The Coming Exodus of Consumer Counsel

The Coming Exodus of Consumer Counsel

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As H.R. 975, the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2003" (the Act), inches toward almost inevitable enactment, two questions are on the minds of many bankruptcy professionals. First, why single out consumer debtors and not all individuals for "special" treatment? After all, the big money is not with the consumer debtor, but rather with individuals whose debts are not primarily consumer. In addition, the Act will no doubt spawn additional litigation over the definition of a "consumer debt" and whether the debtor has "primarily consumer debts." Just as important, though, is the question of whether its enactment will result in a large-scale exodus from the ranks of those who now represent consumer debtors. I cannot answer the first question, but as to the second, I am among the pessimistic: It is highly likely there will be a substantial number of consumer bankruptcy practitioners who will opt out. The complex and convoluted, as well as internally inconsistent provisions of the Act provide significant cause for concern. There is a fear among many on the bench that the more experienced practitioners will no longer represent consumer debtors. As one bankruptcy judge remarked to me, he fears that the more careful practitioners will bail out, leaving the courts to deal with the sloppy practitioners and an even larger number of pro se debtors. This will create a domino effect, with bankruptcy judges either taking early retirement or leaving the bench before retirement age. Replacements for those bankruptcy judges who leave the bench will also be drawn from a smaller and, unfortunately, more than likely less-qualified, pool because those who are experienced and knowledgeable will decline to serve for the same reason that those who are serving leave.


What is in the Act that will have so many experienced consumer debtor practitioners literally quaking in their boots? There are several provisions—some of minor consequence, and some that should make every consumer debtor's counsel shudder. This article looks at some of those provisions that directly affect practitioners who represent consumer debtors and the impact that each may have. (Unless otherwise indicated, references in this article to Code sections are to the Bankruptcy Code, Title 11, as amended by the Act.)

Reasonable Inquiry to Verify

Proposed §707(b)(4) not only subjects debtor's counsel to sanctions in the form of attorney's fees and costs, but also to a civil penalty if the trustee successfully brings a motion to dismiss for abuse and the court finds that debtor's counsel violated Rule 9011. Given the current language of Rule 9011 ("after an inquiry reasonable under the circumstances," factual contentions "have evidentiary support," and legal contentions are "warranted by existing law or a nonfrivolous argument for the extension, modification or reversal of existing law or the establishment of new law"), this gives little cause for concern. But §707(b)(4)(C) goes even further, providing that the signature of an attorney on a petition is a certification that the attorney has "performed a reasonable investigation into the circumstances that gave rise to the petition" and does not constitute an abuse under §707(b)(1)." It also requires that factual contentions be "well grounded" instead of having "evidentiary support" and legal arguments be made in "good faith" instead of "nonfrivolous." Under §707(b)(4)(D), the signature on a petition is a certification that the attorney has no knowledge after an inquiry that the information in the schedules is incorrect.

Coupled with the "sense of Congress" provision in §316 of the Act that the Rule 9011 standard, as it relates to debtors and debtors' counsel (creditors, trustees and their counsel are unaffected), be amended to "have made reasonable inquiry to verify" (emphasis added), §707(b)(4) should cause serious concern for all practitioners. Does this mean that the consumer debtor practitioner must in every case make an independent investigation and inquiry to verify? It certainly seems to require the practitioner to make an investigation into circumstances and some inquiry to verify the facts beyond simply asking the debtor. But how extensive an investigation or inquiry?

What constitutes a reasonable inquiry to verify income and expenses is fairly straightforward. Reviewing the debtor's pay stubs and bank statements should, at least in most cases, suffice with respect to income, except, of course, for the rare debtor who is working under the table. Review of supporting documentation for claimed expenses (other than those expenses used without regard to actual expenses in the National Standards) and disregarding expenses for which there is no record, should be sufficient for verification of expenses.

Whether the debtor is scheduling all the debtor's assets or disclosing all property transactions is quite another situation. As most experienced practitioners know only too well, debtors have been known to conceal facts concerning assets from their attorneys. Is debtor's counsel expected in all cases to make a home inspection? If not, what other means can be used to verify that full and accurate disclosure has been made of the debtor's household goods, including the replacement value, which is dependent upon age and condition? What about the situation where the debtor fails to disclose a savings or investment account? Must counsel have done a "sweep" of all financial and investment institutions? Must counsel engage in forensic accounting and, if so, how far back in time must that investigation go?

