The 2005 Bankruptcy Amendments: New Traps Emerge for the Casual Practitioner
Bankruptcy, like neurosurgery, is not for the dilettante. That is true now more than ever. The Bankruptcy Abuse Prevention and Consumer Protection Act, most provisions of which went into effect October 17, 2005, will keep most general practitioners out of the area. Here is a list of some of the reasons you, as a general practitioner, may wish to reconsider ever filing a bankruptcy case again.
Consumer Bankruptcy Traps
1. All lawyers who help people file consumer bankruptcies (even a handful) are now "debt relief agencies" and must state on all advertisements, web pages, and (possibly) letterhead that "We are a debt relief agency. We help people file for bankruptcy under the United States Bankruptcy Code." Imagine the effect on your solo practice if you had to put that disclaimer on every e-mail and advertisement!
2. The new law institutes means testing and mandatory credit counseling for all consumer cases. This requires knowledge of a new and undeveloped area of the bankruptcy code. What is "income"? What counts as a "family" or "dependant"? If your client runs to you the day before foreclosure, it may be too late to get credit counseling, but without it your client will have the case dismissed, and refiling will not necessarily stop foreclosure. If your client fails the means-test, you are forced to file a Chapter 13, which usually requires a plan of reorganization that pays all nonessential income to creditors for five years. A client only gets one free chance at the automatic stay, so if it is not done right and the case is dismissed, the client is significantly prejudiced.
3. Personal liability is now imposed on all lawyers who file consumer cases if they fail to a) give specific statutory warnings to their clients in writing before filing the case or b) fail to independently investigate the debtor's claims of assets and liabilities. Independent investigation means that the debtor's counsel cannot trust the client's own sworn statement of assets and liabilities. However, general practitioners often lack the facilities to run asset searches, credit reports, and other investigations of their clients.
4. New rules of bankruptcy procedure have been published in every jurisdiction to implement the new bankruptcy amendments. They require filings of payment advices, previous three years' tax returns at the meeting of creditors, and so forth. These rules (and the local rules) impose deadlines for the affirmative duties of bankruptcy counsel. Accordingly, it is easy to miss a deadline.
Business Bankruptcy Traps
1. One new trap appears for all business bankruptcies. If your business's debt is below $2 million (or the unsecured creditors' committee is "not sufficiently active") the case becomes a "Small Business Chapter 11." Small business Chapter 11 cases are subject to strict reporting requirements on a monthly basis. These new reporting requirements are tougher than the statutory requirements imposed on large businesses. Frankly, the small business Chapter 11 is daunting for experienced bankruptcy counsel and requires significant lawyer time.
2. A solo practitioner cannot represent most debtors in Chapter 11 without finding the same traps that apply to consumers in Chapter 13. The Chapter 11 case requires virtually all disposable income to be paid to the creditors. That means the individual debtor cannot maintain his lifestyle, even if he has significant income. No more Mike Tyson Chapter 11's.
Congress has taken a specialized area of the law and made it even more obtuse. Previously, small firm practitioners could assist companies in small Chapter 7 or Chapter 13 bankruptcies. Now, unless they are willing to change their entire practice to accommodate a few bankruptcy cases, the cases need to be referred to a specialist.