it’s similar to the math problem that I kind of floated out there about the payment management where you could find yourself trying to collect 500 payments per month.

On the financing side of things, if you’re offering 12 months payment terms to somebody and you’re charging a couple thousand dollars for a bankruptcy, you’re going to need effectively a few hundred thousand dollars of capital in order to cash-flow that yourselves. And for most consumer bankruptcy attorneys, that’s not feasible—either because they don’t have the funds themselves to do it, they’re relatively small business owners themselves, or certainly it’s been our experience that consumer bankruptcy attorneys have a hard time getting bank financing.

And it relates to the counterintuitive reason why our business works, and that is banks look at a consumer bankruptcy attorney and say, “OK, so you want me to loan money on the premise that you’re going to generate some accounts receivable from people who just filed bankruptcy,” and bankers don’t like that idea. I like that idea and here’s why: the biggest risk in consumer debt is that your borrowers can file bankruptcy tomorrow. And the folks that are making payments to these bankruptcy attorneys can’t file bankruptcy again, except in the rarest of circumstances, for eight years.

And the other thing is they’ve been in some financial distress, but all of their dischargeable debts have gotten discharged, or will very shortly get discharged when their cases commence. And they’re looking for a chance to rehabilitate their credit, and so making these payments timely is in their best interest in that regard, too. So we look at it and say it’s actually a good credit risk for us.

And, so getting back to your question, I absolutely encourage our clients to try and figure out ways to finance the cases themselves, rather than use our financing services, or use some factoring service that may be out there kind of competing in this space. But I will tell you most consumer bankruptcy attorneys who kind of fall into the middle of the bell curve—meaning that they’re filing anywhere from three to 15 or so cases a month—have a really hard time coming up with the capital to be able to do this on their own, and setting up the infrastructure, to collect payments and things like that.

It comes back to something I repeat over time, which is most of us went to law school to be attorneys. We didn’t go to law school to become bankers or accounts receivable managers or any number of related things. Folks that we deal with, their highest and best use is to help people by filing bankruptcy.

Bob: Could you walk our listeners through the logic of the numbers that you’re talking about?

Dan: Yeah. Sure, so if you’re filing 10 cases per month and you are offering 12-month payment terms, over the course of a year you’re going to build up 120 (12 x 10) clients are making payments to you. And if they’re making payments weekly, each one of them has fifty two payments in their payment cycle times 120 clients. That’s actually about 600 payments per month at the peak that you’re collecting. And it’s a big administrative burden.

And most of our clients with solo practitioner or maybe a couple of attorneys partnered up with a couple of staff, and they run really lean and mean, meaning their paralegal and their assistant, they have defined jobs, which is reviewing debtors’ paperwork, and getting the data put in Best Case or Next Chapter or one of the other software programs, and keeping track of the calendar and calling up debtors to remind them of document needs. And the normal Chapter 7 day-to-day stuff, they don’t have the excess capacity to take that on.

And even the ones who take the time to kind of build up some capacity, they’re looking into hiring another full-time person or two to manage the payments. And it requires oversight and it requires fine-tuning. And it’s just simple economics that you tend to make your money on the margins. And so if you’re managing the payments yourself, and doing (I think) fairly well by collecting 90 percent of the payments, and you could be collecting five percent more of them by using somebody who’s a professional and who has the economy of scale and technology. It’s easy to see how you start making up for the cost of using an outside provider like us to do these things.

Bob: And that actually brings me to my next question, which is that at some level the bankruptcy attorney is actually making a credit decision every time they’re doing this. I don’t actually mean “at some level,” they’re definitely making a credit decision, right? So do you also give guidelines of the bankruptcy attorney to make that decision. Do you have guidelines you have for bankruptcy attorneys out there?

Dan: Sure. Well so we have some underwriting requirements to finance contracts. They’re real simple and they’re not hard to meet. There’s an income qualification, which is that a debtor needs to make at least $2,000 worth of monthly income and that could be debtor and co-debtor combined.