The foregoing is simply illustrative of the problem and certainly not exhaustive of situations that arise daily. Certainly, there are situations where counsel must do more than just accept the debtor's statements at face value. But what risk must the attorney take where, as in most cases, there is nothing apparent that indicates anything amiss? I suppose one might hope that the bankruptcy judge finds that under all the circumstances a "reasonable" investigation or inquiry was no investigation inquiry, but that may be a big gamble. Moreover, who is going to pay for the additional time expended in conducting an investigation and inquiry? Doesn't Congress understand that the vast majority of individuals who seek bankruptcy relief have exhausted their financial resources? Unless provision is made for compensating debtor's counsel, it is simply unrealistic to expect debtor's counsel to be in effect the guarantor of the accuracy of the debtor's schedules—the obvious aim of Congress!

We Are "Debt Relief Agencies"

Attorneys who represent debtors, or even some who counsel those who may find themselves in financial distress, are, by definition, "debt relief agencies." A "debt relief agency" is defined as "any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration." (§101(12A)) There are some exclusions, including banks, credit unions and nonprofit organizations (e.g., a nonprofit credit counseling service), but not attorneys. An "assisted person" is a "person whose debts consist primarily of consumer debts and the value of whose nonexempt property is less than $150,000." (§101(3)) (In more than 20 years I have met very few consumer debtors with nonexempt assets approaching even a third of $150,000.) "'Bankruptcy assistance' means any goods or services sold or otherwise provided with the express or implied purpose of providing information, advice, counsel, document preparation or filing, or attendance at a creditor's meeting or appearing in a proceeding on behalf of another or providing legal representation with respect to a case or proceeding under this title." (§101(4A).) Counsel for consumer debtors fit squarely within the definition of a debt relief agency. What being a debt relief agency means to the practitioner is important. Three sections deal with debt relief agencies and should be read in their entirety—§§526, 527 and 528.

First, proposed §526 provides some "shalt nots." These are generally not a problem—e.g., failure to perform a service that the assisted person was informed would be provided or advising the assisted person to make an untrue or misleading statement in any document filed. These are already required under the canons of ethics. In addition, a debt relief agency must not advise an assisted person to incur more debt in contemplation of filing or to pay an attorney or bankruptcy petition preparer fees or charges for services in connection with the filing—a common-sense requirement. There are, however, hidden potential traps in that seemingly innocuous language. Use of the verb "incur" may be construed to encompass advice concerning restructuring debt—e.g., borrowing from one source to pay another without increasing total debt. Coupled with the phrase "in contemplation of filing" there is a significant potential for liability, or at least being sued, for advising a consumer debtor attempting to avoid bankruptcy on restructuring debt.

Second, a debt-relief agency is required to make certain written disclosures to the assisted person not later than three business days after first offering to provide bankruptcy services (§527(a)):

  • A brief description of chapters 7, 11, 12 and 13 and the general purpose, benefits and costs of proceeding under each of those chapters must be given.
  • The types of services available from credit counseling agencies must be provided.
  • A person who knowingly and fraudulently conceals assets or makes a false oath or statement under penalty of perjury in connection with a case is subject to fine, imprisonment or both.
  • All information required to be provided in connection with the case must be truthful.
  • All assets and liabilities are required to be completely and accurately disclosed and replacement value stated after reasonable inquiry.
  • Current monthly income, expenses and, in a chapter 13 case, disposable income, are to be stated after reasonable inquiry.

The foregoing present no real problem. Indeed, common sense dictates that the prudent and careful practitioner should be making these disclosures (except perhaps for the services provided by consumer credit counseling agencies, even if not specifically mandated by the Code).

Subsection 527(b) requires that a particular statement, or one substantially similar, be given separately from any other document and be clear and conspicuous, entitled "IMPORTANT INFORMATION ABOUT BANKRUPTCY ASSISTANCE SERVICES FROM AN ATTORNEY OR BANKRUPTCY PETITION PREPARER." Without reproducing the entire statement, the following is a discussion of some of the more troublesome provisions.

1. If you decide to seek bankruptcy relief, you can represent yourself, you can hire an attorney to represent you, or you can get help in some localities from a bankruptcy petition preparer who is not an attorney.

