Vance and Corinne Cooper
9 Nine Traps and One 1 Slap:
Attorney Liability under the New Bankruptcy Law
Nine Traps and One Slap: Attorney Liability under the New Bankruptcy Law
by Catherine E. Vance and Corinne Cooper* A scene from Oliver Stone’s Platoon: A Viet Cong bunker is discovered and must be searched. Two soldiers carefully enter, with weapons drawn. No enemy soldiers are present, so the soldiers look around and discover a small box. Wary of a booby trap, one soldier opens the lid very, very slowly. It’s not rigged. Relieved, the soldier sorts through the box’s contents. “These are important papers,” he says to his buddy and as they prepare to leave the bunker, the soldier picks up the box to take it with him. Then it explodes. Like the box, the misnamed Bankruptcy Abuse Prevention and Consumer Protection Act1 is waiting to take you down.2
Copyright 2005 Corinne Cooper and Catherine Vance. All Rights Reserved. *Catherine E. Vance is Vice President of Research and Policy at Development Specialists, Inc., resident in the firm’s Columbus, Ohio, office. Ms. Vance has written extensively on bankruptcy and insolvency matters and, prior to joining DSI, served as the Commercial Law League of America’s legal writer and analyst, acquiring a thorough understanding of bankruptcy legislation as eventually enacted in 2005. Ms. Vance received her Bachelor’s Degree, magna cum laude, from the Ohio State University and is a graduate of the Ohio State University College of Law. Corinne Cooper is a professor emerita of law who taught contracts and UCC for almost 20 years. She is moderator of the attorney liability listserv. She is editor of THE PORTABLE UCC (4th ed. 2004) and NEW ARTICLE 9 (2nd ed. 1999) and of the book, ATTORNEY LIABILITY IN BANKRUPTCY, (forthcoming 2006). She is the principal of Professional Presence, a communication consulting company, www.ProfessionalPresence.com. She is a member of the American Law Institute. All outrageous or offensive opinions in this article are Professor Cooper’s, not her co-author’s. 1 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23. The Act is euphemistically titled, “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.” Some opponents of the law refer to it as the Bankruptcy Act Reform Fiasco, or BARF. The editors of this publication have asked that we use “BAPCPA” to be consistent with the usage in other articles included in this issue. Each reference hereafter to a section of BAPCPA will include the provision to be codified. All references to the Code mean the Bankruptcy Code, which is codified at Title 11 of the
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We’ve known it for eight years. It’s a behemoth of bad policy, an illiteracy of ill-conceived provisions, an underbelly of unintended consequences. The problems we know about are bad enough. The problems we haven’t yet discovered are likely to be worse. This article cannot hope to alert lawyers to all the landmines of liability. We point out just enough to terrify you so that you will peruse its provisions with the intensity of a soldier in a minefield.3 We present you here with nine traps: provisions of the Act that do terrible things to bankruptcy attorneys (and not just debtors’ attorneys), some of them almost certainly unintentional. We could have found more, but we were on a tight deadline. Our final section is a slap in the face: a direct assault by Congress on consumer debtors’ attorneys and the clients to whom they are dedicated that is even more egregious—and overt—than the traps in the Act.
Handy Dandy BAPCPA Reference Table As we go to print, BAPCPA is enacted but most of its provisions are not yet effective. To avoid confusion, we use different language to refer to the Act and the Code. Citations to the Act read, “BAPCPA Section ###” Citations to the Code read, “Code § ###” This chart will help you keep track of the relevant Code sections amended by the Act. Act Section 102 Section 203 Section 226 Section 227 Section228 Section 229 Code § 707(b) § 524 § 101 § 526 § 527 § 528 Provision Dismissal or Conversion of Chapter 7 Case Reaffirmation Agreements Definitions Restrictions on Debt Relief Agencies Disclosures Requirements for Debt Relief Agencies
I. BUT FIRST, A LITTLE HISTORY Before being enacted in the 109th Congress, BAPCPA was introduced four times, and its genesis traces back nearly a decade to the work of the National Bankruptcy Review Commission. Space considerations prevent us from detailing BAPCPA’s long and storied history here.4 Yet there are inUnited States Code. One suggestion to our readers: as you read this article, having available a copy of the Banrkuptcy Code redlined to show BAPCPA amendments will probably prove useful. 2 The authors mean no disrespect. But as the text will make clear, Congress has declared war on bankruptcy attorneys in this Act, not only those who represent consumer debtors, but those representing trustees and consumer creditors as well. 3 When you do, we hope you will e-mail us at UCC2@mac.com with your newly-discovered liability traps, so we can include them in our forthcoming book, ATTORNEY LIABILITY IN BANKRUPTCY (Corinne Cooper ed. forthcoming 2006) with proper attribution, of course! 4 See id. for our complete discussion of BAPCPA’s history.
sights to be found in the history. Like much of BAPCPA, the philosophical underpinnings of the attorney liability provisions are rooted in the minority report issued by Commission members. In its final Report,5 the Commission noted that there “is evidence of questionable use of the bankruptcy process by both debtors and creditors,”6 and it made recommendations to remedy problems on both sides. A minority of Commission members focused exclusively on debtors and their attorneys, portraying debtors’ attorneys as willing participants in legalized theft by their clients who must be forced to submit honest pleadings on penalty of personal liability. Diabolically, they are also unethical scoundrels who take their initial fee and run off, leaving their poor clients without adequate representation, or worse, provide the necessary representation and then have the audacity to expect payment for it prior to the pre-existing creditors of the debtor.7 The minority dismissed the Commission recommendations on false claims and other abuses by creditors,8 stating bluntly, “There is no need for redundant rules to deter false claims.”9 Beginning in the 105th Congress, when BAPCPA was first introduced, nearly every version of the bill reflected the views of the Commission’s minority. Although the language has changed slightly over time, BAPCPA consistently represented the view that debtors’ attorneys were simultaneously in league with, and a threat to, their clients, with no similar distrust of creditors or their lawyers. The version of BAPCPA that was enacted is no exception.
5 1 Nat’l Bankr. Review Comm’n, Final Report: Bankruptcy: The Next Twenty Years (1997) [hereinafter “Commission Report”]. 6 7
Id. at 81.
See generally Hon. Edith H. Jones & James I. Shephard, Recommendations for Reform of Consumer Bankruptcy Law by Four Dissenting Commissioners, Commission Report, id. at chapter 5 [hereinafter “Minority Report”]. Commissioners John A. Gose and Jeffrey J. Hartley concurred with many of the substantive proposals in the Minority Report but did not write separately. Id.
According to the Commission Report: Some creditors also have found ways to take advantage of the system. Abusive post-bankruptcy debt collection, documented in the courts and reported widely in the news media, led the Commission to recommend banning the reaffirmation of unsecured debt and providing more supervision for the reaffirmation of secured debt. The 1970 Commission recommended similar restrictions that might have avoided many of the current problems. Some creditors reportedly threaten to bring unfounded non-dischargeability actions that debtors cannot afford to defend as another way to collect dischargeable debt through reaffirmations. They would lose this option with the Commission’s recommendation to set clear dischargeability rules for credit card debt.
Commission Report, supra note 5, at 81.
Minority Report, supra note 7, at 8.
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II. A SHORT OVERVIEW OF ATTORNEY LIABILITY UNDER BAPCPA This is an overview of the attorney liability provisions enacted as part of BAPCPA. This is not intended to be a comprehensive discussion of them, but merely an introduction; we’ll discuss several provisions in the 9 Traps below. A. CERTIFICATION AND SANCTIONS BANKRUPTCY CASES
Section 102 is BAPCPA’s most prominent feature because of its muchdiscussed “means test” for consumers filing for relief under Chapter 7. Section 102 also contains some nasty provisions directed at attorneys who represent consumer debtors in Chapter 7 cases.10 These provisions: • alter, for consumer debtors’ attorneys, the certifications made by virtue of their signatures on bankruptcy documents, and • permit the imposition of unprecedented sanctions against these attorneys.11 Under Rule 9011 of the Federal Rules of Bankruptcy Procedure (largely the same as Rule 11 of the Federal Rules of Civil Procedure), all attorneys make certain assurances by signing any document submitted to the court.12 These rules are designed to prevent frivolous or bad faith filings; they require attorneys to conduct reasonable inquiries into the facts and law in their filings, and to file them only for a proper purpose.13 Under BAPCPA, the signature of the debtor’s attorney takes on greater significance through two distinct provisions: The signature of an attorney on a petition, pleading, or written motion shall constitute a certification that the attorney has (i) performed a reasonable investigation into the circumstances that gave rise to the petition, pleading, or written motion; and (ii) determined that the petition, pleading, or written motion (I) is well grounded in fact; and (II) is warranted by existing law or a good faith argument for the extension, modification, or reversal of
There’s also a little-noticed provision dealing with creditors in Section 102. See Trap #6 infra. See BAPCPA Section 102(a)(2)(C) adding 11 U.S.C. § 707(b)(4) (2005). 12 FED. R. BANKR. P. 9011; FED. R. CIV. P. 11. 13 Id.
United States stated. Attorneys and the Bankruptcy Reform Act of 2001: Understanding the Imposition of Sanctions Against Debtors’ Counsel. amending Code § 707(b) by adding paragraph (4)(C). Zealous advocacy should not be unduly chilled. Catherine E. at 265. 18 BAPCPA Section 102(a)(2)(C). All doubt should be resolved in favor of the signor. amending Code § 707(b) by adding paragraph (4)(B). testing the signor’s conduct by examining what was reasonable for counsel to believe at the time the document was presented. or his attorney. including defining what it means to conduct a “reasonable investigation” or when an attorney has “knowledge” of “incorrect” information after an “inquiry.J. Even the probability of losing is not enough. by referring specifically and only to the attorney. BAPCPA takes the client out of the fight. 106 COM. See generally.” Indeed. 15 See BAPCPA Section 102(a)(2)(C) adding Code § 707 (b)(4). supra note 14. As Ms. Vance noted in her 2001 article on the attorney liability provisions:
Neither Rule 9011 nor Rule 11 has been interpreted to penalize an unsuccessful litigant.14
The reference to “paragraph (1)” means that the filing is not an abuse as defined by the means test and good faith requirement in Section 102. As the court in Taylor v. it’s crystal clear that BAPCPA creates a significant risk of liability for consumer bankruptcy attorneys faced by no other attorney.17 Section 102 also has a generalized provision allowing the court to assess a civil penalty if it finds the attorney violated Rule 9011. The courts will set the standards of conduct that apply to these two provisions. amending Code § 707(b) by adding paragraph (4)(D). for the lack of success alone. like checking account balances.16 The schedules contain information about the debtor’s assets and liabilities.18 The goal of this
14 BAPCPA Section 102(a)(2)(C). 17 To make matters worse.” Still. impossible. 241 (2001). This provision creates an entirely new potential for attorney liability: representing a losing debtor!15 The second certification says: The signature of an attorney on the petition shall constitute a certification that the attorney has no knowledge after an inquiry that the information in the schedules filed with such petition is incorrect. is in a constant state of flux. in some cases. when such inquiry merely reveals a likelihood of losing. L. and there should be a healthy respect for the resultant contribution to the continued evolution of the law. courts have been mindful to avoid using the wisdom of hindsight. although “sanctions are clearly appropriate whenever a reasonable inquiry has or would have indicated that the legal or factual basis of the claim is untenable. the attorney probably can’t bill time spent litigating the sanctions issues because.2005)
NINE TRAPS existing law and does not constitute an abuse under paragraph (1). Verifying that information is sure to be costly and. some of which. Vance. a lawyer does not violate Rule 11 by maintaining the claim.
. 16 BAPCPA Section 102(a)(2)(C). Vance.
B. REGULATING CONSUMER DEBTORS’ ATTORNEYS AGENCIES”
BAPCPA redefines debtors’ attorneys as “debt relief agencies” and dramatically regulates an attorney’s practice.” Section 102 of BAPCPA recasts abuse from a concept that looks at the debtor’s conduct and purpose in filing for Chapter 7 relief into one premised on need. if there’s any good news. it’s the change to a discretionary standard. if they consist of personal guaranties of business obligations).000. which is elaborately set forth in BAPCPA’s means test. BAPCPA creates three important definitions: • “Assisted Person” [“AP”] is any person whose debts consist primarily of consumer debts. from “shall” to “may. some of those cases will fall outside of the provision if the debts are not primarily consumer debts (for example. It’s worth mentioning that this provision once mandated sanctions against the attorney. but to the attorney alone.21 • “Bankruptcy Assistance” includes any goods or services
19 This change was the result of intense lobbying by the American Bar Association.20 Specifically. or whose assets are in an asset protection trust) will fall into the scope of the DRA provisions. amending Code § 101 to add Subsection (3). One can only assume that the attorney who represented Bowie Kuhn does not advertise.288
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(Vol. 20 See BAPCPA Section 102(a)(2)(C). It is beyond the purview of this article. some wealthy debtors (who have not moved or committed fraud. to note in passing that the definition of “assisted person” appears to be a failed attempt to identify small consumer bankruptcies.