It can be from multiple sources. Basically everything other than unemployment compensation. So an annuity, V.A. benefits, pension, social security, part-time work, full-time work, whatever it happens to be. And the payment, monthly payment, can’t exceed 10 percent of their income.

And the other requirement is that we process all the payments electronically. So we require the debtor to either have an active bank account that we can either take an ACH transaction out of, or do a debit card transaction with. Or they can have a prepaid debit card as long as their wages, their compensation, is being deposited directly to the prepaid debit card. That’s really it, in terms of the underwriting guidelines that we impose on folks.

But the folks that work with us who are doing the best job are also watching the patterns and realizing that where they’re stretching to kind of meet the underwriting guidelines or you know they’ve got somebody that they’ve just got that “spidey sense” tingling that they’re not going to be a good credit risk, they’re almost always right. And the way we work, because we’re very sensitive to the attorney’s ethical responsibilities, is we don’t do anything that the attorney couldn’t do. So friendly A/R management, trying to keep him on track…

If it gets to the point where these folks default on their contract, which in our system is 90 days of default, then we turn it back to the attorney and say, “Look, this client needs some special attention and we don’t sue debtors. We don’t refer them to collections. We don’t use all heavy-handed dunning kinds of communications to try and get them back on track.” And so our attorneys do get feedback about what’s working and what’s not. And I tell you, Bob, they’re very rarely surprised at the ones that are struggling, because they almost always had a feeling that they would struggle.

Bob: Absolutely. So that also actually addresses a real objection that bankruptcy attorneys have that I talked to, which is that they don’t want to be the “heavy,” they don’t want to be sending people to collections or to initiate lawsuits because they view themselves as a good guy. But you will report the default to the credit reporting agencies, as you are required to, but that’s kind of the…

Dan: But you know the flip side of the coin of the attorneys not wanting to be the heavies, which I totally understand, is that they actually are the ones that are in the best position to leverage a relationship with the debtor to get back on track and pay the fees. And one of the ethical objections to factoring, where you’re literally selling the client receivable to a third party who can then sue on their own behalf or turn it over to collections, is that it’s just a recipe potentially for ethical complaints against the attorney, who is really obligated to follow the rules of professional responsibility through the entire client relationship, which includes the period of time when clients are continuing to pay for the fees.

So we got some real thorough outside ethics council advice when we were setting up our business and that’s continued as we’ve established our forms and our practices and things. And one of the things we were told, and that we believe, is that attorneys need to still have skin in the game with the financing for it to pass ethical muster in most states. And the reason that is is because it’s really the best approach. It avoids problems with debtors: “Hey, I see you’re suing me on this but I got a dispute with the attorney about whether or not I got good service or whether the bankruptcy was handled correctly.” So that’s just a recipe for problems that we avoid by making sure that the attorneys are still engaged in the process and by committing that we won’t do anything that the attorney can’t do.

Bob: I mean what you’re really describing is kind of like a smaller version of collateralized debt obligations where the banks… I worked on Wall Street for five years… Not in this area but… The banks would bundle all these collateralized debt obligations and then they would sell all the tranches of that debt and they wouldn’t keep any of it. They didn’t care that the CDOs would blow up.

Dan: I just actually watched The Big Short the other day again and CDOs were a problem for that very reason because when you cease to have skin in the game, you cease caring about whether or not you’re making good business decisions and whether you’re offering good services and whether you’re taking good credit risks. And that is, in fact, only one of the reasons why factoring is widely disapproved but it’s an important one, that the attorney is seen as kind of divorcing themselves from any responsibility with the client and that’s just not the way that attorney-client relationships are supposed to work.

Bob: Is there a way of kind of getting your get-out-of-jail free card ahead of time? What I mean is that can you submit your payment plan to the court for one client and say, “Look, I’m working with this company. It’s called Fresh Start Funding. Here’s how we’ve disclosed everything. Can you approve of this so that I get a get-out-of-jail free card so I don’t have the U.S. trustee coming after me?” Is there a way of doing that?

