The practice of bifurcation has a 25-year history of case law dealing with the mechanics and ethics of offering $0-down chapter 7. The practice offers a solution to the increasing problem of low-income debtors’ inability to afford legal representation in chapter 7 bankruptcy. Still, some believe that bifurcation is “illegal and unethical” and that it involves “unbundling and fee sharing.” We are uncovering the truth and busting these bifurcation myths! Here's what the experts have to say…
MYTH: Bifurcation is illegal and unethical
BUSTED: Bifurcation is not illegal or unethical but doing it the wrong way is. Like driving, it is not illegal, but if you drive recklessly, you will get yourself into trouble. There is a 25-year history of case law on bifurcation. In those 25 years, every attorney who has been challenged, including several across the country right now, made one or more of these 4 mistakes:
they failed to use separate written agreements for their pre-petition and post-petition work
they failed to give the client adequate disclosure about what they were doing
they failed to disclose that they bifurcated the case to the court
they charged unreasonable fees
In the 25-year history of this practice, there has not been a single attorney who has bifurcated correctly and gotten into trouble. Not one.
MYTH: Bifurcation involves unbundling
BUSTED: Unbundling is a shorthand way of talking about limited scope representation. Splitting the engagement between two agreements does not limit the scope of the representation in any way, and it therefore does not constitute as unbundling. From the beginning of the relationship, the attorney and client know the attorney is going to handle the entire case, they just choose to split it between the two agreements so that the client can have the benefit of an immediate filing, and post-petition payment terms.
MYTH: Financing cases is fee sharing
BUSTED: Rule 5.4(a) of the Rules of Professional Conduct prohibits attorneys sharing fees with non-attorneys. However, the ethics opinions and case law interpreting this rule have concluded that as long as financing is recourse—so long as the attorney has to repay the debt whether or not the client pays—you are not fee sharing by financing cases. Additionally, it is OK to use a third party to collect payments if they are collecting them as your agent and get paid whether they collect particular fees. With the help of outside ethics counsel, we have structured our line of credit and payment management service that way. We have a hold back structure in place to protect you against ethics problems and the need to pay anything back out of pocket.