Trustee Blog

Attorney Fees Discharged under 727 Part 2

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As we talked about on April 16, 2014, When an attorney charges a chapter 7 debtor a fee and the fee remains  outstanding after filing, then the debt is discharged.  The Court in Hessinger settled the matter.  Below is the Court’s further findings:

“Debt discharge is the raison d’etre of filing for bankruptcy. When a bankruptcy petition is filed, all of the debtor’s creditors are automatically stayed from seeking collection of their debt; this stay remains in effect until the end of the bankruptcy case. 11 U.S.C. § 362. As the case commences, a bankruptcy estate is formed out of the debtor’s pre-petition assets and a reorganization plan is developed in which the debtor’s pre-petition creditors are paid out of the estate. See generally 11 U.S.C. § 501 et seq. Once the case is concluded, the debtor is discharged of all of his pre-petition debt; his pre-petition creditors receive nothing beyond what they were awarded in the reorganization plan. See, for example, 11 U.S.C. § 727. Giving the debtor this “fresh start” is the purpose of the Bankruptcy Code.

Because discharge lies at the very heart of the Code, it is not surprising that the Code provides for only very limited exceptions to the general rule that all pre-petition debts are discharged when the bankruptcy case is closed. These exceptions are contained in 11 U.S.C. § 523, which lists some eleven types of debts which are not affected by the discharge. Pre-petition retainer contracts of the type utilized by appellant are not one of the debts explicitly rendered non-dischargeable by this section, nor does appellant argue that such contracts can be fit inside any of the existing exceptions found in § 523. Rather, appellant argues that policy considerations, taken in conjunction with another part of the code which provides for bankruptcy court oversight of attorney fees, compel the conclusion that pre-petition retainer contracts are impliedly excepted from discharge by the Code.”

The attorney in Hessinger tried to say that the attorney fee was not discharged, but the Court found that attorney fee was not excepted as Congress had not created a specific exception for attorney fees.

The moral of the story is to collect all you chapter 7 attorney fee before the filing of the case or the fee will be discharged.  The United States Trustee in the Central District is now investigating these cases and Trustee Larry Simons reminds all such debtors that the attorney cannot collect on the outstanding amounts owed.



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