Dos and Don'ts of Chapter 7 Bifurcation
Updated: May 27
The practice of bifurcation is not new. There is a 25-year history of case law dealing with the mechanics and ethics of offering chapter 7 debtors post-petition payment terms. This case law provides a clear road map for offering debtors this option legally and ethically. The practice offers a practical solution to the increasing problem of low-income debtors affording legal representation in chapter 7.
How Bifurcation Works
In a bifurcated engagement, the debtor signs a pre-petition engagement agreement with an attorney and pays little or no money down to get their case filed. The debtor then signs a post-petition engagement agreement to have the same attorney represent them for the balance of the case. By creating a separate, post-petition obligation between the attorney and client that is not subject to the stay or discharge, the attorney can offer post-petition payment terms, allowing the client the benefit of an immediate filing despite lacking sufficient money to prepay the attorney.
Some attorneys that have gotten into trouble have all failed to bifurcate their cases correctly. There was a lot to learn from their mistakes, and we have compiled a list of some DOs and DON’Ts to help ensure you follow the steps needed to bifurcate properly.
DON’T: Charge post-petition for work done pre-petition; post-petition fees are only for post-petition work. Offering $0-down terms does not mean simply moving your entire fee to the post-petition agreement. If you're collecting fees after filing the case for work you did pre-petition, you are violating the automatic stay.
DON’T: Threaten to stop working on a case prior to obtaining court permission to withdraw, or to not complete the job if the debtor fails to make timely payments
DON’T: Charge fees in excess of the reasonable value of your services, and don’t unreasonably increase your fees for bifurcated cases
DO: Disclose, disclose, disclose! This includes making proper client disclosures so that you can obtain their informed consent, as well as disclosures to the court.
DO: Conduct your standard due diligence before you file a case.
DO: Give your clients two payment options - pre-pay before filing or pay more and make post-petition payments -- so they can decide which option is in their best interest.
Fresh Start Funding provides attorneys with everything they need to bifurcate cases and collect fees post-petition. In addition to the required forms, Fresh Start Funding provides training to attorneys and their staff so that they can bifurcate cases the right way, as well as general practice information that allows attorneys to grow their practice and help more people. Fresh Start Funding is dedicated to helping attorneys make a fresh start affordable and accessible for everyone.