Ch 7 Abuse - Is my lawyer saving me, or ripping me off??

[bllyshrs]

My lawyer feels that I may have some challenges with my case, but I am not sure if she is being 100% forthcoming or if she is just trying to milk us for more fees. On one hand, our lawyer could be the greatest lawyer ever and is trying to help us avoid being treated unfairly by the trustee. On the other hand, she might be trying to scare us into doubling down on the fees. I don’t know, so I’m turning to the court of public opinion (my esteemed forum participants) to help me out. I’m including a lot of info below to give context to our situation. I would appreciate any advice from those who have experience or a rational opinion.

The story:
After discussing my case in full with several lawyers, we finally made the decision to go forward with a lawyer that we were most comfortable with. My wife and I want the smoothest bankruptcy possible, so we looked for a lawyer who wasn’t just going to tell us what we wanted to hear, but rather be frank and honest about our situation. While interviewing lawyers we gave them as much information about our case as we possibly could, and were 100% transparent to ensure that there are no surprises. Bear in mind, there is only so much you can disclose in a 30-minute consultation, but we did our best to explain our circumstances. We thought we felt that we found a lawyer who was just as thorough and meticulous as we are and made the initial payment.

After our first sit down with our documents and tax statements, she started getting very concerned, and asked to take home all of the documents that we had brought in. We allowed her to, and she came back and let us know that due to the complexity of our case, that her fee was doubling (to $3500!) and that she could not guarantee that the trustee would not assume abuse, in which case there would be more legal fees down the road.

Here is our situation:
- Just moved to Massachusetts (been here for 90+ days, so we can file here, though we need to use Fed exemptions since we haven’t been here long enough to qualify for MA exemptions. Our old state won’t let us use their exemptions unless we currently reside there)
- $140k in consumer debt (credit cards; $50k from personally guaranteed business card, the rest on personal credit cards)
- $1.4m in real estate debt (three properties, two of them already foreclosed, the last one is in process)
- Two vehicles: one paid off (worth $10k) the other upside down (current and plan to continue payments)
- Less than $2k cash on hand for living expenses
- About $5k in total personal property (TV, computer, clothes, etc. Should be under the Fed exemptions when all is said and done)
- Unemployed for two years, actively looking, but nothing has materialized
- We easily pass the means test since I haven’t worked in two years and my wife is a grade school teacher

Other items to note:
- We were able to amass such high debt because I was once a high-income earner (not crazy high, but high enough) earning $160-190k per year in salary for about three years. In ’09 I also cashed out on some stock options, which netted me another $90k in income in ‘09.
- My wife is a teacher who made $35k
- Combined income: in ’08 we grossed about $240k and in ’09 we grossed $310k.
- Most of my income went to real estate, and lifestyle. I saved very little, except for my 401k
- I owned (well, the bank owned but I controlled) three properties; one that I lived in, one rented out, and the other was being rehabbed for rental/sale. All of them were purchased prior to ’07, so they were all heavily leveraged with interest only loans, and underwater
- Mortgage payments were appx $11k/mo
- All of this came crashing down when I lost my job in ’09. Haven’t found a job since
- While looking for work, I started working on my master’s degree
- I also owned a small business from back in ’03 that was insolvent as of ’06. It was an S-corp., so there were some pass-through losses on interest, but no income or assets in years. I never wound it down, so my lawyer thinks that is a huge problem
- I had a trust fund in my name that my parents setup for my college education when I was a kid. At one point it had $100k in it, but that was spent on college more than a decade ago. There was about $1,200 left in the account until this last year, when I withdrew it for living expenses. My lawyer thinks this is also a huge problem

My lawyer is claiming that even though we pass the means test easily, that we are “guilty until proven innocent” as it pertains to abuse. The way she sees it, the trustee will assume that since we made a ton of money in ’08 and ’09, so we must have $500k sitting around somewhere and that we transferred to relatives or something. So, in order to prove that we don’t, it is going to cost us substantially more to prep for our filing and 341.

On one hand, I appreciate a lawyer who is going to look out for potential pitfalls and be prepared for any curveballs that may come up in the 341. I also am unfamiliar with the trustees or trends in Massachusetts, but in Florida, trustees are accustomed to people who invested in real estate only to watch it evaporate in ’08 & ‘09, but the market has not been so bad here in MA. My concern is that I have been very transparent with all of the lawyers I talked to along the way, and no one said that this would be an issue. Now that I’ve paid a retainer fee, I feel like I’m stuck with this lawyer. If she is telling the truth, great. If she is lying, then I’m getting milked for more fees. Worse, if we fire her and go to another lawyer when the old lawyer was right, we could be headed for disaster. We also don’t have the extra money for fees and would have to borrow from family to make it happen.

Is there any validity to what my lawyer is saying or are we being strung along? While I don’t want to assume anything, I would think that if a trustee saw that I had a job that paid $300k in ’09, but $0 in ’10 and ’11, they would understand the simple math here. I was current on all payments and had great a credit score until I lost my job. Against the advice of others, I even burned through my savings and kept up my mortgage payments for 6-7 months after losing my job ($11k per month in mortgages can burn through savings fast!). We cut our luxury expenditures, we never eat out, and we don’t take vacations anymore. We haven’t incurred one additional penny of debt since losing my job; instead we have lived very meagerly and within our means on a teacher’s salary. I find this whole thing a bit preposterous, and have no problem furnishing our bank statements to a trustee, but this lawyer is saying that we may have to “prove” that we didn’t give money to family.