Is an attorney supposed to clearly and conspicuously infer that a client may be able to represent himself or herself or that it is at all advisable to obtain the services of a bankruptcy petition preparer (BPP) without further qualification? Reasonably competent attorneys would not give that advice without a lot of qualifiers. If the attorney did not, would that not be a deceptive practice? Or may the attorney add in the statement itself that the attorney does not recommend either proceeding pro se or the use of a BPP and have it still be substantially similar? There certainly are cases in which a particular debtor could safely proceed pro se, but these are the exception. Certainly with the myriad of pitfalls and traps created by the Act, many of which are less than obvious, and the draconian adverse effect of falling into one of them, will make it even less, if at all, advisable for an individual to proceed pro se.

Even more troubling is requiring a statement that one may obtain "help" from a BPP; yet all that a BPP may do is type forms. True, as noted below, the statement that a BPP cannot give legal advice must also be included. But to the lay person, just what constitutes "legal advice" has all the clarity of a prism in a fog. Use of the term "help" is deceptive in that it carries with it a connotation that a BPP can assist the debtor in navigating the convoluted labyrinth of consumer bankruptcy law under the Act. Nothing could be further from the truth. For example, could a BPP help a debtor complete the schedules correctly? The answer, under §110(e)(2), is unquestionably negative. In order to keep the required statement from being deceptive, it will be necessary for an attorney to include a detailed statement of just how much "help" a BPP may give—literally none!

If it is the intent of Congress to create a situation where consumer debtors will find it difficult to obtain legal assistance in filing bankruptcy, Congress may succeed beyond its wildest expectations.

2. If you select another type of relief under the Bankruptcy Code other than chapter 7 or chapter 13, you will want to find out what should be done from someone familiar with that type of relief.

In making that statement, is it being implied that in a chapter 7 or 13 case it is unnecessary to use "someone" familiar with that type of relief? By use of the generic pronoun "someone," is there an implication that the debtor should be seeking advice from a non-attorney? I, for one, am not particularly comfortable with making a statement from which it may be inferred that I am suggesting either is appropriate.

3. Your bankruptcy case may also involve litigation. You are generally permitted to represent yourself in litigation in bankruptcy court, but only attorneys, not bankruptcy petition preparers, can give you legal advice.

Can it be inferred from the statement that the attorney is suggesting it may be appropriate for a person to proceed pro se in a contested matter or adversary action? I cannot think of a single instance in which I might suggest it is appropriate for a debtor to proceed pro se in any adversary action and rarely, if ever, in a contested matter. Indeed, I feel compelled to advise debtors it is foolhardy to represent themselves in adversary actions: Usually, the stakes are too high and the issue(s) anything but simple and straightforward.

Finally, §528 impresses certain requirements on debt-relief agencies. Some are innocuous, e.g., a written retainer agreement within five days with a copy provided to the assisted person. On the other hand, the requirements with respect to advertising may create a trap for the unwary. In general, advertising directed to the general public by a debt-relief agency must clearly and conspicuously include the following, or a substantially similar, statement: "We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code." Advertising, whether in general media, seminars or specific mailings, telephonic or electronic messages, or otherwise, that falls within the purview of §528 includes:

  • Descriptions of bankruptcy assistance in connection with a chapter 13 plan whether or not chapter 13 is mentioned, or
  • That assistance is provided in connection with credit defaults, mortgage foreclosures, eviction proceedings, excessive debt, debt collection pressure or inability to pay debts.


What happens if debtor's counsel violates these provisions? In addition to the sanctions that may be imposed under §707(b)(4), included in §526 is a provision that a debt relief agency (§526(c)(2)):

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, for actual damages and for reasonable attorneys' fees and costs if such agency is found, after notice and a hearing, to have—
(A) intentionally or negligently failed to comply with any provision of this section, §527 or §528 with respect to a case or proceeding under this title for such assisted person;
(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 §521; or
(C) intentionally or negligently disregarded the material requirements of this title or the Federal Rules of Bankruptcy Procedure applicable to such agency (emphasis added).