Dan: Well, here’s what we see happening. It’s tough to get like an advisory opinion, almost knew it was impossible to get an advisory opinion from a judge. But we also discovered it’s really tough to get, at least, anything that sticks in terms of a blessing in advance from the U.S. trustee program, too. And that’s very typical of bureaucratic kinds of institutions. They just aren’t out there to tell you that you’re doing something right. Their job is to tell you after you’ve done something that you did something wrong.

But what we do… We do talk to attorneys all the time who are in districts where for whatever reason they feel like there’s a trial attorney at the U.S. trustee’s office who doesn’t like zero-down for whatever reason. Go to that trial attorney, go to the U.S. trustee and say, “You know here’s what I’m thinking about doing and here’s the company I’m working with and here are their recommended engagement disclosures and here’s their 2016 language. And here’s a description of how they work with the debtor and so forth.” And educate the trustees, educate the judges. We encourage that.

In fact, I will tell you we actually have an outreach campaign to judges in the U.S. trustees where in conjunction with our publishing articles and doing our webinars, we’re really trying to educate every constituency in the bankruptcy process about this. Because what we discover when we talk to people who have sort of these knee-jerk reactions against zero down, is either that they don’t understand how we’re structuring it and once we work through that they go, “Oh, that actually does make sense.” Or what they’re really opposed to is not zero-down in bifurcation. It’s abuses that they see happening in the context of zero-down, which we very strongly educate and encourage our clients not to do.

And so once they understand that, I’ve had conversations with trustees where I’ve said, “Yeah absolutely, John, you should be concerned with X, Y, and Z. People charging unreasonable fees, people failing to get informed consent, and people failing to disclose the nature of the relationship to the court. Absolutely, you should be concerned with that and you should police it in your district and make sure that the folks who are doing zero-down are doing it correctly.” And I think that’s a very appropriate role for the courts in the U.S. trustee program.

Bob: Yeah.

Dan: But when we have the conversation with them about the ones who, for whatever reason, don’t understand bifurcation, a lot of times they think what we’re doing is simply collecting fees post-petition from pre-petition engagement, which in other than the 9th Circuit probably isn’t doable. (The 9th Circuit has got case law going back 20 years allowing attorneys to collect the reasonable value for post-petition services without a contract from the Hines decision forward.) Other parts of the country that probably is a non-starter, but I’ll compare bifurcation to some other common things. And the light bulb goes on for people.

So, for example, it’s common that somebody will file a pro se bankruptcy and then they’ll realize they are over their heads and they’ll decide to hire an attorney post-petition, and nobody bats an eyelash at the idea that that attorney can enter into a post-petition engagement agreement and be paid from post-petition earnings or exempt assets. Not even a question.

Likewise, we see clients that hire one attorney pre-petition and, for whatever reason, they get crosswise and decide they want somebody else to represent them, so they fire that attorney and hire another attorney post-petition. Same thing. That can be paid post-petition.

So what we’re doing with bifurcation is we’re hiring an attorney pre-petition and then you’re entering into a separate engagement for defined services post-petition.

And once you kind of lay out that structuring compared to these things that happen all the time in the bankruptcy system, most people go, “Oh. I get it. Yeah, how would I distinguish bifurcation from those other situations because there’s really no principled difference in those things?”

Bob: Yeah, I mean you’re basically reading from the original decision, I forget the name of it but it was the… I think it was in the Middle District of Florida and it involved Clark and Washington. That was the case, right?

Dan: Walton v Clark and Washington, yeah.

Bob: Yeah. Something like that.

Dan: Slabbnick in Michigan is a good one. That one has probably ten pages single-spaced of ethics analysis and stuff. We actually have, Bob, a case law summary (as well as reprint copies of the article) that we make available to people whether they are clients or not to help, again, educate, improve the level of practice. Any of your listeners who would like copies of that information, would like to see our forms, we actually share our forms with people whether they sign up with us or not.

