One of the least popular aspect of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) has been its provisions governing "debt relief agencies." It is fairly apparent that Congress believed that one cause for growing bankruptcy filings was unethical attorneys. Their answer was to define and regulate "debt relief agencies." The Connecticut Bar Association and the National Association of Consumer Bankruptcy Attorneys have filed suit to invalidate BAPCPA's regulation of attorney debt relief agencies. More on that later, but first a little background on why this matters.
Who is a Debt Relief Agency?
Under the statute, a debt relief agency is a person who provides "bankruptcy assistance" to an "assisted person" in return for money or other valuable consideration. 11 U.S.C. Sec. 101(12A). "Bankruptcy assistance" consists of providing goods or services to an assisted person with the purpose of "providing information, advice, counsel, document preparation, or filing, 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." 11 U.S.C. Sec. 101(4A). An "assisted person" is a person whose debts consist primarily of consumer debts and whose non-exempt property is worth less than $150,000. 11 U.S.C. Sec. 101(3). A debt relief agency does not include an officer, director or employee of a debt relief agency, a non-profit organization exempt from taxation, a creditor who is assisting a debt with restructuring a debt, a depository institution or an author acting in his capacity as author.
Put it together and what do you have? If you accept money for providing legal advice or representation to a person with primarily consumer debts and non-exempt property worth less than $150,000, then your firm is a "debt relief agency." Conversely, if you want to avoid being a debt relief agency, you must limit your practice to pro bono work or only accept clients with non-consumer debts.
An opinion released on the first day that BAPCPA took effect held that attorneys were not debt relief agencies. In re Attorneys at Law and Debt Relief Agencies, 332 B.R. 66 (Bankr. S.D. Ga. 2005). However, this opinion is almost certainly wishful thinking. When the statute defines bankruptcy assistance as providing legal representation, it is hard to conclude that lawyers are not implicated.
What Requirements Apply to Debt Relief Agencies?
Congress devoted three full sections to regulation of debt relief agencies. 11 U.S.C. Sec. 526-528. In my copy of the Code, these sections take up 3 1/2 pages of small text. Obviously, Congress wanted to make sure that there were a lot of standards applied to debt relief agencies. Among the more onerous requirements are the following:
(a) A debt relief agency may not make a statement in a document filed in a case that is untrue or misleading. 11 U.S.C. Sec. 526(a)(2). Why is this bad? It makes the attorney guaranty the accuracy of his client's statements. Thus, if the client fails to inform the attorney about his bank account in the Cayman Islands and the attorney files schedules which omit that asset, the attorney has just violated federal law. There does not appear to be any requirement that the false statement be made knowingly or that it be material. The mere existence of any false statement is a violation. To make things more egregious, the same requirement does not apply to creditor's lawyers. They can make false statements on behalf of their clients so long as they don't violate Rule 9011.
(b) A debt relief agency may not advise a client to incur more debt in contemplation of a bankruptcy. 11 U.S.C. Sec. 526(a)(4). Why is this bad? It limits the advice an attorney can give his client. Does the client have a worn out car that gets low mileage and costs a lot of money to repair? Getting a new full-efficient vehicle at a low interest rate might be a good idea. However, the attorney can't suggest that to his client or even give an answer when the client asks the question.
(c) No later than five days after the first date on which a debt relief agency provides any bankruptcy assistance to a client, the debt relief agency must execute a written contract with the client. 11 U.S.C. Sec. 528(a)(1). Why is this bad? It assumes that a client will know whether he wants to hire the attorney within five days from the first consultation. What happens if the attorney charges $50 for an initial consultation and the client decides not to file bankruptcy based on the attorneys advice? In this scenario, the attorney is clearly a debt relief agency because he charged money for providing bankruptcy advice. Therefore, he must execute a written contract with the assisted person within five days. He must do this even if no future services are contemplated. Another common scenario applies where an attorney gives an initial consultation without charge and does not hear back from the prospective client again for months. In this situation, the attorney is still required to execute a written contract because he provided bankruptcy assistance to an assisted person. So what is the attorney to do? The attorney must prepare a series of different contracts for each stage of the process. If nothing else, this is overregulation and needless creation of paperwork.
(d) If the attorney chooses to advertise bankruptcy assistance services or the benefits of bankruptcy to the general public, the attorney must use the words "We are a debt relief agency. We help people file for bankruptcy under the Bankruptcy Code" or similar words in the advertisement. 11 U.S.C. Sec. 528(a)(3) and (b)(2)(B). Why is this bad? It mandates that specific, stilted language be used regardless of whether it is appropriate. The term "debt relief agency" is likely to mislead the public, since it suggests that the attorney is something other than an attorney. Governments have agencies. Insurance and advertising professionals have agencies. However, attorneys in private practice rarely, if ever, describe themselves as being with an agency. Thus, to comply with the law, an attorney must make a misleading statement and run the risk of discipline from his state bar association. Taking it further, if an attorney has a practice which includes representing both debtors and creditors, he must include specific language which gives the impression that he only represents debtors. In an even more extreme example, an attorney who limits his practice to representing creditors in bankruptcy would have to include the false statement "We help people file for bankruptcy" in his ad. Why is this? If the advertisement offers to help creditors in bankruptcy, it is still an ad for bankruptcy assistance services. Therefore, the required disclaimer must be made even if it is false.
To sum it all up, the provisions governing "debt relief agencies" impose nonsensical requirements which do little to assist the general public.
The Connecticut Suit
On May 11, 2006, The Connecticut Bar Association, the National Association of Consumer Bankruptcy Attorneys and several individual attorneys and law firms filed suit in United States District Court seeking to overturn the provisions of BAPCPA governing debt relief agencies. A copy of the petition can be found at http://nacba.com/files/main_page/complaint.pdf. The Plaintiffs argue alternatively that the debt relief agency provisions do not apply to attorneys or that, if they do, they are unconstitutional under the First and Fifth Amendments and the constitutional principles of federalism and separation of powers. The legal basis for their arguments is set out in a memorandum filed in support of their request for preliminary injunction. NACBA has considerately posted the document in Word format so that anyone who wants to make similar arguments can cut and paste. It is available on the NACBA home page. http://nacba.com.
The Commercial Law League, a leading creditors' rights organization, has filed an amicus brief in support of the plaintiffs.
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