Monday, July 17, 2006

The Empire Strikes Back: The Government Files Its Reply Brief in the Suit Over BAPCPA's Debt Relief Agency Provisions

I have previously written about the suit filed by the Connecticut Bar Assocation and the National Association of Consumer Bankruptcy Attorneys seeking to overturn the debt relief agency provisions of BAPCPA.

Blaming Attorneys

The United States has now responded to that suit and its defense of BAPCPA focuses largely upon the perceived ethical shortcomings of consumer debtors’ attorneys.

“In enacting the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), Congress found that there was ‘abuse by attorneys and other professionals.’ (citation omitted). To correct this abuse, Congress included in BAPCPA ‘provisions strengthening professionalism standards for attorneys and others who assist consumer debtors with their bankruptcy cases.’”

Memorandum in Support of Motion to Dismiss and in Opposition to Plaintiff’s Motion for Preliminary Injunction, p.1, filed on June 30, 2006 in Case No. 3:06CV729 (U.S. District Court for the District of Connecticut).

The USA goes on to quote from the legislative history to BAPCPA:

“Looking for the source of this meteoric increase in bankruptcy filings, Congress determined that the bankruptcy system “ha[d] loopholes and incentives that allow[ed] and—sometimes-- even encourage[d] opportunistic personal filings and abuse (citation omitted) and that attorneys sometimes played a role in exploiting these “opportunities.”

Memorandum, pp. 8-9.

The U.S. Trustee program is quoted for the proposition that “[a]buse of the system is more widespread than many would have estimated.” Another witness testified that some debtors are told that they are consolidating their debts and do not know that they have filed bankruptcy, while the Fifth Circuit’s own Judge Edith Jones is cited for the statement that “many” bankruptcy lawyers never talk to their clients; another witness testified that bankruptcy practices are run like mills and that clients do not receive adequate disclosures. Finally, Bankruptcy Judge Carol Kenner is cited for the proposition that many debtors sign reaffirmation agreements without adequate disclosure.

The picture painted here is one of out of control lawyers causing a national bankruptcy crisis. It is disheartening that a Congress full of lawyers found it necessary to blame lawyers for the level of bankruptcy filings. Of course, neither the Justice Department nor the legislative history discuss the studies finding a direct correlation between the amount of consumer debt in the economy and the number of consumer bankruptcies filed.

Tempering the Language of BAPCPA

However, the news is not all bad. In several instances, the lawyers for the Justice Department argue that the provisions applicable to attorneys are not really as bad as they appear.

BAPCPA prevents attorneys from advising prospective to incur debt “in contemplation of” bankruptcy. The plaintiffs (the Connecticut Bar Association, the National Association of Consumer Bankruptcy Attorneys and others) argued that this gagged attorneys from advising their clients about how to beneficially structure their debts, such as refinancing a high interest loan. The USA contends that “in contemplation of” bankruptcy means because of filing bankruptcy. Under this construction, the only advice which would be prohibited would be to incur debt for the sole purpose of having it discharged in bankruptcy.

In another instance, BAPCPA requires attorneys to state, “We are a debt relief agency. We help people file for bankruptcy under the Bankruptcy Code” in certain advertisements directed to the general public. While this requirement is patently offensive in any circumstance, the attorneys for the government try to minimize its effect, claiming that it only applies to advertisements directed to prospective consumer debtors. If the government is correct, then attorneys who represent debtors, creditors and trustees would not be required to place this disclaimer on their websites or other material generally promoting the firm. However, this is still a silly requirement. When an attorney says “We are a debt relief agency,” it suggests that he is affiliated with a government or non-profit agency.

The irony with the mandatory debt relief agency statement is that Congress identified a legitimate problem and then failed to fix it. There are some persons who advertise credit repair or debt consolidation when they mean bankruptcy. I would suspect that many of the people doing this are not lawyers and will not be affected by the statute. Congress could have fixed a legitimate problem by simply prohibiting deceptive advertisements. Instead, it mandated a silly slogan which does little to fix the problem while dissuading legitimate attorneys from representing consumer debtors.


The District Court heard oral argument on July 13 and has taken the matter under advisement.

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