By Cathy Moran, Moran Law Group, Mt. View, CA

Three cheers for the First Circuit Court of Appeals.  Fee-only Chapter 13 plans, the panel said in the Puffer decision, are not per se bad faith. I propose a further cheer for Circuit Judge Kermit Lipez, whose concurring opinion proposed to leave the issue to the discretion of the bankruptcy courts, without the admonitions that such plans bear a heavy burden of demonstrating justification of special circumstances.

Others have analyzed the case, so my comments as a debtor’s lawyer will wander wider than the decision.  I am an advocate by vocation and my comments don’t pretend to be objective.

Chapter 13 as the Counter to Higher Cost

The most lamentable consequence of BAPCPA is the increase in the cost to the debtor for capable representation.  My minimum fees for bankruptcy filings have more than doubled since 2005 as I struggle to assemble all the required information, calendar deadlines, and jump through newly legislated hoops for my clients.  Discussions with colleagues from around the country indicate that such an increase is nearly universal among attorneys who represent consumer debtors.

I have read speculation that the unstated goal of the creditor community in pushing bankruptcy “reform” in this shape was simply to enjoy several additional months of continued payments from debtors while they tried to assemble the funds to file bankruptcy.

At the same time, there is widespread disapproval of post-petition payment arrangements between debtors and their attorneys in the context of a Chapter 7 filing.  This causes the very people who have hit the wall financially to come up with payment in full pre-filing in order to obtain representation in Chapter 7.  The utility of Chapter 13 should be obvious for this reason if none other.

In fact, bankruptcy courts ought to embrace fee-only Chapter 13 cases as the antidote to a flood of pro se cases or cases that utilize petition preparers.  The pro se cases tax the court’s resources and the petition preparers profit at the expense of an unsuspecting public.  Skilled bankruptcy counsel, on the other hand, can maximize the probability of a Chapter 13 Plan proceeding through to successful completion with an efficient use of the court’s resources.

If debtor’s counsel is willing to take her fees over time, with the very real risk that the case craters sometime before completion, the court has no objective basis for complaint.

The Disguised Chapter 7

Courts hostile to fee-only Chapter 13 cases charge that such a case is nothing more than a disguised Chapter 7.  Such a dastardly charade, these courts contend, should be unmasked and ousted from Chapter 13.

I’m puzzled.   Last I looked at the Code, the debtor got the choice of chapters.  I find no statutory sorting principle that says there is only one “right” choice for each set of circumstances.

The offense to judicial sensibilities can’t come from the lack of distributions to creditors, as invariably, the cases challenged as being “improperly” in Chapter 13 would be no asset Chapter 7’s.

This argument might have had some legs in the pre-BAPCPA world of the super discharge, when the consequences of a range of unadmirable conduct was dischargeable.  Today, however, the Chapter 13 discharge is only somewhat more potent than the Chapter 7 discharge.  It’s a hard argument to make that debtors choosing Chapter 13 as a way of paying fees they can’t otherwise afford are getting an unfair advantage.

Repayment as the Goal of Chapter 13.

Courts and trustees hostile to fee-only Chapter 13 plans continue to mouth the historic line about the purpose of Chapter 13 being repayment of debts.  The fee-only Plan pays only one pre-petition debt, goes the argument, and is therefore offensive.

That formulation of the “purpose of Chapter 13″ didn’t survive BAPCPA.

Under BAPCPA, Chapter 13 morphed from a choice that debtors could make if a repayment plan met their goals and their abilities tosupervised financial probation for those who were deemed to have the ability to repay some part of their debts.  Courts taking the temporal view of the applicable commitment period see the price of bankruptcy relief being five years of exposure to increased trustee demands upon any improvement in income.

The very result that the Puffer trial court bemoaned, payment only to the debtor’s lawyer, is inevitable in a segment of cases under BAPCPA.  Consider that child support and 401(k) loan repayments are permissible deductions in Chapter 13, but not Chapter 7.  The differences between the formulations of deductible projected living expenses between the two chapters manufactures cases which, while presumptively abusive in Chapter 7, are negative DMI cases in Chapter 13.

A no distribution plan, mandated by the “reformed” law and utterly predictable to the drafters cannot, in my view, be an expression of bad faith or otherwise offensive to the purposes of the American bankruptcy system.

Credit the Impact of Stress

The legislative history of the Bankruptcy Code contains some eloquent statements about the importance of the automatic stay to provide the debtor with a respite from collection.  Too often, we’ve lost touch with truths behind Section 362.

Collection calls, letters and even lawsuits inflict a real toll on struggling debtors.  Fears of the legal unknown magnify the stress experienced by debtors.  The bankruptcy system, I believe, accords too little value to the relief that comes with the automatic stay; stress can kill, and when it doesn’t kill, it degrades life.  To blithely say to the embattled and fearful debtor that they should simply endure while saving up money to pay a lawyer for a Chapter 7 filing is heartless and not required by the Code. Bankruptcy is often as much about the mental health of the debtor as his pocketbook.

The alternative to fee-only Chapter 13 cases in meeting the real-world problems in paying for bankruptcy would be to develop an approach that permits debtors to pay some part of their Chapter 7 attorneys fees post filing.

Ms. Moran has headed her own small firm Moran Law Group in Mountain , California, for nearly 30 years. Family law and tax issues as they play out in bankruptcy are areas of particular interest to Cathy.