December 11, 2012
Whether it is collecting fees from a former client, dealing with a defendant who threatens file bankruptcy, or negotiating a settlement for a client who is contemplating bankruptcy, there are a number of ways that bankruptcy law can intersect your practice.
The following is a list of some of the issues, by no means exhaustive, that bankruptcy can affect your practice:
Attorney fees are an unsecured debt that can be discharged like any other. There are certain exceptions, but there are other things to watch out for as well:
– Once a former client files for bankruptcy, you are prohibited from attempting to collect outstanding fees. If your claim is exempted from discharge you will need to wait until the case is closed or motion to lift the stay in order to collect your fees.
– Funds held in trust are the property of the bankruptcy estate unless exempted. Be sure to notify your client’s bankruptcy attorney if they have unearned funds in trust.
– Payments for outstanding fees in excess of $600 in total may be avoided (taken) by the bankruptcy trustee if paid within 90 days of filing. This does not apply to fees accepted contemporaneously, such as drawing down on a trust.
– Discharge protections do not apply to post petition debts, debts incurred after the client files.
A defendant may invoke bankruptcy to stop litigation or discharge claims. Keep in mind that bankruptcy discharges claims and not just judgments. Certain claims are not dischargeable regardless.
– Claims resulting from fraud are not dischargeable. This applies to fraud damages as well as debts fraudulently incurred, such as falsifying information to obtain credit.
– Any support obligation created from a divorce agreement is not dischargeable. This includes attorney fees.
– Willful and malicious tort damages are not dischargeable.
– Neither are damages resulting from operating a motor vehicle while intoxicated.
Debtor’s claims are property of the bankruptcy estate as well, even if contingent. Exemption limitations may affect settlement, or whether or not your client even files for bankruptcy. Also note that a claim if unlitigated, can be pursued by the bankruptcy trustee. This category is important because in certain cases such as injury claims, it is often the most beneficial for your client to keep money awarded in damages and file bankruptcy on medical bills and other debts.
– Personal injury awards are exempt up to $21,625. This means the money your client receives and does not contemplate attorney fees and costs.
– Workers compensation claims are unlimited. This is a classic example of the type of client for whom bankruptcy is most advantageous. They likely have considerable amounts of unpaid medical debt and there is no reason that they can’t discharge that debt and keep the award for future support.
– The same goes for Social Security Benefits, another unlimited category.
As I previously mentioned, this is not an exhaustive list; however these are all very important issues that can still affect your practice, even if Bankruptcy is not your practice area.
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