"$0 Down" or "Nothing Down" Chapter 7 Bankruptcy will COST YOU THE MOST $ and leave you BACK IN DEBT. Don't do it!
"$0 Down Bankruptcy" sounds great, but is it? Absolutely, if you're an attorney. But for most consumers, its a big fat "No!" “$0 Down” is great for attorneys because it allows them to charge 3 or 4 times as much as other attorneys, or at least 3 or 4 times as much as I do. "$0 Down" is also a great marketing hook, getting these attorneys even more clients, who, in turn, pay way more in fees than most. Wiping out all your bills for nothing down even sounds great to me, but its not. "$0 Down" simply insures that your attorney makes more money, you will pay more money, and that you will exit the bankruptcy process in debt again!
SO HOW DOES THIS ALL WORK?
You may have read on my website that when you file a Chapter 7 bankruptcy, any amount you owe your Chapter 7 attorney, as of that date will be discharged in your case. Accordingly, bankruptcy attorneys have historically insisted on full payment prior to filing. So, how does the "No Money Down," "$0 Down" attorney get around this? While there are several variations to this scheme, in the Southern California area, it generally works like this:
Your attorney agrees to file an "Emergency Bankruptcy Petition" on your behalf for little or no money. An "Emergency Bankruptcy Petition” requires just a few papers to start, giving you emergency protection and allowing you/your attorney to file the rest of the required papers within 14 days. He or she does this because you promise to come back and sign a new contract to pay big bucks for the completion of your bankruptcy.* In this situation, your promise to pay your bankruptcy attorney comes after your bankruptcy is filed, so the debt to your attorney, or more likely the lender your attorney will have you finance his fees with, survives your bankruptcy. When you exit bankruptcy, you are in debt again, and if you can't pay, you will start ruining your credit all over again. While this can be a lucrative strategy for most bankruptcy attorneys, its bad for most consumers.
If exiting bankruptcy in debt were not enough, the worst part about "No Money Down" Chapter 7 bankruptcy is the cost. Our normal attorney fee for what we call "Typical Service" is usually $999.00. This exact same level of service (or less service) will probably cost you $3,000.00 to $4,000.00 when utilizing a "No Money Down" attorney in the Southern California area. Again, how this usually works is once your case is filed, you will go back to the attorney's office and sign an agreement to pay $3,000.00, $4,000.00, whatever the amount the attorney charges, typically spread over 10 to 12 months. So, if the fee is $4,000.00 over 12 months, you'd pay $333.33 per month for a year. But do you pay the attorney? Maybe, but probably not.
You see, most attorneys offering "$0 Down" bankruptcy filings sell your fee contract to a finance company that pays them 70% or 70 cents on the dollar. So, if you agreed to pay your attorney $4,000.00, he's probably going to sell your contract for $2,800.00. This is a win-win for him because he's probably getting at least twice his normal fee and doesn't have to worry about not getting paid. Its also a win-win for the finance company, who pays out $2,800.00 and gets repaid $4,000.00 (which works out to 42.86% interest). With all this winning, you bet somebody's got to lose, and you guessed it, most of the time it's you.
IS THERE EVER A TIME WHEN A "$0 DOWN" BANKRUPTCY MAKES SENSE?
Rarely would it make sense to hire a "$0 Down" attorney or participate in a "$0 Down" scheme. However, there may be a few situations that warrant it. Typically, emergency situations where the added cost of "$0 Down" is less than the loss you'll suffer by waiting. For example, your home is about to be foreclosed, your car repossessed, your wages significantly garnished, maybe your driver's or occupational license are days from being suspended. These are situations which might justify the added expense. However, these types of situations are rare and often there are still other, better alternatives. If you find yourself in one of these types of situations, get several opinions if possible before doing anything.
Other than the few extreme situations where you need or must file bankruptcy now, its almost always better to wait. Whether it be me or another attorney, most good attorneys will let you make small monthly payments until your case is paid. In the end this will cost you far less than a "$0 Down" scheme. In the meantime, once you've hired a bankruptcy attorney, you can refer all your creditors to him. This alone should stop the harassing phone calls and usually any planned legal actions against you. If you've been making payments to creditors, you can usually stop (but don't without consulting a lawyer first) and use the money you save to pay for your bankruptcy.
WHY I WILL NEVER FILE A $0 DOWN BANKRUPTCY
Under current law, I question the legality of "No Money Down" Chapter 7 bankruptcy in the Central District of California. Regardless, attorneys are ethically and legally required to advise clients with their clients' best interests in mind. In my opinion, its a rare case when "$0 Down" benefits the client. This scheme is only profitable because of the excess fees that can be charged and then sold off to third-party companies. In fact, it is these finance companies that are pushing the "$0 Down" scheme. They are marketing this business plan to lawyers around the country, teaching attorneys how to do this, and providing them the forms and advice on how best to navigate this grey area of bankruptcy law.
This practice is not favored by the majority of Courts or the Office of the United States Trustee and these companies often promise to defend bankruptcy attorneys if they get in trouble. "No Money Down" attorneys are being scrutinized across the country. When they get scrutinized, their cases get looked at more closely. And while I do everything by the book, I don't want to invite extra attention to my clients affairs to make a few extra bucks. I, like most consumer bankruptcy attorneys, chose this area of the law because we can significantly improve people's lives for very little cost. This practice is immensely rewarding, but among the least profitable. I, like most of my colleagues, will not push a "$0 Down" scheme to increase my profits at the expense of my clients' financial well-being.
*Here in the counties of Los Angeles, Orange, Riverside, and San Bernardino, Local Bankruptcy Rule 2090-1 (a)(3) requires attorneys who agree to provide services to a debtor to, at a minimum, prepare their bankruptcy petition and schedules and to attend their bankruptcy 341a meeting of creditors (or arrange for another competent attorney to so attend). For many, if not the majority, of Chapter 7 cases, this is all that's required. If you hire a "$0 Down" attorney here, I believe (and this is just my opinion, which could be wrong) your attorney has a duty to inform you that he or she is required to file the remainder of your bankruptcy petition and attend your hearing regardless of whether you pay them a nickel more or sign their fee agreement. How many attorneys do this, I do not know, but I have my suspicions.