Payment Plans and Chapter 7 Bankruptcy

I wanted to write something about payment plans and Chapter 7 bankruptcy. First of all, I am a Massachusetts attorney and these thoughts are restricted to the here in my state. Although the laws related to bankruptcy payment plans are federal, local practice may vary somewhat state by state.

First, the problem. Many consumers do not have sufficient funds to pay for bankruptcy immediately once they decide to file. Consequently, payment plans are attractive to many consumers, and lawyers often offer. However, in general, when it comes to Chapter 7 cases, all fees and costs must be paid before the case is filed in the court. This is because unpaid, pre-filing fees cannot be collected after a Chapter 7 case is filed due to the automatic stay, and if a discharge later enters, because of the discharge injunction. Yet, payment plans are routinely offered in the Chapter 7 context all the time. Here’s how they typically work.

The payment plan period is usually made to overlap with the pre-filing bankruptcy process. In other words, while the case is being prepared, the client makes periodic fee payments, and when the payments and work preparing the case is done, the case is filed in the court. So, being on a payment plan can make a difference when it comes to the timing of a case filing: if you are on an extended payment plan, the work of the case will be spaced out, and the actually case filing would likely take place long after the point when one belonging to someone who paid in full earlier in the process was filed.

This is usually how bankruptcy payments plans work in Chapter 7. However, it is also permissible to charge for pre-filing work and then bill hourly for post-filing work in a Chapter 7 case, as long as these fees are disclosed to the court. This is actually not a payment a payment plan at all, just a lawyer charging his normal hourly rate for work as it is completed. This type of arrangement is not very common in the consumer Chapter 7 context (though it is in business Chapter 7 cases) because consumers generally want to know with some certainty the total amount of their bill for their case upfront. However, in some cases, hourly fee billing can, as a practical matter, reduce the amount of money needed upfront to get a Chapter 7 case filed.

For my next installment in this two-part series, I will explain how payment plan work in Chapter 13 bankruptcies.