Financial Planning and Analysis

Can You File Bankruptcy on Lawyer Fees?

Navigate the complexities of discharging legal service debts through bankruptcy. Understand the implications and processes involved.

Bankruptcy offers individuals a legal pathway to manage or eliminate overwhelming debt, providing an opportunity for a fresh financial start. This process helps those facing financial distress reorganize their finances or discharge certain obligations. The goal of bankruptcy is to relieve debtors from unmanageable debt, allowing them to rebuild financial stability.

Understanding Dischargeable Debts

A fundamental concept in bankruptcy is the distinction between “dischargeable” and “non-dischargeable” debts. When a debt is discharged, the debtor is no longer legally obligated to repay it, and creditors are generally prohibited from attempting to collect it.

Common types of debts that are typically dischargeable in bankruptcy include unsecured obligations such as credit card debt, medical bills, and personal loans. These debts are not backed by specific collateral, meaning there is no asset a creditor can seize if the debtor defaults.

Conversely, some debts are generally not dischargeable under bankruptcy law. These non-dischargeable obligations often include most student loans, certain types of taxes, and domestic support obligations like child support and alimony. Debts incurred due to willful and malicious injury, or those obtained through fraud, are also typically not dischargeable.

Lawyer Fees in Bankruptcy

Lawyer fees are generally treated as unsecured debts in bankruptcy proceedings and are often dischargeable. This means that unpaid legal bills, similar to credit card debt or medical expenses, can typically be eliminated through the bankruptcy process. This applies to fees owed for past legal services, whether for a DUI, divorce, or other proceedings.

However, there are specific circumstances where lawyer fees may not be dischargeable. Fees for services related to non-dischargeable debts are typically not discharged. For instance, legal fees incurred in connection with establishing or enforcing child support or alimony obligations are generally non-dischargeable because the underlying support obligations themselves are not dischargeable. Similarly, if legal fees arose from a judgment against the debtor for fraud or a criminal action, these fees may also be deemed non-dischargeable.

An attorney’s lien can also affect the dischargeability of legal fees. If a lawyer has placed a lien on a client’s property to secure payment, the debt becomes a secured debt rather than an unsecured one. While the personal obligation to pay the debt might still be discharged, the lien itself may survive the bankruptcy, meaning the attorney could still pursue the property to satisfy the debt. In such cases, if the debtor wishes to retain the property, they might need to pay off the lien.

Contingency fee agreements also have specific considerations within bankruptcy. While such agreements are common in litigation, their treatment in bankruptcy can be subject to court review. Bankruptcy courts may assess the “reasonable value” of the services provided, potentially adjusting the amount of the claim even if a contingency fee agreement was in place.

Bankruptcy Chapters for Individuals

For individuals, the two primary types of bankruptcy are Chapter 7 and Chapter 13, each offering a distinct approach to debt relief. Both chapters address dischargeable debts, including eligible lawyer fees, but they do so through different mechanisms.

Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, allows for the discharge of most unsecured debts, such as credit card balances, medical bills, and personal loans, typically within a few months. In this process, a court-appointed trustee may sell certain non-exempt assets to repay creditors. Once the non-exempt assets are liquidated and distributed, any remaining dischargeable debts, including eligible lawyer fees, are eliminated, providing the debtor with a fresh financial start.

Chapter 13 bankruptcy, known as reorganization bankruptcy, involves a court-approved repayment plan that typically spans three to five years. Debtors with a regular income can keep their assets while making scheduled payments to creditors through a bankruptcy trustee. Dischargeable debts, including lawyer fees that qualify, are included in this repayment plan.

Under Chapter 13, the debtor pays a portion of their dischargeable debts over the plan’s duration, based on their income and expenses. Upon successful completion of the repayment plan, any remaining balance on these dischargeable debts is eliminated.

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