. and whose non-exempt assets are worth less than $150.” as defined in the remainder of BAPCPA Section 102. It’s only one word. 21 BAPCPA Section 226(a)(1). but some will undoubtedly remain. but with a remarkable distinction—the fees are shifted not to the debtor. mandating what the attorney must do and what the attorney is forbidden from doing with no regard for the best interests of the client. and • a violation of Rule 9011 on the part of the attorney the court may order the attorney to reimburse the trustee all reasonable costs and fees associated with the motion to dismiss. substantial wealth can still be shielded through state exemptions (even with BAPCPA’s homestead exemption cap) and asset protection trust statutes. To accomplish its mission. Even with the changes to the unlimited homestead. if the court finds that the bankruptcy filing constituted: • abuse on the part of the debtor.” but an important one. amending Code § 707(b) by adding paragraph (4)(A). Code § 707(b) already permits dismissal of a consumer bankruptcy case that is a “substantial abuse.19 Sanctions may also be imposed when the trustee has successfully prosecuted a motion to dismiss the debtor’s case based on “abuse. This provision was also mandatory in earlier versions of BAPCPA. In fact. from advertising to representation. At its heart. given that a violation of Rule 9011 already provides a basis for imposing sanctions. thus limiting the reach of these provisions to lawyers who represent poorer debtors. but nonetheless interesting. 79
provision is far from clear. this provision is little more than a fee-shifting statute. Of course.
NINE TRAPS sold or otherwise provided22 to an assisted person. See BAPCPA Section 226(a)(2).23 • “Debt Relief Agency” is any person who provides bankruptcy assistance to an AP in return for the payment of money or other valuable consideration. debt collection pressure. or who is a bankruptcy petition preparer under Section 110 of the Code. whether or not Chapter 13 is specifically mentioned. or eviction. document preparation or filing. or attendance at a creditors’ meeting or the like. If the attorney’s advertisement is directed to the general public and • includes a description of bankruptcy assistance. or an inability to pay any consumer debt. BAPCPA Section 229(a) adding Code § 528(b)(1).24
Some folks are expressly (and inexplicably. The first is advertising.
. these definitions bring into play a hideous array of new restrictions that apply in three main areas. or • offers assistance with credit defaults.” Trap #1 below discusses the counterintuitive and even dangerous results these definitions and their exceptions produce when determining who is and isn’t a “debt relief agency.” For debtors’ attorneys.25 or • uses language that could lead a reasonable consumer to believe that debt counseling is being offered when in fact the services are directed to providing bankruptcy assistance. in connection with a case or proceeding under the Bankruptcy Code. 25 This includes assistance in connection with a Chapter 13 plan. excessive debt. 24 BAPCPA Section 226(a)(3). such as legal advice or representation. amending Code § 101 to add subsection (12A). amending Code § 101 to add subsection (4A). in some cases) excluded from BAPCPA’s definition of “debt relief agency. Attorney Advertising Any attorney who fits the definition of a “debt relief agency” under BAPCPA must comply with its regulation of advertisements. The second and third are flip sides of the communication coin: attorneys are prohibited from making some statements and forced to make others. 1. mortgage foreclosures. then the attorney is required to disclose that the services relate to bankruptcy and to include this statement clearly and conspicuously in the advertisement:
That “otherwise provided” language is ripe to cause trouble. See Trap #1 infra.
BAPCPA also mandates a disclosure statement that is very much like those required under federal consumer protection statutes.29 Fourth. 28 See BAPCPA Section 228(a) adding Code § 527(a)(2). statutory penalties include both the ability of the client to avoid the contract—but enforce it against the attorney—and the power of state Attorneys General to take action against attorneys. the attorney must provide “reasonably sufficient information” that. It’s discussed at length in Trap #2 below. 30 See BAPCPA Section 228(a) adding Code § 527(b). requires the following disclosure: “information that an assisted person provides during their case may be audited pursuant to this title. which. subsections (a)(3)-(4) and (b). 32 See BAPCPA Section 227(a) adding Code § 526(b) and (c). which every lawyer should do anyway.
. the attorney is also required to advise the client how to perform tasks—such as valuation of assets—that have perplexed attorneys and courts alike for some time.” or makes prohibited statements (discussed below). like the second notice. 31 See BAPCPA Section 228(a) adding Code § 527(c). 2. See Trap #5 infra. The first notice must provide descriptions of the relief available under the different chapters of the Bankruptcy Code.” 29 BAPCPA Section 229(a) adding Code § 528(a)(1) and (2). and that failure to provide such information may result in dismissal of the case under this title or other sanction. which we discuss more in Trap #5 below. We help people file for bankruptcy relief under the Bankruptcy Code.28 Third.290
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(Vol. including a criminal sanction. under subparagraph (D). Here.27 The second notice. some of which is actually inconsistent with the law. the attorney must provide the client with a written contract. Required Disclosures No fewer than five disclosures are required by the attorney to the client—”assisted person” in the new bankruptcy parlance—under BAPCPA. it’s confusing. As in the first notice. sets out specific “advice” the attorney must give.31 If the attorney fails to provide any of these five “disclosures. See Trap #2 infra for a discussion of this provision. but there is plenty more to say about it.30 Finally. the debtor’s potential criminal liability must be mentioned. and must also include language designed to scare the debtor about criminal liability and Attorney General investigations. 79
“We are a debt relief agency. The content of the notice is governed by Code § 342(b) as amended by BAPCPA Section 104. It may seem simple on its face. 27 See BAPCPA Section 228(a) adding Code § 527(a)(1) and BAPCPA Section 315(b) adding Code § 521(a)(1)(B)(iii).”26 This provision is not only offensive. is inconsistent with what the law actually requires.32
26 BAPCPA Section 229(a) adding Code § 528.
. and to acknowledge that there is a presumption of undue hardship under the statute.2005)
NINE TRAPS 3. that it’s okay to borrow the money needed to pay the legal expenses of the bankruptcy. amending Code § 524 by adding subsection (k)(5). preclude what could be the best legal advice for a particular client. attorneys can’t force their clients to do anything. But some prohibitions are also foolhardy—and dangerous. Prohibited Statements
The flip side of the required statements is BAPCPA’s prohibition on what an attorney can say or do. even if doing so flies in the face of the attorney’s sound legal advice. that is the client’s decision. But BAPCPA disregards this reality and goes a step further by requiring the attorney to certify that the debtor—who has a
BAPCPA Section 227(a) adding Code § 526(a)(1). REQUIRING ATTORNEYS TO CERTIFY THE DEBTOR’S ABILITY PAY IN A REAFFIRMATION AGREEMENT
Among the substantial changes BAPCPA makes to reaffirmation agreements is a bizarre requirement for debtors’ attorneys.37 Obviously. and create thresholds for liability that are frightfully low. However. See Trap #4 infra. this creates a serious problem for the attorney. it does require the attorney—in the same document—to certify that the reaffirmation does not impose an undue hardship on the debtor. For example. In addition to the certification that has long been required in every reaffirmation agreement. See id. This assurance does not apply to a reaffirmation agreement entered into with a credit union.36 BAPCPA provides: If a presumption of undue hardship has been established with respect to [a reaffirmation] agreement. In some respects. amending Code § 524 by adding subsection (k)(5)(B). these prohibitions are unnecessary reiterations of ethics and disciplinary rules. The attorney can’t even tell the client.33 which an attorney isn’t allowed to do under any circumstances. After all. BAPCPA says an attorney can’t advise a debtor to make false statements in the bankruptcy papers. 36 BAPCPA Section 203(a). amending Code § 524 by adding subsection (k)(6)(A).34 C.38 If the client wants to reaffirm a debt. if the agreement triggers the statutory presumption of hardship. the debtor is able to make the payment.35 the attorney has to go further. such certification shall state that in the opinion of the attorney. but not precisely a trap because there’s nothing hidden in the language of the statute. See BAPCPA Section 227(a) adding Code § 526(a)(2). and give assurance that the client can perform the promise to pay the debt. whose financial distress has become so dire that he sought out the attorney’s help. 35 See BAPCPA Section 203(a). 37 BAPCPA Section 203(a)(2). They reach “prospective assisted persons” in addition to actual clients. 38 This is a policy problem and a source of potential liability.
Who’s Out? The statute provides some guidance. plain language usually prevails. in a battle like this.40 • “Debt relief agency” means any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration.000. The answer lies in three definitions provided in Code § 101: • “Assisted person” means any person whose debts consist primarily of consumer debts and the value of whose nonexempt property is less than $150.39 • “Bankruptcy assistance” means any goods or services sold or otherwise provided to an assisted person with the express or implied purpose of providing information. TRAP #1: POOF! YOU’RE A “DEBT RELIEF AGENCY” (BUT AMERIDEBT ISN’T) The first question is: Who is a “debt relief agency”? That simple question produces some surprising results. III. 41 BAPCPA Section 226(a)(3) adding Code § 101(12A). But the language of the statute contains no such limitation. advice.
.41 What’s missing from all these definitions? Any reference to a bankruptcy debtor! Common sense would suggest that these provisions apply only to attorneys and others who assist consumers who are in debt and looking at bankruptcy as an option to get out. . counsel. 1. or attendance at a creditors’ meeting or appearing in a case or proceeding on behalf of another or providing legal representation with respect to a case or proceeding under this title. or filing. or who is a bankruptcy petition preparer under section 110 . BAPCPA Section 226(a)(2) adding Code § 101(4A). document preparation. 79
demonstrated inability to pay a reaffirmed debt—is somehow able to pay it. . And the penalty for being wrong could be severe: liability to the creditor for what the debtor owes. and to petition preparers. The definition of “debt relief agency” [DRA] specifically excludes:
BAPCPA Section 226(a). LET’S TACKLE THE TRAPS. amending Code § 101(3). Everyone who has followed this law knows these provisions were intended to apply to debtors’ counsel.292
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(Vol. The plain language defies common sense—and common understanding—but unfortunately.
This raises an interesting question: can debtors’ attorneys opt out of the DRA provisions by creating non-profits that pay them big salaries? Courts aren’t likely to condone a deliberate attempt to evade the impact of the law. it’s hard to argue that they are trying to evade the statute. if the creditor is assisting in the restructuring of that creditor’s debt • a depository institution or credit union • an author. but not as an independent legal entity? If they have a sliding scale for clients. or other institutional creditor.44 AmeriDebt.46
Id. adversarial role on behalf of a bank. Bankruptcy clinics that charge anything for their assistance should clarify their status as non-profit entities before the statute goes into effect. 46 BAPCPA Section 226(a) adding Code § 101(12A). Who’s in? You’re a DRA if you: • • • •
are a person who provides “bankruptcy assistance” to an “assisted person” for money or other consideration. 44 See BAPCPA Section 226(a) adding Code § 101(12A)(B). or seller of works subject to copyright protection (thank goodness!)42
One unanswered question is whether creditors’ attorneys are excluded.43 Another specific exception is that those entities that we normally think of as “debt relief agencies”—that is. If they don’t charge. and institutional creditors cannot be “assisted persons. there’s no problem. this may trigger DRA coverage. 45 See our discussion of this outrageous result in the Slap Section infra. not the debtor. If they are acting in their traditional. credit card issuer.45 2. Suppose they operate within a law school. institutional or not. publisher. would be exempt due to its non-profit status. would be excluded if the creditor is working with the debtor to get that creditor’s debt restructured. employees. directors. they will certainly be excluded because they are providing assistance to the creditor. BAPCPA Section 226(a) adding Code § 101(12A)(C).2005)
NINE TRAPS • officers. because of the specific exception for that situation.
. Are clinics set up to help debtors who cannot find counsel also exempt from this provision? The answer for legitimate clinics is complex. for example. or agents of persons (including petition preparers) providing assistance • 501(c)(3) organizations • a creditor of an assisted person. credit counselors and other organizations that purport to help people deal with their creditors and restructure their debts—are likely to be excluded by the exception for non-profits.” Attorneys representing any creditor. once one of the nation’s largest credit counselors. If they were operating as non-profits before BAPCPA was enacted. as many clinics do.
