25 Jan 2018

“A Not So Fresh Start”

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By David S. Watkins, Esq., BMS Vice Chairman Emeritus

Reprinted with permission from the Fall 2017 issue of the American Bankruptcy Trustee Journal published by the National Association of Bankruptcy Trustees (NABT)

“I tell debtors that America, with its huge frontier, was premised and built on the concept of ’fresh start’. An opportunity to begin a new, and hopefully more prosperous life led people to this place.”
– Sam Crocker, Panel Trustee, November 2007

When I tell friends and family that I work “in bankruptcy,” I am seldom asked to elaborate. Even now there are few who actually understand what I do or what Bankruptcy Management Systems (BMS) does to support bankruptcy trustees. It is obviously not a subject about which inquiring minds inquire. Yet I am gratified knowing that the consumer bankruptcy system is a huge social safety system essential to our lifestyle, economy and, indeed, to the American Dream.

Ever since I entered the bankruptcy arena in 1987, I have been amazed at the number of bankruptcies that continue to be filed every year. Even in generally prosperous times like the 1990s, filings increased regardless of how the economy was doing. Concurrently, BMS dedicated itself to providing the technology and support that enables bankruptcy trustees to administer hundreds of thousands of chapter 7 bankruptcies. Also known as the “fresh start” bankruptcy, chapter 7 has long been the chapter of bankruptcy most frequently used by cash strapped debtors. It is the least expensive to file and results most often in a discharge for the debtor.

Yet something else has been happening. For the first time that I can recall, filings are down significantly and have been for over five years now. As we review this trend, and the possibility of an increase in filings as the economy continues to rebound from the 2008 economic debacle, many of us try to plan for the future. How might chapter 7 bankruptcies fare as we move forward?

Apparently they will not be as popular as I might have expected. I discovered something serendipitously.¹ In addition to having fewer chapter 7 filings because there are fewer filings overall, debtors are increasingly filing chapter 13 cases in certain districts, notwithstanding evidence that chapter 7 may likely meet their needs and are often more appropriate.¹ What has happened?

The answer is not obvious at first. Most debtors need and hire a bankruptcy attorney to file for bankruptcy. This attorney has significant influence over the debtor. While the cost for an attorney to file a chapter 7 appears to average $1200, the cost for that same attorney to file a chapter 13 appears to average $3200. It’s a financial no-brainer to file chapter 7, right? Wrong, because the debtor must pay the chapter 7 attorney fee in advance; the chapter 13 attorney fee can be paid over three to five years through a chapter 13 plan. These plans generally provide to pay the chapter 13 trustee, the debtor’s attorney fees and perhaps a secured or priority creditor, over the course of the plan. Unsecured creditors often receive nothing. Sadly, because most plans fail, these debtors pay their bankruptcy attorney yet do not receive a bankruptcy discharge and, hence, no fresh start. The chapter 13 standing trustee gets paid and the debtor’s attorney gets paid, but the supposed relief is often temporary for the debtor. Most cases are dismissed, often to be refiled or converted as the debtor incurs more debtor attorney expenses. There would have been a 97% probability of getting a discharge had the filing been under chapter 7.

Begging the Question

For me, these developments beg the question “why is this happening.” The debtor is dependent on and greatly influenced by the attorney upon whom he or she relies for advice and counsel. If debtors’ attorneys are aware of this, why would they counsel a debtor to pursue a no-money-down bankruptcy? Perhaps they see it as the only solution, but on the surface, it seems that 55% of the debtors lose.²

Looking further, I uncovered some information that gave me pause. Could there be, unconsciously or consciously, a promotion and authorization of no-money-down bankruptcies despite the deleterious impact they often have on the debtor? While not a comprehensive list, and not statistically measured, I found the following anecdotal examples promoting no-money-down bankruptcies on websites that solicit debt relief. They seem to say “what can we do to get you into a bankruptcy today?” (In balance, I also found examples that did not promote this.)

Considering the statistics surrounding chapter 7 and chapter 13 success rates, does this raise concerns about serving the best interests of the debtor, not to mention the goals of the bankruptcy system?

  • Chapter 7 debtors receive a discharge 97% of the time.
  • No Money Down debtors receive a discharge 45% of the time.¹
  • Unsecured creditors in certain districts will receive a zero dividend in 35%-60% of completed chapter 13 cases.²

Notwithstanding this, no-money-down chapter 13 bankruptcy filings have increased between 2007 and 2015, from 10.2% to 14.5%1—a 42% increase.

There is also a social ramification. As a social safety net, African Americans are less likely to benefit from the bankruptcy system.¹ They are disproportionately involved in this no-money-down type of bankruptcy.


  • Money influences how debtors file bankruptcy.
  • The counsel that debtors receive plays a significant role in this decision.
  • “No Money Down” families look more like those who file under chapter 7 than those who file under chapter 13.¹

Surely this situation can be improved. In particular, access to chapter 7 bankruptcy should not be restricted. No-money-down bankruptcies are ineffective at best and might be the cause of
grave social harm in worst case scenarios.¹

Section 330(a)(1) of the Bankruptcy Code should be amended to overrule In re Lamie³ and to correct what many consider a drafting oversight that de facto permits payment of attorney’s fees over time in chapter 13, but not chapter 7.

Alternatively, the Bankruptcy Code should be amended to permit a chapter 7 debtor six months after filing a chapter 7 to pay his or her attorney fees.

Local rules and standing orders should be modified so that judges do not allow counsel the typical “no look fee” unless a substantial down payment of attorney’s fee was made, e.g. 25%.4

No-money-down bankruptcies might only apply when the debtor can document the likelihood of a substantial repayment to unsecured creditors in keeping with the stated legislative goal of Chapter 13.

About David S. Watkins, Esq.

Mr. Watkins started on the ground floor with BMS in 1987, when it was first created to address the needs of Chapter 7 trustees. He helped to develop the industry’s current service model, which is to provide full service and support at no charge to the trustee. Mr. Watkins also masterminded such innovations as the integration of reporting with word processing and electronic banking. In 1994, Mr. Watkins was appointed an Associate Director to the Board of Directors of the National Association of Bankruptcy Trustees.

About the National Association of Bankruptcy Trustees (NABT)

NABT is the voice of the Chapter 7 Bankruptcy Trustee community, serving its interests and needs through education, communication and promotion of the profession. The NABT publishes the American Bankruptcy Trustee Journal quarterly as a benefit to its members. For more information, visit their website.


1 ’No Money Down’ Bankruptcy, Southern California Law Review, 2017, Forthcoming,UC Irvine School of Law Research Paper No. 2017-12, https://papers.ssrn.com/sol3/papers. cfm?abstract_id=2925899
2 https://www.justice.gov/ust/private-trustee-data-statistics/ chapter-13-trustee-data-and-statistics
3 https://www.law.cornell.edu/supct/html/02-693.ZO.html: in re Lamie, 540 U.S. 526, 124 S. Ct. 1023, 157 L. Ed. 2d 1024 (2004)
4 For more on the no look fee, see Cathy Moran Esq., http://www.bankruptcymastery.com/why-the-no-look-fee-inbankruptcy-harms-us-all