By Joe Liberman, J.D. candidate, Harvard Law School
STUDENT VOICES: The views expressed below are those of the student author and do not necessarily reflect the position of the Access to Justice Lab.
Individuals and families in the United States are in a debt crisis. National household debt exceeds seventeen trillion dollars, and bankruptcy filings rose 16.2 percent in the twelve-month period ending in September 2024. In 2024, people filed nearly 500,000 non-business bankruptcies. One in ten adults in the United States have turned to consumer bankruptcy at some point.
The combination of rising debt and inability to pay for legal help has allowed the proliferation of a financially fraught practice: “no money down” bankruptcies. In a “no money down” bankruptcy, a lawyer assists with a Chapter 13 bankruptcy without requiring upfront payment. While purporting to help the low income client, these bankruptcies often leave the filer in a worse financial situation because they were ill-suited for Chapter 13 bankruptcy. This practice has become lucrative for some bankruptcy practices and is especially prolific in the South and in cities with large black populations, like Chicago.
This post explores the rise of “no money down” bankruptcies and how we can address this access to justice issue.
Bankruptcy Overview
Individuals filing for bankruptcy file either Chapter 7 or Chapter 13. Chapter 7 bankruptcy involves selling much of the debtor’s property to pay creditors. Assuming no other issues, the debtor is then discharged from liability for most debts. The whole process typically takes less than six months to complete. Chapter 13 bankruptcy takes longer, but allows the debtor to keep more property. Over three to five years, the debtor follows a plan to pay off a portion of their debts. Any remaining debt is discharged at the end of the plan. Last year, about sixty percent of personal bankruptcy filings were under Chapter 7.
Bankruptcy can be a boon for debt-ridden households, but it can be perilous for people without enough money to pay for a lawyer.
“No Money Down” Bankruptcies
A growing portion of Chapter 13 filers pay no attorneys fees before filing, a practice called “no money down” bankruptcy. This practice emerged from a 2004 Supreme Court decision, Lamie v. United States Trustee, which held that attorneys fees are subject to discharge in Chapter 7 bankruptcies if the attorney is not employed by the trustee. So apart from rare cases where a Chapter 7 debtors’ attorney is employed by the trustee, Lamie means that if a Chapter 7 filer hired an attorney and did not pay the whole fee upfront, the unpaid portion of the attorney’s fee would be discharged in the subsequent bankruptcy proceeding. Attorneys made the obvious change to require their fees upfront for Chapter 7 filings. Because Chapter 13 bankruptcy contemplates payment over time, accepting payment in installments, or even taking on clients without a down payment, is becoming common practice.
But Chapters 7 and 13 are meant for different financial situations. Chapter 13 attorneys’ fees are on average $2,000 more than Chapter 7, and Chapter 13 cases are dismissed at a rate eighteen times higher than Chapter 7 cases. If a case is “dismissed,” the filer loses all benefit from having paid a court filing fee and any attorneys’ fees and receives no relief; all unpaid debts are still collectible. Many people–typically those without steady income–are better suited for Chapter 7. But the lure of “no money down” can steer them in a financially disadvantageous direction.
Racial Injustice
“No money down” bankruptcies also appear to be racially targeted. The two most significant predictors of whether someone files a “no money down” bankruptcy are that person’s place of residence and their race. The only states in which Chapter 13 predominates are in the South. But the practice is not confined to the South: from 2011 to 2015, Chapter 13 filings by black residents in Chicago rose eighty-eight percent.
Race is also predictive of the outcomes for Chapter 13 filers. Black filers are more than twice as likely to choose Chapter 13 than white peers with similar financial profiles, but despite their similar profiles, the odds of their cases being dismissed are fifty percent higher.
Choosing Chapter 13 is often a byproduct of underlying socioeconomic racial disparities. For example, traffic fines and parking tickets–which are levied disproportionately against black people–are not dischargeable in Chapter 7 bankruptcy, while filing Chapter 13 can help someone get their license reactivated in a matter of months. With black households generally more vulnerable to urgent financial difficulties, they are more likely to turn to bankruptcy, and to Chapter 13.
And apart from the slew of socioeconomic factors that lead black people into worse financial situations than white people, reporting by ProPublica suggests that lawyers steer a higher percentage of their black clients towards Chapter 13 filings.
Potential Solutions
In a recent paper, Professors Pamela Foohey, Robert Lawless, and Deborah Thorne, and former Congresswoman Katherine Porter, analyzed potential solutions that could address the problems of “no money down” bankruptcies.
Scrutinizing Attorneys’ Fees
The authors suggest amending standing orders to target “no money down” bankruptcies and similar problematic Chapter 13 practices. Almost all bankruptcy courts issue standing orders setting “no look” attorneys’ fees. These orders mean that if attorneys charge their clients less than an amount set in the order, courts will approve their fees with virtually no scrutiny. The authors propose that if a Chapter 13 filer is unable to make even one payment, courts should scrutinize the case to determine whether the attorney should have advised their client to file Chapter 7.
The authors also propose amending standing orders so that courts will only “no look” Chapter 13 plans that contemplate substantial repayment to creditors. This proposal would target “fee-only” plans that only provide for repayment of attorneys’ fees, a setup which indicates that the filer should have filed Chapter 7. Both proposals would require attorneys to explain to the court why they advised their client to file Chapter 13, despite likely being better suited for Chapter 7.
A Lamie Fix
The holding in Lamie was likely the byproduct of a drafting error in the Bankruptcy Code. Addressing the drafting issue that led to Lamie would open the door to making Chapter 7 more affordable. The fix would enable filers to pay bankruptcy attorneys’ fees in installments during Chapter 7 cases. However, just because attorneys can offer more affordable fee structures does not mean they have to or will. Because lawyers profit more from Chapter 13 bankruptcies, fixing Lamie might not prompt significant change, especially in jurisdictions where Chapter 13 predominates.
The shortcomings of the Lamie fix illuminate the more fundamental problem that the authors identify: attorney and debtor incentives are at cross-purposes. Clients in need of immediate financial intervention are incentivized to choose the option that they can afford upfront. Attorneys make more money if their client files Chapter 13. These incentives lead both parties to Chapter 13, despite consumers often suffering for it.
Access to Justice
The authors conclude by noting that because of the tension between attorneys’ and debtors’ interests, the most effective intervention might be simplifying the bankruptcy process so that people can more easily navigate it on their own. Bankruptcy paperwork is notoriously difficult, so success often hinges on having a lawyer. And when Chapter 7 is unaffordable, Chapter 13 becomes the only option.
Next Steps
So how do we figure out whether these solutions actually work? Other bankruptcy studies could prove instructive. For example, a paper estimated the effect of Chapter 13 bankruptcy protection by using the different leniencies of randomly-assigned judges as an instrument for Chapter 13 protection. A similar empirical strategy could examine how different levels of fee scrutiny of randomly-assigned judges affect “no money down” bankruptcies.
The bankruptcy system is one of our largest social safety institutions and one of the most used parts of the judicial system. Rigorous study of how to fix it is necessary to ensure that all people can access the financial justice that bankruptcy can offer.
If you’re interested in more on this topic, listen to our Proof Over Precedent podcast episode.