. so long as Mom’s debts and assets meet the “assisted person” standard.” as is representing her against the trustee. 79
If any of the four elements don’t apply to you. Now. How will this affect me?” Like most folks. If the attorney realizes the problem and declines to represent her. and where there may never be one. The “debt relief agency” definition would apply. or counseling Mom about the complaint is “bankruptcy assistance. But isn’t the client a prospective assisted person? Here and elsewhere. it’s the debtor’s mother who shows up at the attorney’s office because the trustee served her with a complaint to recover her Mother’s Day gift as a preference or a fraudulent transfer. . Informing. you are not a “debt relief agency” and you are relieved of the many obligations and restrictions placed on these entities. • Files a complaint to determine the dischargeability of any of the divorce debts. and her non-exempt assets are worth less than $150. This situation gets surprisingly complex. advising. this woman’s own debts are primarily consumer obligations. suppose the attorney: • Looks over the property and debt allocation in the divorce decree and tells the woman which items might be excepted from the ex-husband’s discharge.48 Who else may be swept up in its terms? Imagine a woman goes to an attorney and says.000. Suppose all the attorney says to the woman is.47 It’s safe to assume debtors’ attorneys are included and petition preparers unquestionably are included. “My ex-husband has just filed for bankruptcy. • Attends the ex-husband’s § 341 meeting of creditors. Congress may have exceeded its constitutional authority. Under the plain language of the definitions. with the express or implied purpose of providing information. the woman is an “assisted person” and the attorney has rendered “bankruptcy assistance. See Trap #7 infra on pro bono practice. because they don’t receive a fee. to the extent that BAPCPA attempts to regulate an attorney-client relationship where no bankruptcy has been filed. No money changes hands yet.294
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(Vol. 48 See BAPCPA Section 226(a)(3) adding Code § 101(12A).” This attorney is a “debt relief agency” and must comply with all the mandates of Code §§ 526528. so maybe the DRA definition hasn’t kicked in. “Let me look over the papers and I’ll get back to you. no consideration has been paid. [or] counsel. including the certification and reaffirmation provisions. advice.” That might be enough to become a DRA. . For example.”49 Suppose instead of the debtor’s ex-wife. the definition of “bankruptcy assistance” includes “services sold or otherwise provided . 49 BAPCPA Section 226(a) adding Code § 101(4A). bankruptcy clinics that provide free advice to debtors are not included in this provision.
47 But they are bound by other provisions of the Act.
Our process generally involves certain simple steps to accomplish the end result which is the preparation.” We The People (“WTP”) calls itself “the national leader in legal document preparation services. the filing of a legal action: 1.” Just to drive home the point. This is all patently ridiculous. let’s take a look at a company called “We The People. and where appropriate. We are not trying to argue that this is the right result. It doesn’t clearly identify its intended victims and. Let’s hope that the courts can apply the magic descriptor “absurd” to results like these and free themselves from the constraints of a “plain language” regime that elevates words over practicalities. In or Out – Who Knows? Between the margins of who’s in and who’s out of the “debt relief agency” definition there is a lot of gray. common sense. Purchase – Once the decision is made to proceed with
. look for DRA application triggers): We The People provides a broad range of services that offer an economically attractive alternative to anyone who has a need to handle a legal action that does not require the advice of an attorney. But that’s the problem with the poorly-written language of the statute.” without more.2005)
Lawyers who do no more than fill out a proof of claim form on behalf of their consumer clients could get swept into the torture chamber Congress has created. imagine one last scenario: the pharmaceutical giant Merck goes into bankruptcy.” WTP claims to provide document preparation services and offers its business as a franchise opportunity. 3. What becomes of counsel in the individual and class action suits over Vioxx? What about counsel for the creditors’ committee. To show how complicated this new area of law could become. “Document preparation. appears to be enough to constitute “bankruptcy assistance. it could trap lots of unintended victims. 2. One such franchise. the definition of “bankruptcy assistance” is broad enough to apply and the matter comes down to the nature of the claimants’ debts and the value of the claimants’ non-exempt assets. WTP Mid-Atlantic. We are best in support of customers who have a need for uncontested legal actions. and good law. having failed to name them. describes its operation as follows (as you read through it. Decide – The Customer comes to a We The People office and tells us the action he/she has decided to take. whose constituents include those individual and class action plaintiffs? Again. These range from activities as simple as preparing a bill of sale for an automobile to a divorce to that of a complex bankruptcy.
you will sign the documents and.
8. the customer purchases the service commitment for the action and we provide a workbook to be completed by the customer.
5. you will be given access to our supervising attorney. simply answer questions about the law.
4. we will handle that part of the process for you. He will not give you advice about your specific action. there are followup actions required that may cause you to use our services again. Services not Listed – Please also recognize that. Sign Documents & File – When you are satisfied with the accuracy. Completed Documents – Within a few days.296
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7. Questions – In the event that you have questions about the legal issues with respect to the action your are (sic) taking. we check it for completeness and then the workbook is sent to our paralegal department and they begin the process of preparing the forms and documents. you will need to hire an attorney. we
6. Workbook Completion – Once we have received the completed workbook. If you need more legal advice. This level of service is provided free to all our customers as a part of the forms and document preparation fee paid. we will notify you of the completion of the documents and request that you make an appointment to return to the office to review the documents for accuracy. Advice from an Attorney if Required – Should you need more complex legal advice and counsel and or legal support during your action our supervising attorney could conclude that you need the representation of an attorney. 79
3. This workbook simply documents all of the relevant facts and detailed decisions that the you (sic) must provide us so that we can prepare the appropriate forms and documents required to accomplish your desired goal. Our supervising attorney will answer simple and general questions you may have with respect to the actions. In that case you are free to either consult with another attorney or to engage our supervising attorney. even if you do not find the specific action you need to take. if a filing is required with the courts.
9. At Your Service – In some instances. or it might cause you to need further work from an attorney.
the press release states: “In essence. and gaining a fresh financial start in life.com. easyto-read guide for filing for bankruptcy. We the People.com/services. there’s only a six-month window for average Americans to get out of debt and re-chart their financial destiny through the protection of bankruptcy. 54 Id.” (May 4. They are all available to find a way to help us help you. 52 Id.2005)
NINE TRAPS probably can still help you.
. informing the world that WTP had been acquired by Dollar Financial.”53 Those financial products include “check cashing.findlaw.dfg. Americans have the power to easily file for bankruptcy on their own.wethepeoplema.com/prnewswire/20050504/04may2005094701. 2005. a different press release was issued.50
To make the whole matter more interesting. We have offices through the country and many lawyers on our staff. Press Release. It provides a step-by-step. “New Do-It-Yourself Bankruptcy Book Helps Consumers File for Bankruptcy Before Recently Enacted Federal Law Closes the Door Forever.” Here’s what we think would happen: • WTP as a document services company IS a debt relief agency. on May 4. a self-described “leading international financial services company offering a range of consumer financial products to our customers. 53 http://www.51 Noting that BAPCPA would be effective in just six months. money orders and money transfers. for perhaps the last time in our history. available at http://news. without an attorney. “Right now. without an attorney. short-term consumer loans.” written by WTP’s co-founders. That’s what ‘We The People’s Guide to Bankruptcy’ is all about. many of whom receive income on an irregular basis or from multiple employers.” “bankruptcy assistance” and “debt relief agency. This one is a no-brainer because WTP’s services make it a bankruptcy petition preparer. which is expressly included in the DRA definition.”52 Just two months before the WTP book was announced.asp. WTP announced in a press release the publication of “We The People’s Guide to Bankruptcy.”54 Now look at the definitions of “assisted person. 2005).html. • The WTP “supervising attorney” IS NOT a debt relief agency because he is an employee or agent of a bankruptcy
http://www. and gain the benefits of debt relief.” says [co-author] Ira Distenfield.
be sure to read the Slap Section infra. combined with a desire to make money. tell us)! Our point here is to demonstrate that application of the DRA provisions is going to be far from easy. but remains an employee or agent of WTP.57 Any attorney who fits the definition of a “debt relief agency” under
The authors wonder. Under BAPCPA. If you caught all these liability triggers. presumably with the assistance of the supervising attorney. the attorney IS a debt relief agency. that the customer really does need a lawyer to handle the bankruptcy. but the debtor’s obligations to all of her creditors. Dollar Financial? The answer here is tricky and will be affected by the company’s corporate structure and how WTP is treated within it. debtors’ attorneys are required by law to make several “disclosures” beginning with their advertisements. But it’s possible that Dollar Financial is a debt relief agency because it is. 57 See text accompanying notes 27-31 supra for a complete list of the required disclosures.56 TRAP #2: DROP THE YELLOW PAGES AND PUT YOUR HANDS IN THE AIR! Attorneys experienced in consumer bankruptcy cases may be shocked to learn that liability problems loom before a client walks in your office.
. providing bankruptcy assistance to assisted persons.55 • Suppose the WTP supervising attorney is engaged by the customer after it’s determined. then the DRA provisions still DO NOT apply. If the attorney takes the case independently of his WTP agency. which is the concluding section of this Article. through WTP. what about the author of the website? One last thought: If you found your sense of decency rattled by the WTP scenarios. The creditor exception doesn’t apply because Dollar Financial isn’t working out an arrangement with respect to its own debt. If the supervising attorney takes on the engagement. the possibilities for complicated arrangements like that of WTP are limited only by the human imagination. congratulations (and if you caught some we missed.298
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(Vol. although we note that there’s no exception in the DRA definition for corporate relatives. • The authors of the book ARE NOT debt relief agencies because they fit into the exception for authors of copyrighted works. You cannot even advertise your services without BAPCPA governing your behavior. 79
petition preparer and fits into one of the specific exceptions. What about WTP’s new owner.
C. directed to the general public. § 528(b)(1)(A). or inability to pay any consumer debt shall— (A) disclose clearly and conspicuously in such advertise58 This includes assistance in connection with a Chapter 13 plan. Code § 528(a) says that a debt relief agency shall: (3) clearly and conspicuously disclose in any advertisement of bankruptcy assistance services or of the benefits of bankruptcy directed to the general public (whether in general media.’ or a substantially similar statement. and (B) statements such as ‘federally supervised repayment plan’ or ‘Federal debt restructuring help’ or other similar statements that could lead a reasonable consumer to believe that debt counseling was being offered when in fact the services were directed to providing bankruptcy assistance with a chapter 13 plan or other form of bankruptcy relief under this title. and (4) clearly and conspicuously use the following statement in such advertisement: ‘We are a debt relief agency. seminars or specific mailings. though similar. provisions on advertising. 59 Both are found in BAPCPA Section 229 adding Code § 528. excessive debt. indicating that the debt relief agency provides assistance with respect to credit defaults. 60 BAPCPA Section 229(a) adding Code § 528(a)(3)-(4) and (b).59 These provisions are among the most confusing and convoluted in BAPCPA. or otherwise) that the services or benefits are with respect to bankruptcy relief under this title.58 There are two separate. (2) An advertisement.60 Code § 528(b) states: (1) An advertisement of bankruptcy assistance services or of the benefits of bankruptcy directed to the general public includes— (A) descriptions of bankruptcy assistance in connection with a chapter 13 plan whether or not chapter 13 is specifically mentioned in such advertisement.S. debt collection pressure. BAPCPA Section 229(a) adding 11 U. eviction proceedings. whether or not Chapter 13 is specifically mentioned. mortgage foreclosures.2005)
BAPCPA must comply with its regulation of advertisements of bankruptcy services. We help people file for bankruptcy relief under the Bankruptcy Code. telephonic or electronic messages.
There will be a chapter by Professor Barbara Glesner Fines in our forthcoming book on this issue.” According to Congress. but you don’t have to be one to wonder about First Amendment issues. 79
ment that the assistance may involve bankruptcy relief under this title. to this degree.63 Second. and where the assisted person is not the debtor. the regulations imposed by the [BAPCPA] are overbroad and a court is likely to find that they represent unjustified restrictions on the First Amendment expression by attorneys. [R]estrictions on consumer bankruptcy advertising would be constitutional only if the restrictions: • are justified by a government interest in preventing the significant possibility of consumer deception. CATHERINE E. we are not constitutional scholars by any stretch. . We have developed a 6-color. CORINNE COOPER.’ or a substantially similar statement. and (B) include the following statement: ‘We are a debt relief agency.62 Expect constitutional challenges of this (and other) provision mandating or prohibiting attorney speech. Can the Congress regulate. 4-column side-by-side comparison chart. We help people file for bankruptcy relief under the Bankruptcy Code. See note 3 supra.. . VANCE & BARBARA GLESNER FINES.300
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(Vol. and • are narrowly tailored. ATTORNEY LIABILITY IN BANKRUPTCY 9 (program materials from Bankruptcy Update. Without some demonstration that there is a significant risk of deception of consumers by attorneys in this field. First. sinful bankruptcy attorneys must be branded in order to warn society of their wicked ways. Here is the chart (sans color) for your perusal:
See id. the attorney-client relationship. In the interim. • advance that interest.
63 See note 49 supra. here’s what she says about this issue:
One obvious question emerges from this discussion of the attorney liability provisions. Here and elsewhere. to the extent that BAPCPA attempts to regulate attorney conduct where no bankruptcy has been filed. whether the advertising provisions violate the First Amendment. specifically.. Congress may have exceeded its constitutional authority. ABA Annual Meeting (2003)) (citations omitted).
. There’s a lot of substance to complain about as well. a field historically left to the states? And specifically. highlighting the similar language in the two provisions. are these proposals constitutional under the First Amendment? This section attempts to analyze just one part of that question. .61 This whole provision reminds us of “The Scarlet Letter. and we still can’t make sense of it. . we confess that we are not precisely clear how the two subsections interact.
relief under the Bankruptcy eviction proceedings. CAPITALIZED language describes how the disclosure must appear. excessive Code. We assistance with respect to credit help people file for bankruptcy defaults. We help people file for bankruptcy relief under the Bankruptcy Code. SMALL CAPS identify the defined term. Whether (a) and (b) are to be read together. seminars or specific mailings.” It requires that:
. or whether each is intended to address only the advertisements specifically described within it is a mystery. which describes what we call an “explicit bankruptcy ad. telephonic or electronic messages.
