When you file a chapter seven case, your entire “estate” becomes property of a trustee whose job is to sell it off and pay your creditors.  The trustee is a court-appointed lawyer who does this for a living.  You need to understand how a trustee makes money.   If a debtor has no assets, the trustee gets a small fee for administering the case and that’s it.  But if there are non-exempt assets that the trustee can sell, a percentage of the sales price is taken/retained by the trustee.  So most trustees will look carefully at your estate to see if there is anything that can be sold.  In the old days before the recent recession, there were more assets around for the trustees to sell.  Low lying fruit I like to call it.  So if you owned something whose value was marginal, the trustee would probably not bother with it.  But today, the spoils are less available for the trustee to pick from the tree.  So trustees are looking for anything to sell, even if it may not be worth much.  Here are two real life examples of just such situations I have encountered:

Example Number One:  Real Estate That Has no Equity

I had a client who owned two apartment buildings in the Los Angeles area.  He filed for bankruptcy on his own shortly after the real estate crash.  He had plenty of equity in the building before the crash, but now they were worth exactly what he owed on them.  Since they were investment properties, there was no homestead exemption to protect any equity from creditors.  The debtor reasoned because there was no equity in the properties, the trustee would not bother trying to sell them as there was nothing to gain.  But the trustee had other plans.  The trustee sent a letter to the debtor saying that he believed there was equity in the buildings and that he intended to put them on the market.  The debtor came to me and panicked when I told him that the trustee could do this while waiting for the market to rise.   I became his attorney and started working with the trustee.  We ended up offering the trustee money to “buy back” the properties.  After some back and forth negotiations, a deal was struck and everyone was happy.  But had the debtor refused to bargain, he could have lost both properties.  Was this a shakedown?  That’s what trustees do.

Example Number Two:  A Worthless Business

A debtor whose wife owned a Pizza Parlor filed for a chapter seven bankruptcy.    The debtor transferred the Pizza Parlor to his wife three years ago when he started to have money troubles.  The equipment in the restaurant was not worth much and the income had fallen to very low levels because of the recession.  Although there was essentially no value in the business, the trustee wanted to file an adversarial proceeding against the debtor’s wife to have the restaurant returned to the estate for sale.  The basis for this was that the transfer was done when debtor was under threat of a lawsuit.  Under California law a transfer under these circumstances is fraudulent and can be “undone” by the Court.  Once undone, the business cannot be exempted by the debtor due to the fraudulent nature of the transfer (in other words, the trustee could keep it all).  But the trustee would still have to win the argument in Court and then sell the business for value.  In the “old days” a trustee would not bother with this, but today it is more likely.  In this example, the trustee asked for $20,000 to settle the matter.  The debtor countered with $1, 000, based on a low appraisal of the equipment.   The trustee countered at $15,000 and threatened to proceed with the adversarial proceeding based on the fraudulent transfer.  The debtor refused to pay any more.  My belief was that the trustee was bluffing because when a trustee takes over a business, he or she also takes over that business’s debts and obligations.  I reasoned that the costs to maintain this restaurant were higher than what it could have been sold for.  I advised my client to be patient and see what the trustee would do.  Further actions were not taken by the trustee who ended up dropping the matter and I got my client’s debts discharged.

The two examples above illustrate that chapter 7 bankruptcies are not always cut and dry.  In the first example the debtor was at risk of losing his properties so we made a deal with the trustee that worked out well.  In the second example, my client stood firm and called the trustee’s bluff. However, he also didn’t have much to lose and knew the trustee’s position was weak.  Had there been real value in the restaurant, a chapter seven filing would probably not have been the best course of action.

Before filing for bankruptcy, consult with an attorney to ensure you don’t get unintended consequences, especially if you own anything of some value.

 There are so many lawyers practicing bankruptcy law these days.  How do you know which one is right for you?  Below are some guidelines: 

