722 Redemption & Attorney’s Fees

In the case of Valory Denise Ray, the Unites States Trustee moved for disgorgement of fees earned by debtor’s attorney. The fees in question were those earned during a 722 redemption process whereby the redemption company paid a portion of the loan amount as attorney’s fees. The United States Trustee asserted that a conflict of interest existed in that the funds were borrowed from a third party lender. The United States Trustee also asserted that the amount of the fees was excessive.

722 redemption is where a debtor redeems a vehicle for the fair market value, acquires new funding and pays off the debt to the prior lender. In basically allows a debtor to substitute the old lender and the outstanding debt for a new lender at a lesser loan amount. To encourage this type of work by the debtor’s attorney, redemption companies agree to advance the debtor’s attorney fee and wrap that amount into the loan.

In the Ray case, the court held that there was no conflict on interest under Tennessee law; there was not statutory conflict under the United States Bankruptcy Code; and that the fees of $300.00 were in no way excessive. The Ray case is the standard case that attorneys and redemption funding companies rely upon in providing attorney’s fees within the loan amount.

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