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By Katarina A. Essenmacher and Judge Henry A. Callaway

It’s a common scenario. Suzy[1] works hard at her low-paying job and is keeping her head above water. She rents an apartment or trailer; her car is a beater. She lives paycheck to paycheck, but she is keeping the lights on and her children fed.

But then something happens. Maybe Suzy didn’t respond when she got sued by a debt buyer on an old written-off credit card debt, and the debt buyer is garnishing her wages. Or Suzy’s hours at work got cut. Or one of her children got sick, running up medical bills and making Suzy miss work. Now Suzy can’t afford a garnishment or take the relentless collection phone calls.

Suzy is an honest but unfortunate debtor who needs to file chapter 7 (liquidation) bankruptcy to stop the collections and make a fresh start. So that’s obviously what she should do – right? Right? The problem is that Suzy is too broke to file a chapter 7 bankruptcy.

Upfront Attorney’s Fees Create a Hurdle to Filing Chapter 7

Suzy can’t afford the attorney’s fees to file chapter 7. There is no provision in the Bankruptcy Code for paying chapter 7 attorney’s fees through a bankruptcy. A chapter 7 bankruptcy usually results in the debtor being discharged (released) from most kinds of pre-bankruptcy debt. As a result, many courts hold that a debtor’s agreement to pay her bankruptcy attorney is also discharged and thus unenforceable,[2] leaving an attorney with no recourse even if the attorney agrees to be paid later. Understandably, almost all attorneys thus want to be paid up front to handle a chapter 7 bankruptcy.

An informal survey of chapter 7 attorney’s fees a few years ago in the Southern District of Alabama showed that fees generally ranged from $800 to $1,500, with an average of about $1,000. It’s almost impossible for many low-income debtors – especially ones being garnished or who are under other creditor pressure – to save enough to pay an attorney to file chapter 7.

The Alternative – Filing a Chapter 13 Bankruptcy – Is Not for Everyone

Unlike chapter 7, in a chapter 13 (wage-earner reorganization), Suzy could pay her attorney’s fees through the chapter 13 plan payments. However, chapter 13 has disadvantages that may outweigh its benefits. While chapter 13 can be a useful tool for saving an auto loan or home mortgage in default, chapter 13s are generally more expensive than chapter 7s and prone to being dismissed before the reorganization is complete. The debtor must either pay all debts in full or pay all of his net income into the plan for three to five years. And the attorney’s fees are much higher in chapter 13s; the court-authorized “no-look” chapter 13 attorney’s fees in Alabama are currently around $4,500.

About 70 percent of the bankruptcies filed in Alabama are chapter 13s, compared with about 30 percent nationwide.[3] About half of the chapter 13 cases in Alabama fail – mostly because the debtors cannot make their plan payments.[4] And the poorest counties have the highest percentage of chapter 13s – the opposite of what you would expect. As of this writing in the fall of 2022, Judge Callaway has 24 chapter 7 cases and 1,027 chapter 13 cases pending in the Southern District’s Northern (Selma) division, which includes some of the poorest counties in the United States.

The result of this disparity is that the poorest debtors often can’t file bankruptcy, or they get pushed into the more expensive, problematic chapter 13s. This is a national problem not limited to Alabama, but it is exacerbated here by the state’s relatively low exemptions and high poverty rate.

That’s where the Alabama Bankruptcy Assistance Project comes in.

What is the Alabama Bankruptcy Assistance Project (ABAP)?

ABAP is a statewide project created to help debtors who need a chapter 7 bankruptcy but can’t afford the attorney’s fees to file. All five volunteer lawyer programs in the state participate, enabling ABAP to serve each of Alabama’s 67 counties.

ABAP serves clients whose income is below 125 percent of the federal poverty level (currently $1,416 a month for one person and $2,891 for a family of four). Through its roster of dedicated volunteer attorneys, ABAP provides representation in chapter 7 bankruptcy cases, almost all of which are no-asset cases in which the debtor doesn’t have any non-exempt assets to distribute to creditors.

ABAP also provides educational materials to help clients better understand their debts and options for addressing their situation – not just bankruptcy. ABAP hosts community education events about financial literacy and different types of debt relief. Attendees can talk with an attorney about how to proceed with managing their own debts and get legal assistance if they need it.

In addition, ABAP provides resources for attorneys who want to learn more about bankruptcy practice. These resources include free CLE trainings about bankruptcy basics and court-specific guidebooks with detailed information about the different bankruptcy courts in Alabama.

