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Can I Get Attorney Fees in Bankruptcy Disputes?

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attorney fees in bankruptcy

Creditors Are Unlikely to Make You Pay their Attorney Fees in Bankruptcy Court

Many an attorney primarily accustomed to practicing in Michigan state courts has stepped into US Bankruptcy Court on behalf of a creditor or an ex-spouse expecting to be able to walk away with an award from the Bankruptcy Judge for their fees only to be disappointed. 

The Hilla Law Firm has had to educate non-bankruptcy lawyers of the lack of likelihood a number of times and has never lost the dispute on behalf of a bankruptcy filer.

Yes, creditors, if you think you have a good argument that a bankruptcy filer has committed fraud, you may win that discussion and the debt may be found to be non-dischargeable by a Bankruptcy Court judge—but don’t expect your attorney fees to be paid by that filer.

Your client needs to pay your bill.

Why?

The American Rule Applies in Bankruptcy Proceedings

As noted recently by the Bankruptcy Court of the District Maryland, something called “The American Rule” applies in Bankruptcy Court.

In a case called In Re Nozary, the court in Maryland ruled that a creditor contesting the discharge a of debt it was owed by Nozary could not be awarded fees for the reason that this Rule applies in bankruptcy proceedings. 

The American rules states (as articulated by the US Supreme Court in Alyeska Pipeline Service Company v. Wilderness Society, 421 U.S. 240) that each party must bear its own litigation expenses unless a statute authorizes the shifting of those expenses to another party. 

The Bankruptcy Code does not authorize any such shifting of expenses. Each party pays its own way. If creditors want to object to the discharge of their debt, they will have to file an “adversary proceeding” (lawsuit within the bankruptcy case) seeking to have that debt excepted from discharge.

Attorney Fees Possible By Way of Sanctions Awards

That all said, it is possible to recover funds from a party in Bankruptcy Court by way of an award of sanctions. That is, monetary (or other) damages awarded by the court because a party has engaged in bad behavior of one sort or another.

Rule 11 of the Federal Rules of Civil Procedure (incorporated into the Bankruptcy Rules of Procedure as Rule 9011) allow for monetary sanctions for the filing of papers or pleadings in the case for an improper purpose or to harass or delay the proceedings, as well as under other related circumstances. In short, this Rule allows sanctions for the misbehavior of parties’ attorneys (or the parties themselves, if acting pro se, without an attorney).

Another Federal statute, 28 USC §1927, allows for attorney fees and costs to be awarded when a party “multiplies the proceedings” “unreasonably and vexatiously.”

Section 105 of the US Bankruptcy Code allows a Bankruptcy Judge to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title,” particularly to prevent an abuse of process. However, particularly here in the Eastern District of Michigan, Bankruptcy Judges do not appear to actually recognize that this provision exists (and certainly not for the benefit of debtors in bankruptcy.)

Attorney Fees in Bankruptcy: The Bottom Line

The bottom line is that a person who files for Chapter 7 or Chapter 13 bankruptcy generally does not need to have an unreasonable fear of being found liable to pay attorneys fees of their creditors in Bankruptcy Court, so long as they have retained an experienced Michigan Bankruptcy Attorney to assist them—and so long as they give that attorney all of the information and documentation requested. Honesty keeps you safe in bankruptcy every time.

Creditors, meanwhile, who are unhappy with the bankruptcy filing will need to make a business decision as to whether the costs of litigation are really worth their while.

If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.

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