US Department of Justice makes first overhaul of bankruptcy billing in 17 years

On Tuesday, the US Department of Justice finalized guidelines for the first comprehensive revamp of bankruptcy billing done in almost 2 decades. Under the new guidelines, bankruptcy lawyers will have to make new disclosures on how they bill clients. Now, from November 1, bankruptcy lawyers will need to provide tentative budgets and would have to justify any increases in hourly rates.

However, increases in hourly rates that are linked to promotions of associates are excluded from disclosure though there is no blanket exemption. The U.S. Trustee warned, "applicants should not attempt to characterize actual rate increases that are unrelated to an attorney's advancing seniority and promotion as 'step increases' in an effort to thwart meaningful disclosure or billing discipline."

Rising legal costs in bankruptcy cases have recently come under scrutiny both from regulators and activists compelling authorities to make the first update to fee guidelines for bankruptcy lawyers since 1996.

In many cases, lawyer's fees in bankruptcy cases remain a controversial issue, because bankruptcy advisers, litigators, and other legal costs are paid out of the bankrupt company's estate ahead of others. This means, more money for lawyers and legal costs equates less money for creditors of the company.

Tony West, the US acting associate Atty. Gen. said on Tuesday, "The costs of bankruptcy fall on the creditors and employees of the debtor companies."

According to the US Department of Justice the new guidelines have been made to ensure that the rates of legal work in bankruptcy matters matches ongoing rates for legal work outside of bankruptcy. The guidelines issued on Tuesday are meant only for lawyers and not for financial advisers or accountants.

The new guidelines require bankruptcy lawyers to disclose their methods of arriving at rates and to justify any increase in rates. Lawyers would also be required to provide a rough budget to the Trustee, and may require providing explanations if actual bills exceed submitted budgets by more than 10 percent.

It is not mandatory for the courts to implement the new guidelines ruled out by the US Trustee Program, which is the bankruptcy watchdog of the US Department of Justice. Also, the new guidelines would be applicable only to bankruptcy cases for companies having more than $50 million in both assets and liabilities. However, conventionally, bankruptcy courts have followed such guidelines.

Bankruptcy remains a very specialized area for lawyers and bankruptcy attorneys can receive $1000 or higher per hour.