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Chicago, You Have a Problem With Bankruptcy Lawyers

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By William Vogeler, Esq. on May 24, 2018 11:58 AM

Everybody knows that lawyers never lose -- even in cases they lose -- because they always get paid.

Of course, that's a generalization because every lawyer knows that clients also stiff them. There's a different problem in Chicago's bankruptcy court, however.

In the Northern District of Illinois, attorney's fees routinely have been paid first among creditors through so-called "step-up" payment plans. It's become an issue, and now some lawyers are getting a courthouse haircut.

Counsel First

The controversy started last year when a bankruptcy trustee filed objections to attorney's fees in several cases. The trustee said the lawyers' "step-up" practice, which prioritizes payments to creditors, was self-serving.

In one case, a woman had filed for bankruptcy twice to shed her debt. The plan allowed her to discharge most of that, except to her lawyers. They were paid in full first -- both times.

It prompted some judges to condemn the practice, although they have not stopped it. Instead, they sanctioned certain lawyers and made them refile for payment of their fees.

"There is simply no way of knowing how many debtors have been harmed by a policy driven by the very counsel that they trusted and relied upon to represent their best interests," wrote Judge LaShonda Hunt.

Chicago First

Records show the Northern District had more Chapter 13 bankruptcy filings than anywhere else in the nation last year. It is a high-volume court, where judges are now telling attorneys to slow down.

In the heat of the "step-up" controversy, judges are scrutinizing and cutting lawyer fees. The Semrad Law Firm, which is also known as Debtstoppers, for example, saw its fees reduced in four dozen cases.

It's part of a bigger problem, according to reports. ProPublica said the bankruptcy system is failing black Americans -- particularly in the South -- by luring them into bankruptcies without lasting debt relief.

In Chicago, that's often because the lawyers have been getting paid first. And one way or another, the clients lose.

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