The Cost of Consumer Bankruptcy and How It Has Increased in the Last 10 Years

There is no question that the cost of filing bankruptcy for a typical consumer has increased dramatically in the Augusta, Georgia in the last 10 years.  Some of the increases are easy to identify, such as the increase in court-imposed filing fees and the institution of mandatory credit counseling.  But other increases are not as easily traceable, but just as easy to justify when consumers are made aware of the work that goes on “behind the scenes” when a bankruptcy case is filed.

1)       While the advent of electronic filing made the filing and processing of cases easier, it placed the burden of document storage on the attorneys.  Original documents have to be retained for up to 7 years by the bankruptcy attorney.  In addition, while creditors may receive electronic notices directly from the court, the debtor’s attorney still must mail paper copies of most filings to the affected parties.

2)      Many institutional lenders have opted to “nationalize” or “consolidate” their operations, removing the authority/responsibility of bankruptcy cases from the local offices.  As a result, the chain of communication is slowed down.  In addition, bankruptcy attorneys often find themselves dealing with creditors who are unfamiliar with local law and procedure, which further delays the processing of information and documents essential to the bankruptcy case.

3)      While the nationalization of operations may streamline the expenses on the creditor side, it makes it very difficult to communicate on a specific case.  Bankruptcy attorneys frequently received unsigned letters and e-mails from creditors, with no contact information for a response.  In some of the more egregious cases, the attorneys are not even provided with sufficient information to verify the identity of the client! [i]

4)      Picking up the phone to call a representative of one of these creditors is usually a waste of time.  Long hold times, dropped calls, and shifting from personnel to personnel are just as common in bankruptcy.  The bankruptcy attorney rarely has a direct contact whom they can quickly engage in a meaningful discussion about their client’s case.[ii]

5)      Another problem in the consolidation of bankruptcy issues by the institutional creditors is created by the rules placed upon the state bar with respect to dealing with non-lawyers.  Communications must be tempered in a manner that will not lead to any claims of misrepresentation or deceit.  Attorneys are more comfortable dealing with fellow attorneys, as they are both familiar with the law and there is no perceived undue advantage.

6)      Of course, this leads to the next problem which is the unwillingness of institutional creditors to seek attorney assistance.  While this may save money, it frequently results in poorly-trained creditor employees filing documents incorrectly, missing deadlines, and generating problems which may eventually affect the debtor’s ability to obtain a fresh start.

7)      Even when institutional creditors have legal counsel, they often opt to hire one firm that will then distribute cases nationwide.  For instance, in the Augusta area, it is common for a case to be referred by a creditor to a law firm in Texas, which then transfers the case to a law firm in Atlanta.  The law firm in Atlanta will file a motion in the Augusta Division, but will not appear at the hearing.  Instead, a local lawyer from the Augusta area will appear on behalf of the creditor.  In most cases, the local attorney will have full authority to negotiate on behalf of the creditor client.  But in some cases, the local attorneys are not authorized to negotiate, and the hearing will have to be continued so that the referring law firm can then pass any settlement terms or proposals “back up the chain.”

8)      Because of this consolidation of legal services, it makes it very difficult to resolve or compromise issues prior to a bankruptcy hearing, because there is no telling who is responsible for the file at any given time.  A bankruptcy attorney may contact the law firm in Texas only to be told that the file has been forwarded to an Atlanta firm, who may not have already forwarded it to a local attorney.  As a result, consumer bankruptcy attorneys and their clients have to attend a hearing which would have been unnecessary if communication could have been established earlier.

9)      While most of the cited examples deal with the difficulty and delay in dealing with the creditors, additional attorney time and expense is also caused by the enhanced bankruptcy requirements instituted by Congress in 2005.  While many of the requirements regarding document verification were long overdue, it has extended the amount of time necessary to review a client’s case and determine the appropriate bankruptcy remedy.   Even in simple consumer cases, 3-4 consultations may be necessary to obtain sufficient information to prepare an accurate petition and file a case.  Occasional audits are conducted by the United States Trustee’s Office to verify the accuracy of the information in bankruptcy petitions, and how it was obtained.

10)   Since 2005, bankruptcy cases have become very document intensive, and attorneys have to be constantly mindful of important deadlines.  While most Chapter 7  cases can be expediently handled within 5-6 months, the typical Chapter 13  case will last for up to 5 years.  Because of the volume of paperwork generated by a Chapter 13 case, and the responsibility of the attorney to monitor it, the biggest increase in time and expenses for a consumer debtor has been in Chapter 13 cases.

Fortunately, most bankruptcy attorneys in the Augusta area and surrounding counties of Columbia, Burke and McDuffie offer free consultations.  The more prepared you are as a client, the less time that it will take to analyze your case and propose a solution.   Once you have retained an attorney, be mindful of all communications from your attorney and promptly respond if necessary.  While there does not appear to be any change in the manner in which creditors may delay a case, you as the client can certainly help minimize the amount of fees that you have to pay by understanding the information needed and reasons why.

[i] If you want to experience the essence of lender-induced frustration, try getting a mortgage loan modification.

[ii] The exception is when dealing with local banks and credit unions, where there are longstanding relationships between the bankruptcy attorneys, creditor attorneys and lender staff.  For instance, in the Augusta area, it would probably take ¼ of the time to work out an issue with Georgia Bank & Trust or one of the local credit unions.