How do bankruptcy attorneys get paid?
In: Economics
They get a portion of the bankruptcy estate. People who go bankrupt typically don’t have $0 in property. They might have equity in a home, or a vehicle, or other personal property. Chapter 7 rounds all that value up into the bankruptcy estate (minus exemptions which vary by state) and creditors get paid from that. The attorney’s fee is one of the first to get paid. Secured creditors are typically paid or get their property back. Unsecured creditors typically get nothing or pennies on the dollar.
There are different ways. Usually bankrupt people are still working and have some money. They may pay their bankruptcy attorney a fee instead of their credit card bills or some other creditor to get a bankruptcy filed. Sometimes they will skip a car payment or a mortgage or something else to pay their bankruptcy attorney.
Sometimes someone will lend or give them money (like a parent) so they can file bankruptcy. That’s generally how a chapter 7 bankruptcy is paid for. In a reorganization (Chapter 11), the bankruptcy results in a payment plan to creditors. Attorneys are paid from those plans, and so the attorney gets paid from money sent to the Trustee. Usually attorneys are paid before most other creditors. Attorneys will probably get some money up front as well, but it just depends on the attorney.
It depends on the type of bankruptcy being filed. For your average consumer, you’re talking about Ch7 and Ch13 bankruptcies.
Ch7 is a “liquidation” where the debtor offers up property in exchange for not being liable for debts and Ch13 is where they offer up disposable income in a generally favorable repayment plan over a fixed 3-5yr period.
In a Ch7 case, attorneys will generally want their fee to be paid in full prior to filing as they would be considered an “unsecured debt” and discharged right along side everything else eligible. In other words, they want to be paid first so they don’t work for free.
In a Ch13 case, attorneys fees are rolled into their repayment plan.
If you’re talking about a consumer bankruptcy, that fee is paid up front in the vast majority of cases.
For more convoluted business-type bankruptcies, the debtor’s counsel is entitled to an “evergreen” retainer. This a sort of court-monitored fund that is replinished by assets of the debtor’s estate as necessary/reasonable.
Bankruptcy does not mean the bankrupt person or company has no money or assets. It means they’re no longer able to pay their debts as they become due.
A company that does not have the liquid cash to pay their creditors might still have three million dollars worth of company assets. During the process of bankruptcy an insolvency trustee would take control of those assets and sell them to satisfy the companies creditors.
The lawyer will get paid out of money from those assets.
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