As you can see. mortgage foreclosures.’ or a substantially similar statement. Language in bold is the required disclosure.’ or a substantially similar debt. debt collection pressure. or statement. DIRECTED OUSLY use the following statement TO THE GENERAL PUBLIC. and (B) statements such as ‘federally supervised repayment plan’ or ‘Federal debt restructuring help’ or other similar statements that could lead a reasonable consumer to believe that debt counseling was being offered when in fact the services were directed to providing bankruptcy assistance with a chapter 13 plan or other form of bankruptcy relief under this title. or otherwise) that the services or benefits are with respect to bankruptcy relief under this title
includes— (A) descriptions of bankruptcy assistance in connection with a chapter 13 plan whether or not chapter 13 is specifically mentioned in such advertisement.
528(a)(4) CLEARLY AND CONSPICU528(b)(2) (2) AN ADVERTISEMENT. inability to pay any consumer debt shall— (A) disclose CLEARLY AND CONSPICUOUSLY in such advertisement that the assistance may involve bankruptcy relief under this title. there is a lot of duplication in the language of the two provisions.2005)
Cite 528(b)(1) AN
ADVERTISEMENT OF BANKRUPTCY ASSISTANCE SERVICES OR OF THE BENEFITS OF BANKRUPTCY
528(a)(3) CLEARLY AND CONSPICUOUSLY disclose in ANY ADVERTISEMENT
OR OF THE BENEFITS OF BANK-
BANKRUPTCY ASSISTANCE SERVICES RUPTCY DIRECTED TO THE GENERAL
DIRECTED TO THE GENERAL PUBLIC
PUBLIC (whether in general media. indicating in such advertisement: that the debt relief agency provides ‘We are a debt relief agency. and (B) include the following statement: ‘We are a debt relief agency. Let’s start with subsection (a)(3). Key: Language in italics is definitional.
• debt collection pressure or • inability to pay any consumer debt directed to the general public clearly and conspicuously disclose that the assistance may involve bankruptcy relief. Subsection (a)(4) requires that ads described in (a)(3) clearly and conspicuously include the “Scarlet Letter” disclosure: “We are a debt relief agency.” you wouldn’t want to do otherwise.C.” It requires that: any ad indicating that the DRA provides assistance with respect to • credit defaults. although awkwardly constructed. and include the Scarlet Letter statement. it is a defined term under the Uniform Commercial Code. See U. Subparagraph (B) includes ads that “could lead a reasonable consumer to
64 There is plenty of law on what “conspicuous” means. • mortgage forclosures. whether they mention Chapter 13 or not. Subsection (b)(2)(B) requires that credit assistance ads include the Scarlet Letter disclosure. Disclosure must be clear and conspicuous (although what “clear” might have meant to this anonymous drafter is anyone’s guess. the mandated disclosures are the same: you must mention “bankruptcy relief” under Title 11.” Subsection (b)(2)(A) describes another kind of ad. As you can see. 79
any ad of bankruptcy assistance services or of the benefits of bankruptcy directed to the general public clearly and conspicuously disclose that the services or benefits are with respect to bankruptcy relief. But it is unclear whether these examples also apply to the phrase as used in subsection (b). For example. We help people file for bankruptcy relief under the Bankruptcy Code. § 1-201(b)(10) (2001). the difference between Code §§ 528(a) and 528(b)(2) is only in the description of the ads. Subsection 528(b)(1). In both cases.302
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(Vol.” Subparagraph (A) brings in Chapter 13 ads. Subsection (a)(3) includes examples of what “directed to the general public” means.)64 Although § 528(b)(2)(B) doesn’t require it to be disclosed “clearly and conspicuously.
.C. which we call a “credit assistance ad. • excessive debt. is apparently an attempt to define “advertisement of bankruptcy assistance services. • eviction proceedings.
in § 528(b)(2). . two clear and conspicuous disclosures are required: • the Scarlet Letter statement must be included. based solely on a non-complying advertisement. the phrase used is “An advertisement.” but Section 229(a) doesn’t contain any enforcement provisions. and the duplication.66 First. • Chapter 13 ads § 528(b)(1)(A): an advertisement of bankruptcy assistance services or of the benefits of bankruptcy includes Chapter 13. at her option. or whether it also applies to the phrase as used in subsection (a)(3). 67 The statute says “void” but means “voidable. section 528 shall be void
65 See BAPCPA Section 229(a) adding Code § 528(b)(1). eviction. either under Chapter 13 or otherwise. it can’t be enforced by either party.” But given the structure of the provisions.” which we call debt counseling ads.” A void contract is a nullity. . the debtor can avoid any obligation to the attorney. • Credit assistance ads § 528(b)(2): an advertisement indicating that the DRA provides assistance with credit defaults. but this provision permits the debtor to enforce it. “An advertisement of bankruptcy assistance services or of the benefits of bankruptcy directed to the general public” appears in § 528(a)(3). What happens if you make a mistake? BAPCPA provides several means of enforcement. whether it is mentioned or not. • Debt counseling ads § 528(b)(1)(B): an advertisement of a “federally supervised repayment plan” or similar statement that could lead a reasonable consumer to believe that debt counseling is being offered when in fact the services are directed to providing bankruptcy assistance. mortgage foreclosures. there are four different descriptions of the covered advertisements: • Explicit bankruptcy ads § 528(a)(3): an advertisement of bankruptcy assistance or of the benefits of bankruptcy. excessive debt. directed to the general public. and • the ad must disclose that the assistance may involve bankruptcy relief.2005)
believe that debt counseling was being offered.65 With these definitions. The phrase defined. It is not clear whether this definition applies only within § 528(b). if an ad by a DRA falls within one of these four descriptions. it’s impossible to tell with certainty what this definition defines! 66 Both BAPCPA Sections 227(a) and 229(a) are entitled “Enforcement.
. Setting aside all the terrible drafting.67 Code § 526(c)(1) provides: Any contract for bankruptcy assistance between a debt relief agency and an assisted person that does not comply with the material requirements of . debt collection pressure or inability to pay consumer debts.
See Trap #3 infra. this obligation of the debtor is discharged.
. since she cannot fail to provide promised services. but that applies to failure to file.71 Here’s the real booby trap: As discussed below in Trap #4. We believe it applies to all the measures. The debtor may recover: • all fees and charges that the attorney received.70 Injunctions and other remedies are available to state officials on behalf of their citizens.69 Unlike the enforcement bar in subsection (c)(1). 72 See e. even if there’s no voidability issue. 70 BAPCPA Section 227(a) adding Code § 526(c)(2)(A). attorneys who let their clients pay them after filing found themselves holding nothing but a dischargeable debt. 71 BAPCPA Section 227(a) adding Code § 526(c)(3). 79
and may not be enforced by any Federal or State court by any other person. This will be essential for the attorney’s protection. Rittenhouse v. if the attorney has failed to comply with the advertising provision. not ads. 2005). It’s not clear from this provision if “intentionally or negligently failed to comply” modifies only the award of attorney’s fees and costs. 404 F. Second. including incurring debt to pay the attorney’s fee. There is no express requirement that reliance be shown. other than such assisted person.68 This provision allows a debtor who received competent and effective representation to walk away from any liability to the attorney because the attorney’s ad failed to include the required disclosures. or all the measures of damages. BAPCPA prohibits the attorney from advising the debtor to incur debt in contemplation of filing. BAPCPA Section 227(a) adding Code § 526(c)(2)(B).3d 395. this language will be important in those cases that do. 73 Actually. 395-96 (6th Cir. • actual damages.72) So what does this provision accomplish by declaring the debtor’s obligation voidable? Since payment has to be made before filing. Code § 526(c)(2) gives the client several affirmative remedies for any violation of the advertising requirements. Eisen. although a careful drafter would have placed a comma after “costs” since there are commas after each of the other two categories of damages.g. this section appears to require a causal relationship between the advertisement and the harm. (Even before BAPCPA. But we’re not sure that a court can enforce this obligation.. So theoretically. and • attorney’s fees and costs if the client has been harmed by the attorney’s intentional or negligent violation. There’s also a provision applicable to a dismissed or converted case. we thought of one: Careful attorneys should be delineating in their engagement contracts exactly what documentation and cooperation the debtor is required to provide. and protect the attorney from liability for failure to file a promised document. nor even that the client prove she saw the ad. In jurisdictions where the courts do not permit the attorney to
BAPCPA Section 227(a) adding Code § 526(c)(1).304
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(Vol. what other obligation does the debtor have to the attorney after the petition is filed?73 Although only a few consumer cases see any action beyond the § 341 meeting and reaffirmation negotiations.
Just to make the reading easier. Finally. if the contract is voidable (or according to the statute. TRAP #3: SHHHH! BE CAREFUL WHAT YOU SAY Consumer bankruptcy attorneys75 have always been required to perform according to their retainer agreements. by both contract law and ethics rules. This provision prevents the attorney from enforcing that payment obligation against the debtor. This advice won’t help the domestic relations attorney or class action lawyer whose legal advice brands him a DRA. 527. and one the attorney will want to avoid. including the attorneys fees and costs expended to recover it. compliance with the advertising provisions seems easy enough: say the services relate to bankruptcy and include the Scarlet Letter language. we’re going to assume away all the problems raised in “Trap #1” and focus on attorneys as DRAs here.and post-petition—and any other actual damages. the trustee will. So debtors’ attorneys are going to do their best to comply. The attorney remains in the case and the debtor has no payment obligation. And if the debtor doesn’t ask for it. if the trustee can enforce the debtor’s cause of action for violations of the advertising provisions. but it looks like the debtor can get her fee back. this provision appears to give the debtor—or trustee—a claim against the attorney for return of all fees—pre. and 528!74 This is obviously a bad result. Yet think about the nature of advertising. After all. Indeed. We don’t have answers for these questions. What do you do if the statute goes into effect before your ad in the Yellow Pages renews? What if someone retains an old firm brochure? And what if you advertise in another language? The statute does not require (or permit) translation. if the advertising rules have been violated. He won’t be thinking about bankruptcy at all when he places his ads and won’t have time to comply before his advice comes out of his mouth! In our opinion that’s a good reason to exclude him from the heavy burdens imposed on DRAs. so the debtor’s cause of action against the attorney is property of the estate. But in jurisdictions where the courts permit the attorney to withdraw if a post-petition fee is not paid.2005)
withdraw for nonpayment in post-petition proceedings. then this is also the case for all violations of Code §§ 526. this provision is not an issue.
See BAPCPA Section 227(a) adding Code § 526(c)(2)(A). “void” at the option of the debtor). isn’t the next step to demand the money be returned? The attorney can’t get his work back. but we bet your local bankruptcy judges will use their good sense. Despite the messy language. this provision becomes critical.
. The advertising violation occurs before the bankruptcy is filed.
79 Note that the DRA does not have to “promise” or “contract” or otherwise be legally or even morally obligated to perform the service in order to be stung by this provision’s lash.306
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(Vol. and subsection (4) on incurring debt and/or asking for payment in Traps # 3 and 4 infra. 79 BAPCPA Section 227(a) adding Code § 526(a)(1). (b) Any waiver by any assisted person of any protection or right provided under this section shall not be enforceable against the debtor by any Federal or State court or any other person.... since they are the attorneys intended to be included in the definition of “debt relief agency” under Code § 101(12A). this section applies to debtors’ attorneys. the subsection says that DRAs shall not fail to perform any service that they “informed” a prospective/actual assisted person [“PAAP”] they would provide in connection with a case or proceeding under title 11. You merely have to “inform” a PAAP that you will provide it. directly or indirectly.76 ..
.77 Let’s break this provision down into its component parts. but may be enforced against a debt relief agency.. affirmatively or by material omission. Section 526 addresses restrictions on debt relief agencies: (a) A debt relief agency shall not— (1) fail to perform any service that such agency informed an assisted person or prospective assisted person it would provide in connection with a case or proceeding under this title. Section 526 is the “sadistic” provision of BAPCPA. I perform”—into a draconian series of duties and penalties destined (and surely intended) to snag debtors’ attorneys. No casual statement appears to be excluded. It will tie you up in knots and then punish you for any failure to perform exactly as instructed.78 Second. First. or (B) the benefits and risks that may result if such person becomes a debtor in a case under this title. . (3) misrepresent to any assisted person or prospective assisted person. 79
BAPCPA turns a natural and normal part of the attorney-client relationship—”You pay. 78 See Trap #1 supra. Yellow Pages
76 We’ll deal with subsection (2) on false or misleading statements. 77 BAPCPA Section 227(a) adding Code § 526(a) and (b). with respect to— (A) the services that such agency will provide to such person..
such as dischargeability litigation. like the loss of non-exempt property or the possibility of being hounded into the grave by creditors if you fail to make payments in your Chapter 13. however. “material” modifies only the “omission” provision. failure to cooperate with the attorney does not seem to be an excuse. Absence of consideration or reliance offers no apparent defense because prospective clients are included. as a DRA. “everything will be okay” when you know that everything is a mess and might continue to be even after filing.2005)
ads would seem to fall within its scope. as in:
See BAPCPA Section 227(a) adding Code § 526(a)(3). you are liable for “misrepresentation. but failed as a DRA if you didn’t tell your client you’d perform such a service. The language of paragraphs (1) and (3) does not seem to admit the possibility of correction based upon new facts. for example.80 This requirement is in addition to the obligation in subsection (1) to perform all the services you say you will. It also indirectly and materially omits certain disclosures. you violate subsection (3) if you: • misrepresent to a PAAP • directly or indirectly • affirmatively or by material omission • the services you will provide. Suppose your client pulled a disappearing act and a deadline is fast approaching. To protect your client. a large body of case law on “misrepresentation” including from the Code itself under Code § 523(a)(2).81 The misrepresentation does not need to be material. We hope the courts would find the statement is not a “misrepresentation” or. you could be in violation of this provision! Third. 82 See BAPCPA Section 227(a) adding Code § 526(a)(3). You could even be found to have violated the language of this provision if you understate the services that you will provide. 83 Plenty of debtors go into bankruptcy knowing that some battles lie ahead. So.
