The Bankruptcy Reform Act: What It Means for Lawyers

150 150 Karr Tuttle Campbell

The main provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”, aka the Bankruptcy Reform Act) went into effect on October 17. But its impacts were felt earlier.

Anticipating the new law and perceived restrictions on debtors, there was an unprecedented flurry of bankruptcy filings, primarily by  consumer debtors, in the weeks leading up to October 17. In the  Western District of Washington alone, 10,967 bankruptcy cases were  filed between October 1 and October 16. By comparison, 1,103 cases  were filed in the same period in 2004. Once the BAPCPA went into  effect, only 136 cases were filed between October 17 and November  10.

So, what’s the big deal and why were people so eager to avoid the effects of the new law? While there have been numbers of articles and presentations on the impact of the new bankruptcy law on debtors, there has been less reporting on the impact of the new law on lawyers.  For those either representing debtors, particularly consumer debtors, or those who have just a peripheral relationship with bankruptcy, it is  crucial to understand that things have changed. It’s not “business as  usual.”

One of the theories underlying the BAPCPA is a new “presumption of abuse” that those seeking bankruptcy protection are not poor-but- honest debtors needing a fresh start, but instead are people seeking to  avoid their obligations. There appears also to be a distrust of the attorneys representing those debtors. Thus, the BAPCPA has created  a number of new hurdles, potentials for liability and inherent conflicts  that make debtor representation much more challenging than in the  past.

Consumer Bankruptcy Lawyers
as Debt Relief Agencies

The BAPCPA states that those providing advice to “assisted persons” (essentially lownet- worth consumer debtors) must identify themselves  to the public at large as “Debt Relief Agencies.” A Debt Relief Agency  is required to provide a number of written notices, including a notice  that the debtor does not need the assistance of a lawyer.

Failure to comply with these requirements is a violation of the Bankruptcy Code. It has been suggested that if the failure is found to be  either negligent of intentional, a law firm may be liable to the client  for the amount of any fees or charges in connection with the case, in  addition to actual damages and attorneys’ fees and costs incurred.1 Also, if any promise in an advertisement is unmet, it can be considered a misrepresentation, constituting a violation of section 526(a)(3) of the  Bankruptcy Code, also creating liability.

One Georgia bankruptcy court entered a ruling immediately after the law took effect that attorneys do not have to comply with these  requirements; however, no other courts are reported to have joined in  that opinion.

“Trust But Verify”:
Attorney Certification
of Debtor’s Schedules

The BAPCPA requires attorneys representing consumer debtors to conduct a “reasonable inquiry” to verify that the information being submitted by the debtor is well grounded in fact. Moreover, the  attorney’s signature constitutes a certification that the attorney has no  knowledge after an inquiry that the information supplied is incorrect. If  the information is subsequently found to be inaccurate, the firm may be  construed to be assisting the client in misrepresenting his or her  financial condition.

Unfortunately, many of the important terms are not defined and there is a significant concern that these certifications go well beyond the  requirements of Rule 11. The ABA Business Law Section recently  issued a report on this issue, recommending a set of guidelines that can assist attorneys venturing into these waters.

Also, attorneys are expected to check PACER to ensure that their clients have not previously sought bankruptcy protection, regardless of  what their client says. An Alabama bankruptcy court recently held that it  was a violation of Rule 11 for an attorney to file a case without checking for prior bankruptcy filings.2

Section 707(b)(4) of the BAPCPA also states that, if it is determined under the new rules that a case was improperly filed as a Chapter 7,  the debtor’s attorney, not the debtor, can be held responsible for all  costs incurred by the trustee in seeking the dismissal. The court may  also assess a civil penalty for violating Rule 11.

Restrictions on Advice
Under the “means test” created by the BAPCPA, clients that otherwise would not qualify for Chapter 7 might qualify if the amount of their  secured debt is increased, since the means test deducts secured debt  from the income calculation. However, Debt Relief Agencies are  prevented under section 526 of the BAPCPA from encouraging clients  to incur additional debt. Thus, an attorney deemed a Debt Relief  Agency is apparently barred from advising his or her client on this issue  and potentially even advising on how the means test is  calculated, since a review of that test could lead a client to the  conclusion that he or she should incur debt.

Getting Paid
The Congressional Budget Office anticipated that the cost for a debtor’s attorney would likely increase by $150 to $500 per case. An  informal survey of local bankruptcy debtors’ attorneys confirms that their  base fees have indeed increased. Thus, it is now more expensive for troubled debtors to seek bankruptcy relief.

Attorneys representing Chapter 7 debtors must be paid in advance of the filing; however, an  attorney taking a credit-card payment for fees likely runs afoul of  section 526 referenced above.

Chapter 13 debtors’ counsel are often paid through the course of the case. In the past, the fees of debtors’ counsel were paid as a first  priority and usually paid within one year of filing. The BAPCPA now  subordinates the fees of counsel to domestic support obligations and it is expected that fees may now take up to 60 months to be paid,  assuming the debtor remains in Chapter 13.

So, what to do? First, be sure to become very familiar with the  BAPCPA before taking on any new cases. The law is truly different,  and the penalties can be severe for not understanding those changes  fully.

Second, be aware of the pitfalls and potential liability. The ABA has recently published an e-book, “Nine Traps and One Slap — Attorney  Liability Under the New Bankruptcy Law,” which is advertised as  containing in-depth information on liability problems for consumer- debtor attorneys, as well as all other lawyers who get involved with any bankruptcy proceedings.

1 § 526(c)(2)(A).
2 In re Oliver, 323 B.R. 769 (M.D. Alabama 2005).