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"Attorney fee-only" bankruptcy plans

Attorneys' fees in bankruptcy are generally not available from Chapter 7 estates, so attorneys found a way to abuse the system and put their interests first: a Chapter 13 filing where virtually the only thing the debtor pays is the fees, even if the debtor would be better off with a Chapter 7 filing. Some bankruptcy courts recognize this for what it is and reject it entirely. The First Circuit now begs to differ, and, rather than holding them per se unlawful, calls for bankruptcy courts to perform a balancing test in case there is a special circumstance where such a plan would be appropriate. [WSJ Law Blog; Reuters; In re Puffer]

The ruling's punting seems a mistake. It's hard to imagine that any injustice from a per se rule will outweigh the cost to society of litigating the parameters of whether a fee-only plan is abusive or not. Of course, lawyers benefit from a more complex system that requires more litigation: paging Benjamin Barton and Judge Jacobs.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.