.83 This statement is made by a DRA to a PAAP and directly and affirmatively misrepresents the benefits that may result by filing. And finally. perhaps. an omission that isn’t material. or • the benefits and risks that may result by filing bankruptcy. There is. Here.” a term not defined by the statute.82 You could run afoul of this provision if your prospective client dissolves in a pool of tears and you say to the sobbing debtor. if you say. “I’ll pick you up on my way to court” and your car breaks down. you call the trustee to arrange an extension and prepare and file an agreed order to that effect. You’ve upheld your duty as an attorney.
your check for our retainer bounced. and • Reasonable attorneys’ fees and costs. after inquiry. Now that the provision has snagged you.308
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(Vol. § 526(c)(2)(A). putting you over the median income. the contract is both void and unilaterally enforceable. these damages may become a claim of the estate if they arose from conduct (or omission) prior to filing. we agreed that we would file your petition and your schedules for you but the information you provided has turned out to be. There’s a double whammy if the failure to file the schedules results in dismissal. 79
• “I told you we would file a Chapter 7 but that was before I discovered that your wife earned $25.”84 Although a court may properly find that these statements do not constitute “misrepresentations” under paragraph (3). totally fraudulent and you won’t give us the real figures.86 As we mentioned in Trap #2. What happens? The DRA is liable to the AP for: • Any fees or charges received by the DRA from the AP for providing bankruptcy assistance • Actual damages. See note 70 supra. what is the penalty? At a minimum: As in Trap #2.” • “Yes. you described her as ‘unemployed. a contract that is “void” is a nullity. they fall clearly under the language of paragraph (1) as services a DRA informed a PAAP would be provided. a contract for bankruptcy assistance between the DRA and the assisted person that doesn’t comply with the “material requirements” of Code §§ 526. 85 See BAPCPA Section 227(a) adding Code § 526(c)(1).’ which is correct but not for this purpose. This is another drafting mistake: under contract law.” • “Yes. 527 or 528 is unenforceable by the DRA but may be enforced against the DRA. that same person is left high and
84 This scenario is made more plausible because of the certification requirement for the schedules under Code § 707(b)(4)(D). The proper term would have been “voidable” at the option of the AP. The news isn’t all bad.000 last year as a teacher’s aide.85 The debtor can make you perform and you can’t make the debtor pay. 86 See BAPCPA Section 227(a) adding Code. incapable of enforcement at all. I know she lost her job in a school cutback but when we met. Even though BAPCPA regulates a lawyer’s relationship with a prospective assisted person. I told you that we would represent you in bankruptcy but before we filed. an express condition for DRA liability.
we need to break down the statutory language. Translation: A debt relief agency shall not: 1. 88 Four different interpretations of this language are possible. outlined in note 63 supra.87 TRAP #4: “WE TAKE CHICKENS BUT NOT VISA.2005)
dry when it comes to enforcement. only the “assisted person” gets mentioned. Advise a PAAP to incur more debt to pay an attorney
87 We restate our concern. When Code § 526 gets to the debt relief agency’s actual liability. 89 This section has more “ors” than the Olympic rowing team!
. “PAAP”] to incur more debt in contemplation of filing a case. 88 Code § 526(a)(4).”89 Here are the statutory building blocks we are working with: INTERPRETATION 1 A debt relief agency shall not advise an assisted person or prospective assisted person • to incur more debt • in contemplation of such person filing a case or • to pay an attorney fee or charge for services performed as part of preparing for or representing a debtor in a case under this title. or 2. meaning the prospective assisted person has no remedy. Why scoop all these potential clients into the statute’s grasp and give them no remedy? It’s another example of the sloppy drafting that is the hallmark of this legislation. To understand these interpretations.” Code § 526 sets out specific activities and conduct that are forbidden if you are a debt relief agency. Among them is this mandate: A debt relief agency shall not— advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title or to pay an attorney or bankruptcy petition preparer fee or charge for services performed as part of preparing for or representing a debtor in a case under this title. Advise an assisted person or prospective assisted person [collectively. that Congress may have exceeded its authority when it attempted in BAPCPA to control an attorney’s conduct with a prospective client for whom no bankruptcy is ever filed. each presenting a different description of what the DRA is prohibited from doing. and understand the use of “or.
or 2. or 2. Advise a PAAP to pay an attorney fee or charge for services performed as part of preparing for or representing a debtor in a case. Advise a PAAP to pay an attorney fee. Translation: A debt relief agency shall not: 1. INTERPRETATION 3 A debt relief agency shall not • advise a PAAP • to incur more debt in contemplation of such person filing a case or • to pay an attorney fee or • charge for services performed as part of preparing for or representing a debtor in a case under this title. Advise a PAAP to incur more debt in contemplation of filing a case.
. or 3.310
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(Vol. Charge for services performed as part of preparing for or representing a debtor in a case. INTERPRETATION 2 A debt relief agency shall not advise a PAAP • to incur more debt in contemplation of such person filing a case or • to pay an attorney fee or charge for services performed as part of preparing for or representing a debtor in a case under this title. 79
fee or charge for services performed as part of preparing for or representing a debtor in a case. Advise a PAAP to incur more debt in contemplation of filing a case. Translation: A debt relief agency shall not: 1.
) 2.2005) INTERPRETATION 4
A debt relief agency shall not • advise a PAAP • to incur more debt • in contemplation of such person filing a case or • to pay an attorney fee or • charge for services performed as part of preparing for or representing a debtor in a case under this title. Apr. They can no longer take credit cards. see Dan Hudson. nor to prohibit them from charging for their services but only to prohibit payment obtained by incurring debt. “Accepting Credit Card Payments: A Primer”. GPSOLO. not even to pay the attorney. Advise a PAAP to incur more debt to pay an attorney fee. What more does this mean for debtors’ attorneys? Can they acquire unencumbered assets of the debtor to pay their fees (however unlikely it is that the debtor
90 For an article on small firms accepting credit cards. 3. The correct interpretation is the first one: Congress doesn’t want debtors borrowing when they know they’re going to file bankruptcy. 4. they cannot file the petition until they are sure the amount has arrived in their account. Advise a PAAP to incur more debt in contemplation of filing a case. (That’s a policy disaster. We’ve established that the likely intent of the statute is not to deny debtors’ attorneys all payment. or 2. at 10. Translation: A debt relief agency shall not: 1. They can’t suggest that the debtor borrow the money from a family member or friend.) What this means is that debtors’ attorneys can no longer do four things: 1./May 2005. Let’s forget for a moment how unlikely it is that the attorney will get paid otherwise. not a drafting one. They can’t accept money that the debtor insists was a gift from family or friends. or 3. but as with a check.90 (They can take debit cards. Charge for services performed as part of preparing for or representing a debtor in a case.
. They cannot answer if the debtor asks whether borrowing money to pay the attorney’s fee is an option. unless the intent to make a gift is clearly documented.
At the initial meeting. but what’s more relevant for the attorney is that he might face tort liability if his “advice” is the proximate cause of the child’s worsened condition. It’s also important to remember that this is not a prohibition on the debtor incurring debt but a prohibition against the attorney advising the debtor to do so. Because a bankruptcy is in the works for this client. The public policy consequences here are obvious.” This is true even though nothing else in the law makes this type of debt improper. it is reasonably foreseeable that she will forego the doctor’s visit for her son because she can’t pay for it and he will become sicker. 92 There’s another trap lurking in the “shall not advise” prohibition: If the attorney complies with Code § 526 and tells the client she can’t incur the debt. the attorney can give the required advice (“I cannot advise you to use your credit cards any more”) and follow up later with a warning (“Don’t tell me if you did it. or labor? Probably not. counsel can’t advise the debtor to incur additional debt for any purpose. 79
has unencumbered assets)? Probably yes. it’s terrible lawyering. can attorneys barter for future goods or services from the debtor—say.312
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(Vol.91 Suppose you properly instruct your client in your first meeting not to use her credit card or incur any other debt. Of course. The bottom line of this trap is that attorneys representing debtors will have to document carefully how their fees are paid or risk falling “afowl” of this prohibition. but not his promise to pay. eggs. making an emergency room visit necessary. but it’s the only real option for the attorney. even if it’s in the best interest of the client to do so. and the client isn’t gaming the system in an effort to take advantage of her creditors. the Visa charge would be a debt incurred in contemplation of filing. “My son is sick and he has to go to the doctor.
. Under this provision. it’s certainly not enough to warrant a dischargeability complaint for fraud. and the client has scrupulously followed it. Between the initial consultation and the filing of the petition. Under this prohibition. it would create an impermissible debt.92 The attorney can avoid this conundrum by following the lead of generations of criminal lawyers. and it will protect the right of the client to incur additional debt in emergency situations.”) This protects the lawyer from giving the prohibited advice. so Code § 526(a)(4) prevents the attorney from saying “You can use your Visa.
91 BAPCPA Section 227(a) adding Code § 526(a)(4). It’s also important to remember that the debt prohibition doesn’t just apply to the attorney’s fee. I don’t have insurance or any money to pay for the doctor or for my son’s medicine. so you can drain the debtor’s bank account or take his chickens. Can it be a tort (or malpractice) to do what a bad statute requires you to do? We sincerely hope not. your client calls and says. Can I put it on my Visa?” What is the attorney to do? The attorney has given the required advice at the initial meeting. as this contractual obligation would not only be dischargeable in bankruptcy.
Plenty of retail outlets sell used household goods. 95 BAPCPA Section 327 adding Code § 506(a)(2). What’s worse is that the debtor. their property. Code § 527(a)(2)(B) requires the DRA. For the attorney.
BAPCPA Section 228(a) adding Code § 527(a)(2)(B). it could mean trouble under the new Code § 707(b)(4)(D) certification standard: the schedules are incorrect and the attorney knows it. especially since most debtors plan to keep. BAPCPA Section 228(a) adding Code § 527(c)(1). (3). it’s the latter that better reflects what the debtor’s property is worth. to advise the assisted person that: all assets and all liabilities are required to be completely and accurately disclosed in the documents filed to commence the case. It could also mean that property that would be exempt if valued properly is worth more than the available exemption. 96 Id. acting on the attorney’s “advice. requires the attorney to give the AP advice that isn’t an accurate statement of the law. and the replacement value of each asset as defined in section 506 must be stated in those documents where requested after reasonable inquiry to establish such value. Between these two measures of value.” but let’s look at some of the information DRAs must provide under pain of sanctions.
. among other things. we learn that the DRA must provide the assisted person with “reasonably sufficient information” on.93 Hear the snap of a trap closing? In Code § 527(c). which would lead to incorrect information being included in the schedules. not replace. then. this means the property will be overvalued in the schedules.2005)
TRAP #5: “I CAN’T TELL YOU THAT WHAT I’M TELLING YOU IS WRONG. For the debtor.96 Code § 527. “Disclosures.” Code § 527 is benignly entitled. “how to value assets at replacement value” and “how to value exempt property at replacement value as defined in section 506. via written disclosure. but the price they charge for those goods is not the same as what they’d pay the debtor to buy them. which defines “replacement value” as “the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time the value is determined.” could attempt to ascertain the “replacement value” of all her property.”94 The problem here actually comes from amended Code § 506.”95 The trouble is that this definition only applies to personal property that secures a consumer debt.
97 Let’s take the statute one provision at a time. 79
TRAP #6: SURPRISE! THE JOKE MAY BE ON YOU Attention creditors’ attorneys: Did you know that you now have to certify that what is in your client’s motion isn’t true? Okay. may award a debtor all reasonable costs (including reasonable attorneys’ fees) in contesting a motion filed by a party in interest (other than a trustee or United States trustee (or bankruptcy administrator.
. and the motion was made solely for the purpose of coercing a debtor into waiving a right guaranteed to the debtor under this title. and (ii) the court finds that – (I) the position of the party that filed the motion violated rule 9011 of the Federal Rules of Bankruptcy Procedure. Attorneys for these creditors will still have their conduct scrutinized.314
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(Vol. the court. in accordance with the procedures described in rule 9011 of the Federal Rules of Bankruptcy Procedure. Buried deep under Code § 707(b)’s layers of expense allowances and income reductions is a little-noticed provision that would allow courts to punish creditors and their lawyers who abuse the abuse provisions of § 707(b). maybe we’re being a bit dramatic.
