It’s tax refund season again. This means that the number of consumer bankruptcy filings will surge because consumers can afford to pay to file bankruptcy and discharge their debts. For many, bankruptcy is a luxury that they can’t normally afford. A significant portion of the cost of filing a consumer bankruptcy is paying for attorney’s fees. Typically, these attorney’s fees must be paid in full before the case is filed because most courts have ruled that a debt owed to a consumer bankruptcy attorney is discharged like any other debt in bankruptcy. Therefore if a bankruptcy attorney enters into an agreement calling for payment of his or her attorney’s fees after the case is filed, that debt is cancelled by the bankruptcy itself and so attorneys require that the entire fee be paid prior to filing.
The American Bankruptcy Institute, the largest professional association of bankruptcy professionals, believes that filing a consumer bankruptcy is too difficult for many people and is becoming a significant problem. Passage of the bankruptcy reform legislation in 2005 made filing bankruptcy significantly more expensive and difficult. As a consequence of these problems, consumer bankruptcy is simply out of financial reach for many who desperately need to file. Bankruptcy is part of the financial safety net that should be available to those who need to file.
The ABI recently released a report recommending changes to consumer bankruptcy laws to address the problem of availability of bankruptcy to those most in need. Among the recommendations was that Congress provide that debtor’s attorney’s fees are not discharged by the filing of a bankruptcy. By doing so, more attorneys would be motivated to allow their clients to enter into installment agreements for the payment of their fees thereby reducing the immediate cost of filing a bankruptcy. Hopefully this recommendation will become law. It is our belief that the tax refund bankruptcy surge should not exist and that bankruptcy should be affordable to consumers throughout the year.