Business Bankruptcy Lawyers: 6 Questions About Fees and Court Approval

Every company will need to retain a business bankruptcy lawyer if they are planning on filing. That’s because there is no pro se representation allowed under business bankruptcy law. If your business is going through Chapter 11, the bankruptcy lawyer will have to get court approval to be hired, and to get paid out of the estate. The judge will review every fee. A Chapter 7 is different: there is no approval required and it’s paid up front.

Court Approval for the Job

In a Chapter 11 bankruptcy, the bankruptcy court approves who is hired as counsel, and for how much. That’s because the assets used to pay your lawyer are assets that could go to creditors. In a Chapter 11, the lawyer represents the debtor company and also represents the bankruptcy estate. The Chapter 7 lawyer only represents the company. The lawyer must also hold no interest adverse to the estate, and be a “disinterested person.” A law firm owed money from before filing is a creditor, and is going to have a hard time qualifying.

You don’t necessarily have to hire a lawyer who has never represented your business before. Having been the business’s lawyer before filing for Chapter 11 does not preclude the firm from continuing as counsel. Under Subchapter V, a pre-filing claim of under $10,000 is okay. A law firm that’s already handling a specific matter for the company can be approved by the judge to continue as counsel on that matter.

Usually the law firm will ask for a retainer, and they’ll use that to pay their fees. You’d replenish it to keep the work going. There’s a good reason for that. The way bankruptcy works, if the firm was paid within 90 days before filing for old bills, then that becomes a preferential transfer to a creditor. The law firm could become a creditor.

When you first start the case, you will sign an application to retain your lawyer. Once you sign it, the lawyer files it with the court. Any attorney working on the bankruptcy case must file a detailed statement with the court, disclosing all connections to the debtor, the creditors, the other interested parties, and others involved in the case. If that statement is incomplete, the lawyer can be disqualified from the case, and lose the fees they are owed. Getting an order approving the employment is usually not difficult, and the law is generally that the order is effective from the beginning of the case. So you can usually trust that even work before the court makes a decision will get paid.

It’s not just lawyers -- it’s appraisers, auctioneers, and professionals like accountants. If they are hired to work on the bankruptcy, they have to get court approval for the job, and for their fees.

Fee Application

It’s not the same thing to approve employment and to approve fees. The fee issue comes later. Once you retain the lawyer, they’re still not actually entitled to payment, at least not until they get a separate order specifically allowing for it. To get paid out of the estate, the lawyer has to file a fee application with the court. The application shows the services performed, the time spent on them, expenses of the case, and payments made or promised by the debtor to the lawyer. A copy has to go to the U.S. Trustee. The U.S. Trustee or a creditor can challenge either employment, or the fees the lawyer is requesting, or both. The court then reviews the fees to decide whether to approve them. In doing this, the judge is supposed to determine if the amount requested is reasonable. They will look at time spent, rates charged, whether the fees are comparable to what lawyers outside of bankruptcy charge, and whether the work was reasonably needed. The court can order payment of less than what is requested. If you plan to pay your lawyer from the estate, your lawyer will have to document the work in a lot of detail. In these cases, they usually keep track of time in tenths of an hour, because judges or other lawyers tend to look closely at the fees.

A Chapter 11 bankruptcy attorney does not have to wait until the end of the case to get paid for their fees. Instead, they can request money up to every 120 days, and more often if the court gives the okay. In big cases, lawyers can get 80-95% of their fees paid every month, as they work. Monthly payments reduce the time the law firm’s waiting for fees. The payments don’t replace the need to make interim and final fee applications.

A Chapter 7 bankruptcy attorney isn’t required to get court approval to get hired or paid, unlike the Chapter 11 attorney. The law firm is not entitled to payment out of the estate. Your lawyer is required to file a detailed statement with the court of the fees paid or promised in the year before filing, within 14 days. If the lawyer charges too much, the judge may require a refund. In nearly every district, there is a fee that is the usual amount for typical cases. Lawyers whose fees are at that level rarely run into problems.

Administrative Expenses

In a Chapter 11 bankruptcy, the lawyer’s compensation is an administrative expense of the bankruptcy estate. Administrative expenses get paid first, ahead of any of the unsecured creditors, if the money is available to pay them. That doesn’t mean you should assume that your lawyer will get paid. If there’s no money to pay them, there’s no money. In a conversion from Chapter 11 to Chapter 7, the fees and expenses to the Chapter 11 lawyer may get wiped out. The fees of the Chapter 7 Trustee and Chapter 7 counsel will get paid out of the estate first. It isn’t certain the Chapter 11 lawyer will recover anything, so a retainer can help avoid being out money. If the lender’s lien covers all of your assets, there’s no money to pay your lawyer, so bankruptcy lawyers will usually demand a “carve-out” from the lender, to be paid out of the lender’s collateral. This is something that would have to be approved in bankruptcy court.

You will have to pay filing fees for your bankruptcy case, in addition to the fees paid to your lawyer. They’re a total of $1,738 for a Chapter 11 bankruptcy; $338 for a Chapter 7.

You should discuss all of these things with a potential lawyer before hiring them for your bankruptcy.

• Ask about retainer size.
• Ask about connections to the creditors.
• Discuss what happens if your case converts from Chapter 11 to 7.
• Talk about a carve-out if your assets are all tied up in a lender’s lien.
• See what your lawyer’s fee arrangement is, and who will review it.