97 BAPCPA Section 102(a)(2)(C) adding Code § 707(b)(5)(A).000. Here it is. in full: (A) Except as provided in subparagraph (B) and subject to paragraph (6). on its own initiative or on the motion of a party in interest. but its exceptions deserve some explanation. or (II) the attorney (if any) who filed the motion did not comply with the requirements of clauses (i) and (ii) of paragraph (4)(C). defined by reference to the number of people the creditor employs fulltime and a claim aggregating less than $1.” also mentioned in subparagraph (A). if any)) under this subsection if – (i) the court does not grant the motion. We want to keep attention focused on the application and interplay of clauses (i) and (ii) of this new Code section. but the fact is that. The “subparagraph (B)” reference in subparagraph (A) creates an exception from sanctions for small business creditors. while sanctions provisions against debtors’ attorneys are a well-known part of the new bankruptcy law. creditors and their attorneys aren’t completely off the hook. “Paragraph (6). generally prohibits most parties in interest from moving to dismiss or convert a case where the debtor’s income is below the statutory threshold.
Did the attorney comply with the requirements of 707(b)(4)(C)(i) by determining that the motion is: (I) well grounded in fact AND (II) warranted by existing law or a good-faith argument for a change in the law AND does not constitute an abuse under (b)(1)?
5. The main point of Code § 707(b)(5) is to punish misconduct. is the exception. Did the attorney comply with the requirements of 707(b)(4)(C)(ii) by performing a reasonable investigation into the circumstances that gave rise to the motion?
4. The position of the party that filed the motion violated Rule 9011 This language seems to state the obvious because sanctions are allowed
. The case that gets litigated all the way to a decision on the merits. courts aren’t likely to focus on the debtor’s lack of success on the merits but on enforcing the remainder of the section. so the phrase “the court does not grant the motion” takes on a shade of ambiguity.
1. however. to which we now turn. Did the court grant the motion?
2. Was the motion made solely for the purpose of coercing the debtor into waiving a guarnateed right?
There is liability for costs and attorney’s fees. That much is obvious from the language of the section. 2. with the debtor’s consent.2005)
1. The court does not grant the motion Neither the creditor nor its attorney will be liable to the debtor if the motion to dismiss or convert the case as an abuse is successful. Does the “position of the party” violate Rule 9011?
3. Faced with a creditor that settles a motion that should never have been made. Does it mean that the debtor must prevail on the merits in order to recover or that sanctions are precluded only when the court actually orders dismissal (or. conversion) of the case? We don’t think this ambiguity will cause much problem.
There is no liability for costs or attorney’s fees.
we think there’s an argument that the language makes sense and is not redundant. or written motion.100 Viewed in context. meaning the attorney must look at the reasons underlying the motion. or written motion— (I) is well grounded in fact. between Rule 9011 as a standard in § 707(b)(5) and the Rule itself. There could be an important difference. The Rule is tied to documents filed with the court. But if you compare this language with other sections of the Code directed at misbehaving creditors. you are certifying that you have: (i) performed a reasonable investigation into the circumstances that gave rise to the petition. and (ii) determined that the petition.
. and (II) is warranted by existing law or a good faith argument for the extension. or reversal of existing law and does not constitute an abuse under paragraph (1). It’s just another check on creditor behavior. the “position of the party violated Rule 9011” requirement is simply the standard Congress chose to limit abusive filings by creditors.316
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(Vol. which would be the motion to dismiss. Rule 9011 remains in full force and effect. which are common in the Code: • If a creditor alleges fraud in a dischargeability complaint.”98 • Damage awards for violations of the automatic stay require “willfulness. 3. pleading.101 The “reasonable investigation” the attorney is required to conduct isn’t problematic. The “position of the party” language goes beyond the document. 100 Code § 303(i)(2). See Code § 362(k) (Code § 362(h) prior to BAPCPA). including what it did (or should have done) before making any filing with the court. 79
any time a motion violates Rule 9011. 101 BAPCPA Section 102(a)(2)(C) adding Code § 707(b)(4)(C)(i) and (ii). modification. The “gave rise to” language suggests causation. which is in keeping
See Code § 523(d). looking instead to the party’s overall conduct. The attorney who filed the motion did not comply with the requirements of clauses (i) and (ii) of paragraph (4)(C) The phrase “the requirements of clauses (i) and (ii) of paragraph (4)(C)” means that when you sign your creditor client’s motion to dismiss the debtor’s case as an abuse. pleading. its position must be “substantially justified.”99 • Involuntary petitions have to be in “bad faith” if the debtor wants actual and punitive damages. however.
a prefiling investigation into the “circumstances that gave rise to” the petition is difficult to understand:
To a large extent.2005)
with the general tenor of Code § 707(b)(5) to allow sanctions for improper motions. or increased costs to the other parties and the courts. If the debtor is seeking bankruptcy protection with inappropriate motives. supra note 14. Id. or • The creditor’s attorney must certify that.” The means test. such as harassment.” Id.”103 But what could it possibly mean to say that a motion filed by the creditor—the whole purpose of which is to dismiss the debtor’s case as an abuse of chapter 7— “does not constitute an abuse under paragraph (1)?” Consider the two possible interpretations of the language: • The creditor’s attorney must certify that the motion to dismiss is not an abuse of the provisions of chapter 7 as defined by the means test or the good faith standard. unnecessary delay. have resulted in the filing of a bankruptcy petition. when applied to the debtor.” “Paragraph (1)” of course was the rallying point of BAPCPA for supporters and opponents alike. but as a general rule the prepetition circumstances that compelled the debtor to seek bankruptcy relief bear little on whether the debtor is eligible for such relief under the Code. it commands the dismissal or conversion of abusive chapter 7 consumer cases. There are exceptions in both the Code and the legislation. notwithstanding the motion to dismiss. at 259-60. creates a presumption of abuse that may be rebutted only by “demonstrating special circumstances. amended § 707(b)(1) says that the court “may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts . codified at § 707(b)(2).
102 See Vance. Neither current law nor even the means test is all that concerned with the particular misfortune that has befallen any given debtor. It is entirely appropriate to examine whether the debtor’s bad faith or improper conduct. however. . § 707(b)(2)(B)(i). especially in consumer cases. if it finds that the granting of relief would be an abuse of the provisions of this chapter. If the means test provision does not arise or has been rebutted. such as a serious medical condition or a call or order to active duty in the Armed Forces. to the extent such special circumstances that (sic) justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative. Unlike Code § 707(b)(4). But these cases are already proscribed by Rule 9011’s requirement that a paper not be presented for an improper purpose. . where the “circumstances that gave rise to the petition” makes little sense in relation to the rigid means test for consumer debtors. with the means test and a good faith provision defining just what constitutes “abuse. the reason why a debtor files for bankruptcy is irrelevant. the circumstances that gave rise to the petition may become relevant.
. § 707(b)(3) requires that the court consider whether the debtor filed the petition in bad faith or whether the totality of the circumstances of the debtor’s financial situation demonstrates abuse. Vance’s article explains. and eligibility does not turn on normative value judgments.102 The real problem is in the last phrase of the section: the motion “does not constitute an abuse under paragraph (1). As Ms. rather than financial distress. the debtor’s case in which the motion was filed is not abusive. the phrase “reasonable investigation” actually makes sense here.
then it would be free to implement the intent behind the language—discouraging creditor abuse and giving the debtor a remedy when a creditor crosses the line—rather than being limited to enforcing the language strictly according to its terms. the court must also find that the pleading was not filed solely to cause the debtor to waive rights under the Code. right? Wrong. not just any mistake. carefully trying to ascertain a meaning that is both plausible and consistent with its purpose. The motion was made solely for the purpose of coercing a debtor into waiving a right guaranteed to the debtor under Title 11 The “solely to coerce” language puts us in mind again of that scene from Platoon. The first interpretation of the “paragraph (1)” language is just as problematic. The first interpretation comes closer to what we think Congress meant to do: they wanted to punish creditors. We’re not going to speculate as to how the courts will define “abuse” or what sort of standard they might fashion if absurdity is found because making sense of the “paragraph (1)” language isn’t the end of the analysis. you reach the end and—boom—there’s a requirement that destroys your hard work and everything you thought you understood about the statute. 79
The second interpretation puts the motion at odds with itself and the attorney between the proverbial rock and the hard place. So the first interpretation must be the correct one. There is a third possibility: Congress made a mistake. the language means that a creditor’s attorney is relieved of nearly all the standards of conduct that govern other lawyers and all parties. 4. and they cannot be read in a way that allows for sensible application to a creditor’s motion to dismiss. But instead of making compliance impossible. If a court draws this conclusion. it’s hard to imagine that Congress meant to put creditors’ lawyers in such an impossible situation. The result is a standard empty of meaning. the first interpretation makes it meaningless. We know from court decisions interpreting “solely” that it means “only” and
. for filing abusive motions. and their lawyers. After you undertake a painstaking reading of the language of § 707(b)(5). but one that produces an absurd result. Read literally. Given the overall tilt of BAPCPA in favor of creditors (despite BAPCPA’s lofty sounding official title). How can the court apply them to determine if the creditor’s motion is an abusive filing? It can’t. (2) and (3) of § 707(b)—are expressly tied to the debtor’s finances or conduct.318
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(Vol. Where there’s a violation of the attorney’s certification requirement. All of the provisions that are relevant to the “not an abuse under paragraph (1)” language—paragraphs (1). but for a different reason.
not “mostly...”104 So if an attorney signs a motion to dismiss that has any purpose other than coercion. 2005). We offer a plausible solution..
Violates Rule 9011
Motion filed solely to coerce
Every motion filed solely to coerce the debtor violates Rule 9011
Adding even more confusion is the manner in which Congress has separated “the party” in subclause (I) from “the attorney” in subclause (II). violated Rule 9011. 425-26 (6th Cir. causing the latter to swallow the former. a reading of the section’s language that
See e. the whole statute runs into a superfluity problem. 397 F. (I) will not apply at all. Kentuckiana Livestock Mkt. which allows for sanctions if “the position of the party . White v. .
. triggers sanctions under its more general counterpart found in subclause (I). Inc. As we state above. But it could also mean that in any case in which the creditor is represented by counsel. no matter how slight. leaving a very narrow range of circumstances in which the debtor could actually recover after defeating a motion to dismiss.” “materially” or “substantially. by definition. Less clear but equally important is figuring out how the “solely to coerce” language can be read harmoniously with the general provision of § 707(b)(5)(A)(ii)(I).” Coercion most assuredly is an “improper purpose” under the Rule but because it is a Rule violation. the attorney gets a free pass for certification violations under § 707(b)(5). a violation of the certification and solely to coerce provision. That is.3d 420. this could mean that the attorney is completely off the hook unless the motion is made solely to coerce the debtor. .g. None of this is logical because it leads to results that thwart the apparent intent of the section: to discourage abusive creditor motions and to punish creditors who abuse their right to seek dismissal or conversion of the debtor’s case.
at 467. the court noticed a pattern and issued a notice to show cause to the creditors and the law firm’s principals. Ms. We think (II) applies only to rogue attorneys whose actions in the bankruptcy case are made with neither the knowledge of their creditor clients nor a due regard for the law. despite the written contract. and without obtaining any requisite consent. which were never answered. at 464-65. clarifies the confusion and effectuates the legislative intent. 1998). the debtor’s lawyer received a letter threatening dischargeability litigation unless the debtor reaffirmed a substantial portion of the debt. The proposed order accompanying the motion for default judgment ordered the debtor to pay attorney’s fees.
