A recent WSJ Law Blog story, “First Circuit Lifts Ban on ‘Attorney Fee-Only’ Bankruptcy Plans” reports that the paradox in personal bankruptcy is that you need a lawyer to help you through it, in many cases.  Lawyers have to get paid, but sometimes debtors don’t have the cash up front, and the Supreme Court has said that attorneys’ fees are not payable from estate funds in Chapter 7 proceedings, except in very limited circumstances.

In recent years, lawyers have come up with a workaround: Chapter 13 proceedings.  If Chapter 7 is the conventional, and often speedy, course when an individual has debts that dwarf his income and assets, Chapter 13 is the road less traveled.  It’s longer (a minimum of 36 months) and allows a debtor to discharge debts over time, as long as the court approves his plan for satisfying some of his creditors.

In a case before the Boston-based U.S. Court of Appeals for the First Circuit, a debtor couldn’t afford to pay his attorney up front for Chapter 7 proceedings, so the attorney suggested his client apply for Chapter 13 protection.  Under the proposed plan, the debtor would pay into the bankruptcy estate $100 per month for 36 months.  Of that, only about $300 (or about 2% of the roughly $15,000 owed) would be available to general creditors.  The attorney would get the lion’s share ($2,900), while the rest would cover the trustee’s fees.

It’s known as a “fee-only” plan, and the bankruptcy court rejected it.  So did the federal district court, ruling that such arrangements were verboten.  The First Circuit, the first federal appellate court to weigh the issue, said that an outright ban on “fee-only” plans was wrong as a matter of law.  The First Circuit panel was adamant that the plans should only be used in exceptional circumstances, noting that they may be “vulnerable to abuse by attorneys seeking to advance their own interests without due regard for the interests of debtors.”