1. I would always recommend meeting with the lawyer and asking him or her detailed questions.  There is nothing that can substitute for getting to know the person you will be dealing with.  Most attorneys will offer a free initial consultation.  That is your opportunity to ask questions to see if the attorney is knowledgeable and experienced.  It is also good to determine if the attorney’s personality fits well with yours. 
2. But the meeting is just one step.  You want to make sure that the attorney(s) are honest and treat clients well.  Check to see if the law firm is a member of the Better Business Bureau.  If so are there any complaints against the principals or their firm? 
3. Are they current in their knowledge?   Bankruptcy lawyers need to be on top of the frequent changes in law.  Are they a member of any bankruptcy organizations such as the CDCBAA (Central District Consumer Bankruptcy Attorney Association)?  Are they members of any local bar organizations such as the Los Angeles County Bar or the San Fernando Valley Bar Association?  Are they on any bankruptcy panels?  In order to be on the panel for the two bars just mentioned, an attorney must demonstrate a high level of experience. 
4. Does the attorney carry malpractice insurance, sometimes called professional liability insurance?  In order to be on most panels, this is a requirement.  It is also good for you because if the attorney makes a mistake and causes you harm, there is insurance to cover it. 
5. Will the attorney provide references?  This can really be insightful.  If the attorney won’t give you contact information for prior clients, are they hiding something?  If you ask for references, make sure you get more than just one name. 
6. Finally, does the attorney practice in one area of law or several?  I strongly believe that it is better to deal with someone who concentrates in the area of law that you need.  Remember, a jack of all trades is a master of none.

Sometimes bigger is better when it comes to law firms.  If you have a serious criminal matter or are planning lengthily litigation against another party it can be argued that a well known powerful law firm has advantages.  But in the world of bankruptcy bigger usually means you will get lost in the shuffle.  Large bankruptcy firms tend to operate as mill houses.  The more people they “process” the better their bottom line.  Some firms are actually run by non-lawyers and have a real attorney only as a front.  This is illegal but it happens often.  In my opinion, having a single lawyer committed and involved in your case is the best option.

How can you tell if a firm is a mill house?  There are several ways:

1)      Do you meet with the lawyer or a paralegal?

Many paralegals are quite knowledgeable but they are not attorneys.  You should always consult with a real attorney.  Non-lawyers are never allowed to give legal advice or suggest which chapter to file.  Salespersons are often hired by law firms to close your business; these people are likely placing their interests ahead of yours.  A real licensed attorney must treat you as a fiduciary.  That means they have to consider your interests ahead of their desire to make money.

2)      Does the lawyer attend the 341 meeting of creditors?

Sometimes lawyers must use appearance attorneys when they have scheduling conflicts (e.g. more than one appearance at the same time), however, some firms use these in common practice. Beware as the use of appearance attorneys can be a sign that you are dealing with a mill.

3)      Is the price for legal services too good to be true?

Another indication that you might be dealing with a mill is an extremely low cost to do your bankruptcy.  While not a certainty, a lawyer who handles your case for under $1,000 dollars is probably using non lawyers and/or appearance attorneys as part of their practice.

4)      Is your attorney accessible?

Does your attorney return calls within a couple hours?  Better yet, will he or she give you their cell phone number?  If the attorney is hard to reach, chances are he or she is not personally involved in your case and/or they are too busy.

There is no definite rule regarding law firm size.  Some large firms do a perfectly adequate job of representing their clients.  However, I believe that a small firm with easy access to and personal involvement of the lawyer is the best way to go.

As a Los Angeles bankruptcy attorney with extensive experience, I can promise you that your case will be handled correctly and with proper care. Please feel free to call me with any questions at 1-800-856-7421.

How do I feel about appearance attorneys?   Well, if a client is paying a rock bottom price to a mill firm, they shouldn’t expect the attorney to personally appear at Court, because the attorney will not make any money if they do.  The old adage “you get what you pay for” often rings true in law as in any other service.   Is it ethical to use them?  Sometimes.  I admit to using appearance attorneys, but only in certain specific circumstances:

1)      There must be a schedule conflict or serious illness.

2)      The case must be a chapter 7 and not a chapter 13 (do to the intricate nature of chapter 13 cases).

3)      The case cannot be too complicated.

4)      The appearance attorney must have many years of bankruptcy experience and must be reliable.

I consider my use of appearance attorneys very ethical and never make the decision based on financial considerations.  However many bankruptcy attorneys use appearance attorneys exclusively in order to avoid several hours of driving and wait time for the case to be called.  They might have a thriving practice and never visit Court!

In general, mill firm or not, clients expect their attorneys to be familiar with and engaged in their cases.  This would include their appearance in Court when required.  If this doesn’t happen, can a client complain?  Buried in most attorney retainer agreements is a clause that allows the attorney to make use of other attorneys provided the price of the overall service does not go up as a result.   If you want your attorney to make all appearances personally, have them put it in writing in their retainer agreement.