. on the other hand. at 461-64.110 As unusual as it is to distinguish between the conduct of the creditor and
Household Credit Servs. Dragoo (In re Dragoo). like the contract or payment records. Tex. Id.”109 The Myers & Porter attorneys. the attorneys failed to serve the complaint on the debtor. 107 Id. as was common in proceedings on these dischargeability complaints. the court learned that Myers & Porter was engaged by the creditors’ national counsel and that. who often learned of the complaint only after the attorneys moved for default judgment. were dealt with severely: each was suspended from practicing in the United States Bankruptcy Court for the Northern District of Texas for a period of not less than four years. but no evidence was offered to prove that the debtor was liable for those fees. Debtor’s counsel filed an answer and served interrogatories. Porter. In these cases. at 466.320
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(Vol. Consider the facts of a case decided in a Texas bankruptcy court. Myers and Mr. 108 Id.D. Inc. Through evidence and court filings. the language should be limited to extraordinary cases where the attorney’s conduct does not represent “the position of the party” as described in (I). Myers & Porter had acted without informing national counsel or the creditors.106 In one case.105 Myers & Porter represented creditors in a number of dischargeability complaints filed in consumer cases that alleged fraud. v. When this case was called for trial. 110 Id..R. N. 219 B. 109 Id.108 The court made an express finding that the creditors and their national counsel “were not responsible for the problems caused by Myers & Porter. neither the creditor nor Myers & Porter appeared. 460 (Bankr. 79
gives meaning to all of its parts. were not attached. The complaints generally failed to plead fraud with particularity. That is. and supporting documents.107 After handling a few of these cases. at 461-62.
orderly and respectable. but the court. the Texas court did the right thing. After all. • new barriers to entry. and most important. just as courts do now under Rule 9011. Subclause (I) would apply to cases that follow the usual course of a party asserting a position through the attorney. what incentive could there be to subject pro bono attorneys to increased liability? If one assumes that the law is intended only to apply to “bad” debtors’ attorneys—that is. Finally. which the court can apportion between attorney and client as the situation warrants. All the consumer provisions (and the political rhetoric behind them) point to this goal: • the means test will decrease the number of Chapter 7 filings. if not all. Second. will decrease the overall number of filings. with the attorney certification and the “solely to coerce” standard. the rogue attorney interpretation allows subclauses (I) and (II) each to have an independent meaning and application. First. TRAP #7: NO GOOD DEED GOES UNPUNISHED It would be easy to assume that the provisions of BAPCPA only apply to debtors’ attorneys who receive payment. That is. the attorney. who serves as the party’s agent. where an attorney files motions to dismiss or convert without the creditor’s knowledge or consent. this interpretation avoids the disastrous result that the class of attorneys who represent creditors in consumer cases would be somehow exempt from the requirements of Rule 9011 that are intended to keep the process honest. the lawyers in that case truly were rogue attorneys. the system and even their own clients. Subclause (II). like that presented in Texas. subclause (II) would be limited to the exceptional cases. But the more likely intent of the attorney liability provisions is to decrease the number of consumer bankruptcies resulting in a discharge. and • imposing advertising restrictions and increasing liability on consumer debt-
. and they victimized not just debtors. can be read as codifying the case of the rogue attorney and doing so resolves most. and result in many more dismissals. those who are assisting their clients to abuse the system—then it would make sense to exclude attorneys who receive no fee. The rogue attorney interpretation also avoids the problem of superfluity that arises when interpreting the “solely to coerce” provision and the general violation of Rule 9011. with the sole intent of coercing the debtor into waiving a right. of the interpretive problems with § 707(b)(5).2005)
its agent. a creditor’s motion that violates Rule 9011 triggers sanctions. such as requiring credit counseling and demanding extensive documentation.
amending Code § 101 by adding subsection (12A). discouraging even pro bono practice makes some sense. Even before BAPCPA became effective. . . many attorneys take on pro bono cases when they represent consumer debtors. . 113 How many attorneys will put their homes on the line to assure that debt-ridden consumers have assistance to file bankruptcy? Only consumer debtor bankruptcy experts (who are likely to be insured for this practice) will continue in the practice. for example. onerous liability provisions are added to the obligations imposed upon debtors’ attorneys. 79
ors’ attorneys will drive up the price of bankruptcy. since they apply to all attorneys who sign documents. But when new. All these provisions will increase the number of debtors who enter bankruptcy without counsel. from the Bankruptcy Roundtable Listserv dated April 18. or who is a bankruptcy petition preparer under section 110 .”112 So. The American Bar Association pointed to this problem in its opposition to the attorney liability provisions in the bill:
BAPCPA Section 226(a)(3). the definition of a petition preparer in Code § 110 requires compensation. Rules affecting attorney conduct regardless of payment are not new. Rule 11 and Rule 9011 are not limited to attorneys receiving payment.322
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(Vol. Id.” Id. 114 Of course. However. are almost certain to give up these cases. who constitute a large segment of the pro bono bankruptcy providers. . . But the certification and reaffirmation provisions do apply to pro bono practice. regardless of whether they receive a fee. the attorney advertising provisions do not apply to pro bono bankruptcy attorneys and they wouldn’t have to refer to themselves as “debt relief agencies” in their advertising. because the check bounces or the work vastly exceeds that anticipated by the attorney. there were reports of coverage being cancelled for consumer bankruptcy practice.
. If that is the objective. 2005. a professional malpractice insurance company. See Code § 110(a)(1). Bankruptcy petition preparers are not defined as DRAs by reference to the receipt of consideration in this section: “ ‘debt relief agency’ means any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration.111 To qualify as a DRA. e-mail on file with the author from Robert Minto. Perhaps one benefit of the pre-bankruptcy debt prohibition will be a reduction in such cases. . Many of these provisions apply only to DRAs as defined in Code § 101. and decrease the number of available attorneys.114 And creditors’ attorneys. E-mail on file with the author reporting a cancellation by Great American Insurance in Texas. Even those who are not faint-hearted are likely to be instructed by their malpractice insurers that this area of practice is outside the scope of their coverage. president and CEO of ALPS. the likelihood that lawyers will volunteer their services to assist debtors out of the goodness of their hearts plummets. and fewer of them will take on pro bono cases intentionally. 113 The malpractice issue is very real. the attorney must provide “bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration .
available at http://www.
NINE TRAPS These provisions will greatly reduce pro bono representation for the poorest Americans. Section 302 allows any party in interest to move for an order making effective or continuing the
115 Letter from Robert D. TRAP #8: A SCAPEGOAT FOR THE SERIAL FILER Let’s face it: Although they represent just a small minority of bankruptcy filers. SUBCOMMITTEE ON PRO BONO. available at http://www.g. BANKR. there are people out there who know the Bankruptcy Code better than their lawyers and use the Code. As a result. Director. 117 BAPCPA Section 302. American Bar Association Governmental Affairs Office. Section 302 of BAPCPA attempts to curb serial filing by limiting the automatic stay where the individual debtor filed one or more previous bankruptcy cases within a year of the current one. whether or not they charge a fee.116 As we said. BUS. LAW SECTION BUS. has been nurturing a pro bono bankruptcy practice program. the courts. e.html. The new serial filer provisions actually come in two parts. and the Section of Business Law Pro Bono Committee.115
What’s particularly sad about this is that the American Bar Association. to provide legal service to consumers unable to afford attorneys. with the former dealing with cases in which there was one prior bankruptcy pending within a year of the current one and the latter addressing the more serious situation of there being two or more prior cases within the preceding year.pdf. to members of the Senate (Mar.117 Recognizing that serial filings can arise from circumstances other than abuse. Evans. 116 See. COMM. & SECTION OF LITIG. These are bankruptcy’s serial filers. 1999). Their tactics are abusive and some of them are very clever when it comes to navigating through the bankruptcy system. no good deed goes unpunished in BAPCPA. COMM.org/poladv/letters/109th/bankrupt/bankrupt030105. BANKR. Although the “debt relief agency” provisions in Sections 227-229 only apply to attorneys who receive payment for their services. AND INSOLVENCY LITIG. 2005). SUBCOMMITTEE ON PRO BONO LEGAL SERVS. None of the many voices that joined the chorus of opposition to BAPCPA took up the cause of the serial filer.. amending Code § 362(c). under the leadership of the Standing Committee on Pro Bono and Public Service. these provisions will strongly discourage attorneys and law firms from providing essential pro bono bankruptcy services to the very debtors who need them most.abanet. and honest lawyers to game the system.abanet.org/legalservices/probono/publications/ bankruptcy_starterkit. BAPCPA adds paragraphs (3) and (4) to Code § 362(c). HOW TO BEGIN A PRO BONO PROGRAM IN YOUR BANKRUPTCY COURT: A STARTER KIT FOR LAWYERS AND JUDGES (2nd ed. the new certification requirements of Sections 102 and 203(a) apply to all debtor bankruptcy attorneys. 1.
The difference is in how the two paragraphs are structured. rebutting the presumption of bad faith. 79
stay. thus. We have quoted here the language applicable when two or more cases were pending in the year prior to the commencement of the current case. If the debtor succeeds in proving his attorney’s negligence and. to have – . The debtor might fail in his effort to shift attention away from himself and toward his allegedly negligent counsel. or failed to perform the terms of a plan confirmed by the court. which not only brands the innocent debtor as a serial filer..324
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(Vol. but only for 30 days after the filing of the current case. A failure to file any of the myriad documents required under BAPCPA results in automatic dismissal of the case. the automatic stay is effective. Note also that this presumption also sets a huge trap for pro se debtors. 120 BAPCPA Section 302(3). and for reasonable attorneys’ fees and costs if such agency is found.
. after notice and a hearing.. See BAPCPA Section 302(3) adding Code § 362(c)(3)(A) and Code § 362(c)(4)(A)(i).. but the attorney will still have to dedicate time and money in defending herself and her reputation. See BAPCPA Section 302(3) adding Code § 362(c)(3)(C)(i)(II)(aa)-(cc). but the presumption of bad faith also denies the pro se debtor the defense of inadvertence or negligence. Innocent debtors who can’t afford a lawyer (a result BAPCPA makes more likely) could inadvertently omit a document and not realize until much later that the case had been dismissed. A logical reaction upon discovering the dismissal would be to refile. Where only one case was pending within a year of the current bankruptcy. and the debtor is an “assisted person.” including when: a previous case under this title in which the individual was a debtor was dismissed within the time period stated in this paragraph after the debtor failed to file or amend the petition or other documents as required by this title or the court without substantial excuse (but mere inadvertence or negligence shall not be substantial excuse unless the dismissal was caused by the negligence of the debtor’s attorney). but the language is the same under Code § 362(c)(3). the moving party must demonstrate that “the filing of the later case is in good faith as to the creditors to be stayed.” then the attorney is subject to Code § 526(c): (2) Any debt relief agency shall be liable to an assisted person in the amount of any fees or charges in connection with providing bankruptcy assistance to such person that such debt relief agency has received.
118 Id. amending Code § 362(c)(4)(D)(i)(II)(emphasis added).120 The crafty serial filer will no doubt seize upon the reference to the attorney to evade the effect of this provision. for actual damages.”119 The section sets out three situations in which the case “is presumptively filed not in good faith. failed to provide adequate protection as ordered by the court. No stay is effective upon the filing of the current case if there were two or more cases pending during the previous year. 119 BAPCPA Section 302(3) adding Code § 362(c)(3)(B) and Code § 362(c)(4)(B).118 To get relief.
my measures make improvements over current law in this area that are too numerous to mention here at this time. TRAP #9: NO LAWYER LEFT BEHIND! Supporters of BAPCPA took particular delight in emphasizing how favorable the new law would be to women and children. commentators decried the change because of its practical effect: If trustees and their professionals—including attorneys—couldn’t get paid.122 Con121 122
146 CONG. 2000)(statement of Sen.2005)
NINE TRAPS (B) provided bankruptcy assistance to an assisted person in a case or proceeding under this title that is dismissed or converted to a case under another chapter of this title because of such agency’s intentional or negligent failure to file any required document including those specified in section 521. REC.
To put the result in simpler terms. and for a time this priority trumped even administrative expenses. especially the amendment to Code § 507(a) that moved support obligations from seventh to first priority. and 3. but they work to facilitate the collection of child support and alimony and effectively prevent deadbeats from getting their obligations discharged. leaving them worse off than they were before the change. In near unanimity. . they wouldn’t administer assets and support creditors would get nothing. Yikes. . S50 (daily ed. disgorgement of all amounts the attorney received from the debtor in the prior case. Hatch). behind attorney’s fees and other special interests. .121 The phrase “attorney’s fees and other special interests” was meant to be derisive. the attorney’s payment of the serial filer’s costs of rebutting the bad faith presumption in the later case. as opposed to its current place at seventh in line. an attorney’s negligent failure to file a single document in a prior case could lead to: 1. If you really want to know the truth. Senator Hatch’s statement in the 106th Congress was typical: This bill also protects our children. the obligation to pay child support and alimony is moved to a first-priority status. 26. Under my provisions. a free pass into bankruptcy for the serial filer. Jan. 2. Bankruptcy experts also recognized that the priority elevation of support debts was largely cos-
Upon filing a bankruptcy petition.124
metic. A bankruptcy trustee’s powers exceed those of any creditor. If “assets that are otherwise available” is interpreted to mean only those assets that a support creditor could pursue under nonbankruptcy law. A support creditor generally has no right to step into the debtor’s shoes and sue another person for the debtor’s damages. the “special interests” to which Senator Hatch referred include workers who are owed back wages and consumers who paid a deposit but didn’t get their goods before the company filed for bankruptcy. as a result. .
. to the extent that the trustee administers assets that are otherwise available for the payment of such claims. 79
gress agreed and further amended the support priority to provide the following carve-out: [T]he administrative expenses of the trustee . the carve-out may not apply to assets administered through powers available only to the trustee in bankruptcy. Only in the rarest of bankruptcy cases in which there is a distribution to creditors did support creditors compete with any claimants. attorneys and other professionals may find themselves rendering services on behalf of the trustee on a volunteer basis. instead of a fraudulent transfer. the trustee’s expenses in prosecuting the claim in bankruptcy might fall outside of the carveout. Or the claim might be against a family member or friend. . and the trustee enjoys the same right in a bankruptcy case. The trustee’s expenses for avoiding the transfer would be covered by the carve-out because the action is one that is “otherwise available” to the support creditor. the personal injury claim may not be an asset “otherwise available” to the support creditor and. Here’s an example: A fraudulent transfer can be avoided by a support creditor under a state law. 123 BAPCPA Section 212(9). In other words. Suppose that. other than those with administrative claims.123 The trap here is different than those discussed elsewhere in this article because rather than facing sanctions or otherwise being punished for some statutory violation. the asset to be administered is a personal injury claim the debtor has arising out of an automobile accident. even the justifiably favored support creditor. The highlighted language is ambiguous. Even in those rare cases. who were higher on the § 507(a) priority list. and courts might interpret it as limiting the trustee’s administrative expenses to property that the support creditor could reach had the bankruptcy never been filed. shall be paid before payment of claims under subparagraphs (A) and (B). amending Code § 507(a)(1) (emphasis added). First. it might be hard to find an attorney who will pursue a claim on a contingent fee basis if a looming bankruptcy could deliver all the proceeds to the support creditor. 124 Why wouldn’t the debtor have pursued a personal injury claim? Several reasons. this claim becomes property of the estate and the trustee becomes the real party in interest with the exclusive right to prosecute the personal injury claim.326
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but not an actual.