Or anyone who wants to just talk to Matt or I about it, they still have lingering questions and they want a little intellectual debate about this topic. Call us up. We’re happy to talk to you about it. We live and breathe this stuff every day and I’ll go out on a limb and say Matt and I, if we’re not the two most eligible people in the country on this topic, we’re certainly in the top four or five. So we’re happy to chat with people about it and help people wrap their heads around how they can implement this in their practice to help more people and grow the practice at the same time.

Bob: Awesome, I just also want to circle back to what you were saying earlier. You were helping people understand how the way that you do bifurcation is reasonable and you were pointing back to that Clark & Washington case and the pre-petition and the post-petition split. But taking a step back, I was reading an article, maybe six months or a year ago, about how a lot of attorneys in predominantly black neighborhoods are kind of abusing Chapter 13s and charging $5,000 for a Chapter 13 and then people hit some kind of hiccup. So they’re basically charging $5,000 fees and then like 10 percent of their plans go all the way to completion. And then when that happens, even though they’ve paid for four years on a five-year plan, all their debt comes roaring back with late fees and interest.

And you compare that serial abuse of the African-American community in a city like Memphis, and you compare that to Chapter 7 with a one-year payment plan… I mean, it’s just night and day. To me, it’s not even a question.

Dan: You’re preaching to the choir now on that one. And so there have been two really influential articles in the last little bit. So the title of our article: Liberating Debtors from the “sweatbox”… That “sweatbox” reference is to an article that was published in the Notre Dame Law Review this year by the co-investigators of the consumer bankruptcy project led by Professor Pamela Foohey. And they wrote a companion article that was published in the Cal Law Review earlier in the year that talked about fee-only Chapter 13s and had done some cross-sectional and longitudinal investigation of the dynamics of that and pointed out that it was particularly racially and economically disproportionate in its effect on black communities and very poor communities, where for whatever reason the attorneys there, maybe, didn’t think they could do zero down Chapter 7s. Or they just liked the comfort of knowing that the code is very specific that attorney’s fees are the administrative expenses in Chapter 13.

And so they put people into 13s, knowing that, at most, the person’s going to be able to pay enough into the plan to pay the attorney’s fees. And the typical fee for a Chapter 13 case across the country, according to Professor Lou Picos’ research a couple of years ago that was published, is almost triple. And so you’ve got this dynamic with paying a whole lot more just for the privilege of the attorney collecting the fees as administrative expenses… A much bigger burden on the system. And you put your finger on it, the default rates for Chapter 13 plans are exceedingly high. But they’re even higher for these fee-only Chapter 13s.

So interestingly, after we published our ABI article in June, one of the very first reactions that I got from somebody was from a chief judge in a district in the Southeastern United States that covers a lot of area that’s predominantly relatively poor and folks of color… and he said, “Look, I’ve issued a standing order in my jurisdiction, formally acknowledging the fact that you can do zero down Chapter 7s if you do them the right way as an alternative to dealing with fee-only Chapter 13s. Because he saw his district being flooded with these fee-only Chapter 13s and recognized that they were just a bad deal for everybody.

Bob: The article that I’m talking about was—I found it—it’s in the Atlantic and it’s called Caught In the Bankruptcy Feedback Loop, and the subtitle is “Black Americans are far less likely than their white peers to successfully erase their debts in court and a network of attorneys profits as a result.” And it’s about Memphis and some other communities and Pro Publica analyzed their bankruptcy filings nationwide. In this particular district, everyone just files Chapter 13 and no one makes it through their plan.

Dan: So yeah I think that article in The Atlantic actually did cite to the article I was talking about, the Cal Law Review that was published by Professor Porter, Foohey and a couple of others called “‘No Money Down’ Bankruptcy.” So there was actually that article in The Cal Law Review got a fair amount of more popular media attention after that because I don’t think there’s any putting a spin on this that’s positive. Zero-down, fee-only Chapter 13s, not only do I think they’re not in the debtors’ best interest and not in the system’s best interests. But I think that they pose real ethical challenges for attorneys that you completely avoid if you, instead, put those same folks into a zero down Chapter 7 with informed consent and proper disclosure.