Counsel's Untenable Position

The combination places attorneys who represent consumer debtors in an untenable position. It creates a situation where an attorney, in some cases, could not sign and file a petition at all. Let me explain, as it results from the conflict between §707(b) and other provisions of the Code with respect to defining "disposable income" under chapter 13 (not all of which are contained in the definition of disposable income in §1325(b), but are elsewhere in the Code—e.g., §§541 and 1322).

The means test of §707(b) creates a presumption of abuse if, after applying the test, the debtor could afford to pay as little as $100/month to unsecured creditors. Thus, if the attorney signs and files a petition where the application of the means test establishes that a chapter 7 filing constitutes an "abuse," it could hardly be deemed well-grounded in fact, and since the signature is a certification that filing the petition does not constitute an abuse, the filing would be an intentional disregard of the material requirements of the Code. But suppose that same person has income or expenses excluded from "disposable income" but not the §707(b) means test (e.g., child support payments, payments for care of a foster child, disability payments for a dependent minor, repayment of loans from an ERISA retirement account or thrift savings plan, or contributions to retirement plans, deferred compensation plans or tax-deferred annuities). In those cases, the additional exclusions could eliminate any disposable income. If there is no disposable income, a chapter 13 plan is, ipso facto, not confirmable because it cannot provide for any payments to the trustee and can hardly be considered to have been filed in good faith. Consequently, if the attorney signs and files a chapter 13 petition that also could hardly be termed well-grounded in fact or warranted under existing law, what is left—a chapter 11? Surely not even Congress believes that is a viable alternative for a consumer debtor.

So the attorney is faced with the situation of telling the client, "Sorry, but I cannot represent you; you will either have to go it yourself or perhaps seek the 'help' of a bankruptcy petition preparer." To make matters worse, the attorney would have to advise the client that if the client filed a petition under chapter 7, unless the combined income of the debtor and the debtor's spouse (whether or not filing jointly) is less than the median income for a family of the same or smaller size, the case is subject to dismissal. In addition, the client could be liable for sanctions. (Although it is questionable whether any trustee or U.S. Trustee would request that sanctions be imposed or that a court would impose sanctions if requested, Rule 9011 nevertheless allows sanctions to be imposed, and an attorney would be remiss if that was not explained to the client.)

There may be a potential "out" for the attorney where the combined income of the debtor and the debtor's spouse is less than the applicable median income, because the case may not be dismissed if that condition exists. The reason a chapter 7 petition would not be dismissed in that situation is not because the filing would not constitute an abuse as defined in §707(b)(2), but because under §707(b)(7) no one has standing to bring a motion under §707(b)(2). It may be difficult, if not impossible, to make a "not an abuse" certification whereby statutory definition of abuse exists even if no one has standing to raise the issue. On the other hand, it is equally, if not more, difficult to fault an attorney who signs and files a chapter 7 petition under those circumstances. Perhaps this is a situation where the literal reading of the statute would result in an absurdity and does not express true congressional intent. It appears clear that Congress intended to provide a "safe harbor" for those debtors whose gross annual income was less than the applicable median income (see H.R. Rep. 108-40, 130 (2003)). One's comfort level would be raised if Congress, instead of eliminating standing to challenge the petition as an abuse, simply stated that the presumption of abuse under §707(b)(2) does not apply if the combined income of the debtor and the debtor's spouse was less than the applicable median income, as is the obvious intent.

Conclusion: Count Me Out

I know not about others, but for me the party is over. Congress has sung and I do not like either the melody or the lyrics, so it is time to bring down the curtain on representing consumer debtors except, perhaps, pro bono cases. Representing consumer debtors is not particularly financially lucrative, and the added burdens and risks of the Act are simply more than I care to bear. Nor do I want to be placed in the position of having to advise a single mother receiving child support for three children, who is saddled with enormous debt left over from a failed marriage and is being harassed by debt collectors, that Congress has determined she is not entitled to bankruptcy relief. Or tell the same thing to "Joe Sixpack" who has borrowed from his pension plan in a good-faith effort to pay medical bills for a disabled child, but is still saddled with insurmountable debt. I would much rather let the politicians explain the logic for that. If it is the intent of Congress to create a situation where consumer debtors will find it difficult to obtain legal assistance in filing bankruptcy, Congress may succeed beyond its wildest expectations.


1 Board-certified in business and consumer bankruptcy by the American Board of Certification. Return to article

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Tuesday, July 1, 2003