Does anyone have any experiences or anecdotal information that can be helpful? Would the trustees really jump to the conclusion that I’m working the system? And if so, shouldn’t disproving it be as simple as showing them my mortgage bills? When you made ~$200k pretax, and spent over $120k a year on mortgages, it isn’t difficult to understand where all the money went, right? Or is my lawyer telling the truth and properly prepping me for a huge battle? Help.

[despritfreya]

. . . she could not guarantee that the trustee would not assume abuse. . .

I stopped reading when I saw the business reference and the $1.4 mil in real estate debt. Were these investment properties? I do not want to read further until you answer this question:

Is more than 50% of your TOTAL debt attributable to a business venture, investment opportunity, profit motive?

If the answer is "yes" then you do not need to "qualify" for a 7. (I assume the properties are not subject to some anti deficiency provision and I further assume that the 1.4 is what you owe AFTER the properties were foreclosed.)

Once I know if "qualification" is an issue I will go back and read the rest.

Des.

[bllyshrs]

This is not a situation where business debt outweighs consumer debt, so there is a need to qualify. Only 50k in business debt. Majority of real estate debt was for my personal residence. Two of the properties were purchased for profit motive, but again, my personal residence outweighs the investment properties. So yes, qualification if necessary. In addition, the investment properties were already foreclosed, therefore the debts are now unsecured.

[despritfreya]

blly,

My time is very limited this morning and it does look like you are not a cookie cutter case. I will subscribe to this thread and do a thorough review either this evening or tomorrow morning. In the meantime, others may chime in.

Des.

[despritfreya]

I my comments are more in a general nature, with references to a few key points you made. I see nothing here that causes me alarm. A Trustee is going to investigate your business dealings since that is the Trustee’s job. So long as you disclose, disclose, disclose and fully cooperate when asked to deliver records, there is nothing to fear.

. . .she came back and let us know that due to the complexity of our case, that her fee was doubling (to $3500!) and that she could not guarantee that the trustee would not assume abuse, in which case there would be more legal fees down the road.

$3,500.00, as a base fee in a case such as yours, would be what we would have charged. After you had filled out our worksheets you and I would have a 4 to 5 hour sit down going over everything. Prior to our meeting I would have done a “background” check, which would have added about an hour to my time. In addition, the fee agreement my Firm uses is very specific as to what the “fixed fee” covers and anything outside of the coverage would be subject to a separate fee agreement at our normal hourly rates. This separate agreement would cover any additional work required after the 341 meeting such as reviewing additional document requests from the Trustee and/or his lawyer, attending a 2004 Exam (deposition) and any contested matters.

We easily pass the means test since I haven’t worked in two years and my wife is a grade school teacher. . .Combined income: in ’08 we grossed about $240k and in ’09 we grossed $310k.. . .All of this came crashing down when I lost my job in ’09. Haven’t found a job since. . .

If you “easily pass the means test” then there is no “presumption of abuse”. I am not sure why your attny is stating that your filing would be an abuse. You are not employed. The fact that in the past you made a good living is not relevant if you cannot find employment now. What was your income in 2010 (rhetorical question)? You are at the bottom of the bell curve and, as such, this is the time to file. It does not appear that anyone could even argue that based upon the totality of the circumstances you are abusing the system. For me, you are the perfect candidate to file the 7 now and clean up the mess that was created 2 years ago.

I had a trust fund in my name that my parents setup for my college education when I was a kid. At one point it had $100k in it, but that was spent on college more than a decade ago. There was about $1,200 left in the account until this last year, when I withdrew it for living expenses. My lawyer thinks this is also a huge problem.

Why? All I see is that you lived off this money over time. No different from pulling money from a traditional IRA prematurely - and we are not talking a fortune since the vast majority was used for education years ago.

My lawyer is claiming that even though we pass the means test easily, that we are “guilty until proven innocent” as it pertains to abuse. The way she sees it, the trustee will assume that since we made a ton of money in ’08 and ’09, so we must have $500k sitting around somewhere and that we transferred to relatives or something. So, in order to prove that we don’t, it is going to cost us substantially more to prep for our filing and 341

There are folks on this board who are from Florida and do indicate that Trustee’s in Florida are more aggressive. That being said, what you have described here is the typical case that walks into my office. Debtor lived large, made a ton of money, spent a ton of money, invested in real estate and then lost his/her shirt. In my district, yes, your case would be scrutinized by the Trustee but not for abuse. It would be scrutinized to see if you made any preferential transfers or “fraudulent conveyances” that could be recovered by a Trustee (“fraud” is a term of art an not “fraud” in the normal sense you would think). The Trustee has to make sure you are not hiding assets. But, since you are not, and, presuming you have kept good records, there is nothing to fear. The Trustee will review all of your business records and, in the end (assuming there is nothing out there) he/she will close the file.

My guess is that your attny does not handle many cases like yours. She is unsure of what will happen next. If you are comfortable with her then go with her. There is nothing wrong with testing the waters and, if she is a good attny, if something comes up that she cannot handle, she will find someone who can. A good percentage of our cases come to us from attnys who realize they are in over their heads. We either take over the case or help behind the scene by making suggestions.

Alternatively you can continue to seek an attny who may be a bit more seasoned in the area of a more complex case. The reality, however, is that if you kept good records, have not squandered the money and are truly at the bottom of the bell curve with nothing to hide you will be fine. It will just take time for the Trustee and/or his attny to complete their investigation before the case can be closed.

Des.

[bllyshrs]

Des, I meant to reply earlier, but thanks so much for the response and advise. I think you are right, my lawyer seems nice but just doesn’t seem to have the experience handling some of the complexities of my case. I do like her, since she seems to be looking out for our best interests. I just think she saw that our case was not a cut/dry, vanilla filing and freaked out a little, which kind of freaked me out.

[despritfreya]

You are welcome. . . Keep us posted.

Des.