Bob: Okay that’s a great note to end on… Thank you so much for joining us.

Dan: It’s been my pleasure.

Bob: Yeah, it’s been great. And so we already explained how people can contact you, but your website is that freshstartfunding.com?

Dan: Yeah, freshstartfunding.com. The 800 number for folks to get a hold of this is (800) 915-6545. And then our email address for enquiries is info AT freshstartfunding DOT com. But folks can also reach myself or Matt at dan AT freshstartfunding DOT com or matt AT freshstartfunding DOT com. And I’ll tell you, any of your listeners who are interested and ultimately decide to sign up with us, we’ll waive our $199 on+boarding fee for them if they just mention your podcast when they give us a call or drop us an email.

Bob: Awesome. Awesome. And you also have webinars that are available every couple of weeks that they can check out as well?

Dan: We do. Yeah, and in fact, those webinars are scheduled on our websites, so if they go to our website, they’ll see the link and the nav bar for webinars and some of the next few upcoming webinars they can sign up for. They can just click right through right there on the website to sign up and then they’ll get a lot of the same information candidly that they probably heard on your podcast but probably a few more nuggets that they’ll find helpful, too.

Bob: Okay. I want to end with a comment and then I want you to comment on my comment.

Dan: OK.

Bob: Well, one of the biggest things that I hear about zero down Chapter 7s from attorneys is they say, “Oh, I’m going to wait for the Ashcraft case to be decided,” or they say, “I’m going to wait on this. No one else is doing it in my district.” My comment to them is: whoever does a zero down Chapter 7—whoever starts offering that first in your district—is bringing a nuclear bomb to a knife fight.

So they’re going to win. They’re going to dominate the market and if you are offering free consultations while someone else is offering zero down Chapter 7s that ends up having a $2,500 payment, which is double what they’re charging, maybe they’re even charging $1,250 which is half of what you’re charging. But that person’s going to win and they’re going to… So then at some point, you’re going to realize, “Oh. I’m behind the eight ball. I have to give up practicing bankruptcy or I have to start offering zero down Chapter 7s myself.” But now you’re six months behind your competitor, and that’s a terrible place to be.

So this is what I tell them. Do you have any comments on that? Do you think that’s an accurate way of looking at it?

Dan: Yeah, I do. I mean if you’re in a district where there are already folks offering zero down, you are playing catch up, but you still should absolutely jump into the fray. If you’re lucky enough to be in a district where there’s no one that’s offering this or very few people and you can take advantage of that first mover advantage, you really should do it because you’d think, “Well, if I jump into the fray later when it’s safer, I can catch up if I put my ads out there they’ll get just as much traction.” But they actually don’t because, Bob, as you know, obviously, you start not only fine-tuning the Google AdWords campaigns and things like that but you do actually start getting some SEO benefit over time too. And that marginal benefit is going to drive more people to that first mover’s website.

And the other thing is for all that period of time that they’re the only one in the market doing it, they’re building up capital and processes and expertise in the area that will also help them. So I’m with you. I think folks need to be courageous and smart. They need to do it the right way and they need to make sure that they avoid the ethical pitfalls.

But the way Matt and I look at this, and most of our clients will look at it the same way now too, is that the horses are out of the barn on this already. Zero-down is not going away. You got some jurisdictions where there are U.S. trustees that are still taking a run here and there at these cases. But what we see coming out of it is largely decisions that slap attorneys for doing other bad things. Not explicitly disallowing zero-down and given the volume of cases that are being filed on zero-down terms in a lot of jurisdictions now, I just think it’s an irreversible trend. So, again, to put one of my mom’s favorite sayings out, “There’s a train coming and you either jump on it or you’re the reason they put cowcatchers in the front.”

Bob: OK. we’ll end there. And Dan, thank you so much for joining us.

Dan: Thanks, Bob.

Bob: OK, great. Bye-bye.