. the policy implications are inescapable. because if assets are not administered. The result is hardly the super-priority for support creditors trumpeted by the bill’s sponsors. but declined in the case of the support priority carve-out. Child support creditors are armed with pretty powerful weapons and in some respects their power approaches that of a bankruptcy trustee. for example.2005)
When seeking compensation. The trustee won’t be able to hire professionals to administer an asset if there’s no assurance of payment. In fact. But when you take a step back and look at all the provisions aimed at debtors’ attorneys. so Congress knows how to include proceeds. leaving support creditors worse off. it becomes less likely that assets will be administered.C. except. There are bankruptcy lawyers who are
And there is no incentive for the debtor to pursue a claim if all the proceeds will go to his creditors. A recalcitrant child support obligor can. perhaps in the Internal Revenue Code. In other sections of the Code. particularly where the drafting is confusing or just plain sloppy. 125 11 U. including his ex-wife. AND NOW. the expense carve-out doesn’t fix the problem. be threatened with the loss of a professional license or even jail time. such as § 541. limitation. not the ability of the trustee to be paid for administering other assets that the support creditor has no nonbankruptcy right to pursue. We acknowledge there are exceptions. because professionals will be disinclined to represent the trustee on a voluntary basis.125 proceeds are specifically mentioned.126 But this only expands the category of assets that are “otherwise available” to the support creditor. which is the subject of myriad state and federal statutes. § 541 (2000). the support creditors are put first in line to collect nothing. THE SLAP: THE UNKINDEST CUT OF ALL For the most part we’ve avoided policy discussions and focused on the language of BAPCPA. 126 The child support creditor possesses a power of intimidation that appears to be unmatched in the law. Congress has convicted an entire class of lawyers whose only crime is dedication to the welfare of their clients and providing competent and affordable representation to ordinary people whose lives are desperate because they are deeply in debt. some attorneys fail to live up to professional standards of conduct.S. We acknowledge that the analysis may become murkier when the priority debt at issue is for child support. The problem with such an argument is that the new administrative carve-out does not expressly include proceeds of administered assets. IV. the trustee’s professionals will contend that the support creditor is entitled to the unencumbered proceeds of every action the trustee undertakes and so the “assets otherwise available” language presents a facial. As written.
’” said Howard Beales. and those who aid their clients in committing fraud. But they are few in number.businessweek. The fees they pay. often pay their executives lavish salaries and make cushy deals for goods or services with related companies. CEOs. The agencies. available at http://www. which has become the Enron of the credit counseling scandal. The same is true of every profession: doctors. Some agencies are fraudulent.” are often steep. others are run by executives with questionable backgrounds. “There was nothing voluntary and nothing charitable about these payments. According to a Business Week report in 2001 (the mid-point between introduction and enactment of BAPCPA): The billion-dollar credit-counseling industry is deeply troubled.) consumer-protection official who with colleague Myriam A. But the real insult—the slap in the face to all consumer debtors’ attorneys—is in BAPCPA’s treatment of these lawyers in comparison to two groups with a demonstrated record of preying on the financially vulnerable: credit counseling agencies and bankruptcy petition preparers. and even members of Congress have ignored their professional obligations. judges. director of the FTC’s Bureau of Consumer Protection. Some clients end up in worse financial shape after using agencies. 2001). (Oct. the Federal Trade Commission announced it had filed suit against AmeriDebt.328
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(Vol.htm.” says Eric S. Torrico has been tracking credit-counseling fraud.” BUSIWEEK ONLINE. usually labeled “voluntary contributions.127 In 2003. 29.
. Friedman. While Congress was considering BAPCPA. Here. much was learned about the credit counseling industry and the news was not good. 79
incompetent. They also steer consumers to affiliated for-profit companies that make debtconsolidation or home-equity loans. “A Debt Trap for the Unwary. Heather Timmons and John Cady. which mostly operate as nonprofits. All consumer debtors’ attorneys are treated as suspect and in need of regulation. however. “We will not allow consumers to be duped into ‘contributing’ hundreds of dollars to these so-called ‘non-profits. Congress has legislated based on these exceptional cases. Consumers’ money didn’t go to
Christopher H. “This whole industry is fertile ground for scams. Schmitt.com/magazine/content/ 01_44/b3755094. a Montgomery County (Md.
130 Id. 295-96 (Bankr. Nevertheless.”128
Also in 2003. many of these agencies function as virtual for-profit businesses. at 2.130 The Congressional response to this abundant evidence of a systemic problem in the credit counseling industry is inexplicable. Unlike credit counseling. tax-exempt status.131 Courts have consistently set out a very narrow range of permissible activities
128 Press release. 131 See In re Guttierez.129 Among the findings of the report. 19. (“Nov. 287. available at http://www.S. aggressively advertising and selling DMPs [Debt Management Plans] and a range of related services.gov/opa/2003/11/ameridebt. one specific target of the statute was the inherently dangerous unauthorized practice of law by bankruptcy petition preparers. BAPCPA requires that all consumer debtors be channeled through credit counselors as a condition of bankruptcy eligibility! The insult to attorneys is worse when attention is turned to bankruptcy petition preparers. it just ended up lining the pockets of the defendants. this field has always carried the taint of illegitimacy. prepared by the Consumer Federation of America and the National Consumer Law Center.R. Indeed. 248 B. Some agencies appear to be in clear violation of Internal Revenue Service (I.” In short. 129 DEAN LOONIN & TRAVIS PLUNKETT. Agency Alleges that ‘Credit Counseling’ Firm Misrepresents Costs and Nature of its Services. 2000) (citation omitted). 2003). CREDIT COUNSELING IN CRISIS: THE IMPACT ON CONSUMERS OF FUNDING CUTS. when Congress enacted § 110 of the Code in 1994. Tex. HIGHER FEES AND AGGRESSIVE NEW MARKET ENTRANTS (2003) (Report by the National Consumer Law Center & Consumer Federation of America).
.D. W.) rules governing eligibility for tax-exempt status.htm. Federal Trade Commission. Congress’ fear was that bankruptcy petition preparers might “take unfair advantage of persons who are ignorant of their rights both inside and outside of the bankruptcy system. is abuse by these agencies of their “non-profit” status: Nearly every agency in the industry has non-profit. the first comprehensive report on the credit counseling industry was released.2005)
NINE TRAPS creditors. it was motivated by concern that debtors would be at the mercy of fly-by-night “typing mills” that would lull the unsuspecting public into thinking that they had the expertise to offer valuable legal (or at least quasi-legal) bankruptcy assistance.ftc.R. “FTC Files Lawsuit against AmeriDebt. Not only are these agencies expressly excluded from the “debt relief agency” provisions as nonprofits.
and • by placing unnecessary burdens. and expense on the practice of bankruptcy law In the same stroke. the Bill that became BAPCPA. this law has created a pigsty. or to discourage in any way the excessive consumer borrowing that has been driven in large part by the barrage of credit cards that are offered to American consumers. the credit industry fought every attempt to give real information to consumers that might curb their hunger for debt. lowering the practice of law to the level of petition preparers: • by branding lawyers—and requiring them to describe themselves—as “debt relief agencies. It would be nice to pretend that this treatment was unintentional. we’d probably pick a time earlier than the eve of bankruptcy for these lessons. This amendment. Congress.133
See id. and. at 297-98. the result of poor drafting or a poor understanding of bankruptcy practice. We call this ‘the Barn Door” provision because it comes a tad late! If we genuinely want to educate consumers about the danger of excessive debt. to increase the number and business of bankruptcy petition preparers. means to punish consumer bankruptcy lawyers for representing their hapless clients.g.132 BAPCPA threatens to undermine this body of case law and the protections that have long been afforded unsophisticated debtors. in the many ways outlined in this article. which was offered by Senator Akaka. to force debtors to undergo “re-education” with consumer credit counselors. risk. to increase the number of pro se filers.” • by forcing them to give bad legal advice. and anointed credit counseling agencies the gatekeepers to the bankruptcy courts. See. e..” including bankruptcy petition preparers. and preventing them from offering some good advice. But you cannot escape the conclusion that this result is intentional. its individual and social costs. The Act requires all “debt relief agencies.330
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(Vol. to provide consumer debtors information that is unquestionably legal advice. 79
for bankruptcy petition preparers: they are scriveners who may type the debtor’s information on the official forms and not much else. Congress has carved out a range of activities that bankruptcy petition preparers may— indeed must—provide even though this constitutes the unauthorized practice of law. In other words. most remarkably. the vote on proposed Senate Amendment 15 to Senate Bill 256. This provision is not intended to provide consumers with muchneeded insight into the nature of debt. While purporting to level the playing field. such as information about the advantages and disadvantages of filing under different chapters and instructions on valuing assets. a laudable objective. was entitled: “To require enhanced disclosure to consumers regarding the consequences of making only minimum required payments
. There’s no question that the cumulative effect of all these provisions will be to drive lawyers who file consumer bankruptcies out of business. Congress has offered an imprimatur to petition preparers engaged in the unauthorized practice of law. In fact.
as long as they don’t default. Borrowers who make a late payment—whether it’s for the phone bill. Apr.gov/ index. We have been at it for 8 years now. in some cases. 135 It’s also corporate welfare in two ways: This law will pour money into the hands of the credit counseling industry at a time when it has been subject to repeated inquiry and criticism for abusive practices. .
in the repayment of credit card debt. credit-card issuers reported record profits of $30 billion—much of it earned on liberal lending policies and punishing fees that often exacerbate the financial woes of cardholders who have gotten in over their heads. We over here get so tired of those populist arguments. If they want to reduce excess debt. “Tough Love for Debtors. WEEK. as shown by the record profits of credit card companies in recent years. And they do it under the guise that they are trying to protect the weak and the infirm and those who really cannot help themselves. Examining the Current Legal and Regulatory Requirements and Industry Practices for Credit Card Issuers With Respect to Consumer Disclosures and Marketing Efforts.S. or a house payment— often are charged punitive rates averaging 29% on all their cards. and for other purposes. and thereby reduce the risk of bankruptcy. had to say on the Senate floor the day of the bill’s passage by that body: It is getting to the point where some might even forget why we initiated this legislation. See U. Senate Committee on Banking. available at http://banking. unless it is a complete cavein. But lending to overextended consumers has turned out to be an extremely profitable business. These on-theedge borrowers are the most profitable part of any bank’s card operations. the Senate is holding hearings on the practices of the credit card industry. a prime mover of the bill. 2005.134 No. at 98.2005)
Let’s acknowledge here that creditors control—to the penny—how much debt consumers can incur. over 25% interest to lend to high-risk borrowers. 2005 by a vote of 59-40.” This proposed amendment was defeated in the Senate on March 2.cfm?Fuseaction=Hearings. Give me a break. this counseling is just another punitive measure to make it more difficult for people to get to the courthouse and discharge their debts. . a credit card.135 Here’s what Senator Hatch. Some of those who oppose the bill and are offering final postcloture amendments are flying in the face of years and years of hard work and bipartisan compromise. May 17. 134 As reported in Business Week. .Detail&HearingID=154.senate. Last year. 2005. the ones who bring up the amendments will never vote for this bill no matter what you do. 25. And it pours money into the hands of credit card companies who have received. Mara Der Veanesian. which Republicans promised to do during BAPCPA debate. By the way.” BUS. so we cannot solve the problems that are eating our country alive in bankruptcy. As this article goes to press.
. creditors could return to the golden days when creditors only permitted consumers to borrow what they could reasonably repay.
there are people out there who really believe this stuff when somebody starts yelling.136 We began this Section admitting that there are cases of abusive bankruptcy filing. Hatch). 9.
151 CONG. screaming. nor any other practices that justify this punitive reaction. and shouting on the Senate floor. Unfortunately. Congress has reached out and slapped the face of an entire segment of the profession. In the final analysis. But none of the conduct alleged by BAPCPA’s supporters is borne out by the facts: there is no empirical evidence of a significant growth in these problems. what’s most troubling is that lawyers who practice in other fields are oblivious to the dangerous precedent this sets.332
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(Vol. with no more justification than that it suited their contributors to do so. S2339 (daily ed. Mar. 79
Yet it happens every time—they get up and act like the world is coming to an end because their populist rhetoric is not being listened to. 2005) (Statement of Sen.