First let us establish what an asset Chapter 7 bankruptcy case is. An asset Chapter 7 bankruptcy case means that there are assets that cannot be exempted from the bankruptcy estate and creditors are entitled to the value of these unexempt assets. The trustee assigned to the case will administer the bankruptcy estate for the benefit of creditors.
So what is the argument against filing an asset Chapter 7 bankruptcy case? The issue is what is in the best interest of creditors, or those who are owed money? Let's say the assets available to creditors' totals about $20,000. The trustee will receive 25% of the first $5,000; 10% of the next $45,000; 5% of the next $950,000; and 3% of the balance. This is a sliding scale. So an estate totaling $20,000 the Chapter 7 trustee will get approximately $3,500. These fees are statutory. In contrast a typical Chapter 13 trustee will receive about 10% of the estate for administering the case depending upon the jurisdiction. So if the estate totals $20,000, the Chapter 13 trustee will receive approximately $2,000 for administering the estate.
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So what is the problem here? There is not a huge difference in the trustee fees right? Well, in the Chapter 7 case the trustee will most likely hire an attorney to assist with the case. Most attorneys that work for trustee's charge anywhere from $300 to $600 an hour. If the attorney for the Chapter 7 trustee spends a mere 10 hours on the case in the example above, the attorney for the Chapter 7 trustee would receive around 25% of the total estate of $20,000. So the Chapter 7 trustee gets about $3,500 plus their attorney fees of $5,000 equals $8,500 in fees. This represents almost half of the money available to creditors. In contract the Chapter 13 trustee only receives about $2,000 total. What is in the best interest of the creditors then?
To be fair, most bankruptcy attorneys must charge higher fees for a Chapter 13 given the additional work that is required. So the bankruptcy attorney fees in theory could equal what the professional fees charged in a "7". But most jurisdictions cap what can be charged for a basic Chapter 13 case. These caps can vary widely depending upon the jurisdiction. Also to be fair, some Chapter 7 cases absolutely need the trustee to hire an attorney to help administer the bankruptcy estate. This is especially true when there are issues regarding the value of assets and what assets are part of the bankruptcy estate or not. Recent there has been news from major news organizations about the amount bankruptcy professionals charge in Chapter 11 reorganization cases. Some of the hourly rates are as high as $1,000 an hour. It is hard to balance what is in the best interest of creditors, especially when most creditors do not participate in small asset Chapter 7 cases and Chapter 13 cases.
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