Law Review: Lofgren, McIntyre, & Miller- Chapter 7 or 13: Are Client or Lawyer Interests Paramount?

Abstract:

Households often rely on professionals with specialized knowledge to make important financial decisions. In many cases, the professional’s financial interests are at odds with those of the client. We explore this problem in the context of personal bankruptcy. OLS, fixed effects, and IV estimates all show that attorneys play a central role in determining whether households file under Chapter 7 or Chapter 13 of the bankruptcy code. We present evidence suggesting that some attorneys maximize profits by steering households into Chapter 13 bankruptcy even when the households’ objective financial benefits are low and the probability of case dismissal is high. An attorney-induced Chapter 13 filing increases household legal fees and reduces the probability of long-term debt relief.

Commentary:

This clear preference in the paper for Chapter 7 bankruptcies appears  based on the oft repeated statement that “[f]or most debtors, a Chapter 7 bankruptcy involves a quick discharge of most unsecured debts, while a Chapter 13 bankruptcy requires households to make payments for three to five years.”  This is a myopic view of bankruptcy, however.  In most Chapter 13 cases, the household  is only paying its mortgage, car payments and taxes (if any) during the three to five years of the plan,  with little or nothing being paid to unsecured creditors.  Similarly, in most Chapter 7 cases, the household also continues paying its mortgage, car payments and taxes (if any).  The difference being that the Chapter 7 Debtor gets a discharge quickly and is then left to fend for himself with the mortgage, car and taxes.  The Chapter 13 Debtor does not get a discharge for three to five years, but is protected from all creditors during that time.

For a copy of the opinion, please see:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1983397

About

1. Bachelor of Arts degree in English Literature from Washington University, 1993. 2. Juris Doctor degree from George Washington University, 1996. Admissions to Practice of Law: North Carolina Bar, 1996. Federal District Courts for the Eastern and Middle Districts of North Carolina. Specialty Certification: North Carolina State Bar: Certified as a Specialist in Consumer Bankruptcy. Areas of Practice: Practice limited to consumer and business debtor bankruptcy law, 1998 to present. Memberships: National Association of Consumer Bankruptcy Attorneys (NACBA). North Carolina Academy of Trial Lawyers (NCATL). North Carolina Bar Association, Bankruptcy Section. Lectures prepared and presented: North Carolina Academy of Trial Lawyers seminar on bankruptcy; Topic: Counseling the Consumer Debtor Prior to Court - C.Y.A. Forms to Help 'Gird They Loins'; 2001. Middle District Bankruptcy Seminar; Topic: Preparing Chapter 13 Plans; 2002. NACBA National Convention; Topic: Efficient Office Practices; 2003. NACBA National Convention; Topic: Chapter 7 vs. Chapter 13 Debates; 2004. Middle District Bankruptcy Seminar; Topic: Chapter 7 & 13 Hot Issues; 2004. Positions held: NACBA National Convention; Convention Chair; 2008. NACBA National Convention; Panel Moderator: Topic: Basic Bankruptcy Issues; 2008. NACBA National Convention; Panel Moderator; Topic: Chapter 13-Disposable Income and Other Issues; 2007. NACBA National Convention; Panel Moderator; Topic: Representing Members of the Military and Their Families; 2007. NACBA, Member of National Board of Directors, 2006 to present. NCATL, Chair of the Bankruptcy Section, 2003 to 2007. NACBA, Chair of the North Carolina Section, 2003 to 2007. NC Bar Association, Bankruptcy Section, Bankruptcy Council Member, 2004 to present.

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