A Zero Down Chapter 7 Bankruptcy is Unethical & Illegal

Beware consumers!  While the economy is in very tough shape and the need to financially protect yourself has never been greater, the truth remains that “Zero Down” Chapter 7 cases are unethical and illegal.  While the vast majority of bankruptcy attorneys are ethical and follow the law, there are always exceptions and I just recently personally learned that two big bankruptcy firms (not in Nebraska or Iowa) have used this tactic extensively and was quite shocked by the blatant disregard for the law.  One firm has been caught and was fined over $200,000.

Sometimes, a “bankruptcy deal” is too cheap to be true or advisable

Consider what an appropriate attorney must pay (advance on your behalf) to get a case filed.  Here are the basics:

Court cost:  $306
Credit report (average):  $33
Educational classes (average):   $50
Total: $389 (average for an individual filing)

Therefore, if an attorney quotes you $1,500 for the entire Chapter 7 bankruptcy, the attorney fee is $$1,111 ($1,500 minus $389).  So, if you are looking for a competent bankruptcy attorney to handle your case, keep these “costs” in mind.  If, for example, you are quoted $700 for everything, the attorney would only earn $311 for a lot of work, including going to court! Although the marketplace should be competitive, common sense tells you that a run-of-the mill $700 bankruptcy quote is something to run from….and fast!

Unethical bankruptcy firms sometimes promise that payments can be made AFTER the Chapter 7 bankruptcy is filed

Here’s how the scheme works…..and this is based on a true story:

The bankruptcy attorney advertises a Zero down attorney fee for Chapter 7.  The only money necessary is the “costs” up front, which are at least $306 plus the required pre-bankruptcy education course.  (Although a credit report is highly recommended before the bankruptcy is filed…..some firms don’t require it to save a few bucks and make the overall price appear cheaper).  The “deal” then is that after the bankruptcy is filed, the client can make payments to the law firm.  Out of desperation, many people take the offer.

But there is a problem:  Promises to pay (a contract or a debt) for bankruptcy fees  AFTER a case is filed are wiped-out, i.e., discharged, once the bankruptcy is filed.  Thus, the client is “bankrupting” the attorney fees.  That sounds good but it is not permitted under federal law unless the client voluntarily signs a Reaffirmation Agreement once the case is filed.  And, in practice, this isn’t happening in the vast majority of cases.  Most of these unethical bankruptcy firms just take ACH (automated clearing house) payments out of their client’s bank account for several months after the bankruptcy is filed.  And, normally, they pay a much higher amount than they would have if paid in advance.  Or, alternatively, they take post-dated checks before filing the case.  Again, this is totally unethical and unacceptable under the federal and most state rules and laws.

Good bankruptcy advice and professional skill is worth every penny

If you find yourself needing some really sound bankruptcy advice, your very best bet is to obtain a free consultation from a firm that has the experience, skill and, most importantly, ethical reputation, to set you on the right path.  Ask a lot of questions to the attorney that you meet with.  Good attorneys will not be offended or think that you are wasting their time.  Just the opposite should be true.  And, expect a straight and understandable answer.  There is nothing wrong with second opinions as well and we always welcome them.

Don’t confuse Chapter 13 “Zero Down” cases with Chapter 7

This article specifically addresses Chapter 7 attorney fee practices only.  Chapter 13 cases, by contrast, are COMMONLY zero down attorney fee cases.  Of course, each office and situation requires an individual analysis, but it is legal and ethical to accept zero down cases in Chapter 13 cases.  The reason for the difference is that the Bankruptcy Court is supervising the payment of fees after the case is filed and the bankruptcy attorney’s compensation is highly regulated.  Federal law specifically does allow for Chapter 13 fees to be paid over time.

If you have any questions, please feel free to contact me!