How does ABAP work?

The process is simple for both clients and volunteer attorneys. Prospective clients can contact either their local volunteer lawyers program or the ABAP coordinator directly. The VLP intake specialists collect information from the client and send it to ABAP.

The ABAP coordinator first determines whether the client is eligible for a chapter 7 bankruptcy. What is the source of the client’s debts, and are they dischargeable? Is the client ineligible to receive a discharge because of previous bankruptcies? The coordinator then works with the client to decide whether a chapter 7 bankruptcy is in the client’s best interest. What are the client’s financial goals, and will a chapter 7 help him or her achieve them? Does the client have a home with equity that will be jeopardized by a chapter 7? Answering these questions helps determine the appropriate course of action.

If filing chapter 7 is not the best way to help the client, ABAP provides advice and refers the client to other resources. For example, a client who needs debt relief but has too much equity in his home for a chapter 7 may be better served by a chapter 13 bankruptcy.

If the client decides to file chapter 7, the ABAP coordinator contacts a volunteer attorney to see if he or she can accept the client’s case. If so, ABAP sends the client’s documents and case information to the attorney. The ABAP coordinator will prepare a draft of the client’s petition and schedules at the request of the volunteer attorney. The attorney will thus have a head start and normally be ready to file the chapter 7 with minimal additional front-end work.

ABAP volunteers are asked to take only one or two cases a year, although they can accept more. An attorney receives one hour of CLE credit for every six hours of pro bono work, up to three CLE hours a year. Volunteers specify the counties in which they are willing to accept cases, and they can include other limitations. ABAP volunteers are covered by the program’s malpractice insurance and can use its BestCase software license to prepare and file documents with the bankruptcy court. By joining the list of volunteers, an attorney is not obligated to take a referred case. A volunteer who can’t accept a client at the time of a referral can always decline, and ABAP will place the client with another attorney.

Why is ABAP important?

Bankruptcy is complicated, and it is difficult for a debtor to successfully file and receive a discharge without an attorney. As noted above, a client who can’t afford the upfront attorney’s fees for a chapter 7 often either does nothing (and continues to suffer from debt collection) or files a chapter 13, where the fees are paid through the chapter 13 plan. A chapter 13 bankruptcy can be a useful tool for a client with regular income trying to protect a car from repossession or house from foreclosure. But as discussed above, chapter 13s are generally more expensive for the debtor and much more prone to failure.

This problem isn’t the fault of the debtors or the attorneys. It results from a gap in the bankruptcy system. With help from volunteer attorneys, ABAP can fill that gap. As Alabama attorneys, we can do better for our community and for the clients who rely on us. ABAP provides access to pro bono chapter 7 services by developing a roster of volunteer attorneys who are willing to take just two cases per year to ensure that low-income debtors in Alabama get the relief they need. If we all do a little, together we can do a lot.

How do I get involved?

Joining ABAP as a volunteer is easy. You can find out more and sign up to volunteer on ABAP’s website, https://www.alabar.org/abap/. ABAP also hosts CLEs and provides support to help attorneys get involved in bankruptcy practice. If you want to learn more about ABAP or are new to bankruptcy practice and would like information for upcoming ABAP CLE trainings, contact the ABAP coordinator at (334) 517-2108.

Endnotes

[1] Suzy is a fictional character, constructed to represent anyone who might need this service.

[2] See, e.g., Walton v. Clark & Washington, P.C., 454 B.R. 537 (Bankr. M.D. Fla. 2011); In re Waldo, 417 B.R. 854 (Bankr. E.D. Tenn. 2009).

[3] U.S. Bankruptcy Caseload Explorer, https://jnet.ao.dcn/resources/data-analysis/us-bankruptcy-caseload-explorer (last visited August 23, 2022). For the four years ending March 31 in 2019-2022, the percentage of cases filed under chapter 13 for the Southern District ranged from 62.9 percent to 73.1 percent; for the Middle District, from 71.7 percent to 77.9 percent; and for the Northern District, from 42.8 percent to 53.8 percent. The percentage of cases filed under chapter 13 nationwide for the same periods ranged from 25.2 percent to 37.7 percent.

[4] Id. For the four years ending March 31 in 2019-2022, the discharge rate in chapter 13 cases in the Southern District ranged from 43.1 percent to 59.1 percent; for the Middle District, from 49.6 percent to 63.5 percent; and for the Northern District, from 38.1 percent to 51.8 percent.

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