From Attorney Liability in Bankruptcy, Chapter 1
- Find out how to comply with the Bankruptcy Abuse Prevention and Consumer Protection Act.
- Learn what disclosures are required by the act.
Ready or not, it’s time to comply with the BRA1 and its many provisions targeted at attorneys representing consumer debtors. This chapter offers an overview of these provisions, which fall into three general categories:
- New certification and sanctions provisions in Chapter 7 cases
- Regulation of attorneys as “debt relief agencies”
- Heightened certification requirements for reaffirmation agreements.
As a fourth category, we offer some discussion of BRA provisions that will affect other attorneys. Just because you are representing someone other than a consumer debtor doesn’t mean you get a free pass under the BRA.2
In addition to the increased burdens on debtors’ counsel, the BRA diminishes the distinction between the services that trained, licensed attorneys provide to their clients and the largely unregulated fields of credit counseling and bankruptcy petition preparation. Chapter 18 has more on this.
Certification and Sanctions in “Abusive” Consumer Chapter 7 Cases
Amended § 707(b) contains the new law’s most prominent feature; the BRA substantially rewrote the section to include the much-discussed “means test” for consumers seeking Chapter 7 relief, as well as a less-noticed good faith filing requirement. Among these changes is new § 707(b)(4), directed at the attorney for the debtor, which:
- alters, for consumer debtors’ attorneys, the certifications made by virtue of their signatures on bankruptcy documents, and
- permits the imposition of unprecedented sanctions against these attorneys.
Under Rule 9011 of the Federal Rules of Bankruptcy Procedure (largely the same as Rule 11 of the Federal Rules of Civil Procedure), all attorneys make certain assurances by signing any document submitted to the court. These rules are designed to prevent frivolous or bad faith filings; they require attorneys to conduct reasonable inquiries into the facts and law in their filings, and to file them only for a proper purpose.
Under the BRA, the signature of the debtor’s attorney takes on greater significance through two distinct provisions. The first of these appears in § 707(b)(4)(C) and provides:
The signature of an attorney on a petition, pleading, or written motion shall constitute a certification that the attorney has—
(i) performed a reasonable investigation into the circumstances that gave rise to the petition, pleading, or written motion; and
(ii) determined that the petition, pleading, or written motion—
(I) is well grounded in fact; and
(II) is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law and does not constitute an abuse under paragraph (1).3
The reference to “paragraph (1)” means that the filing is not an abuse as defined by the means test and good faith filing requirement in new § 707(b)(2) and (3). This provision creates an entirely new potential for attorney liability: representing a losing debtor.
The second certification, codified at § 707(b)(4)(D), says:
The signature of an attorney on the petition shall constitute a certification that the attorney has no knowledge after an inquiry that the information in the schedules filed with such petition is incorrect.4
The schedules contain information about the debtor’s assets and liabilities some of which, like checking account balances, is in flux. Verifying that information is sure to be costly and, in some cases, impossible. Among other things, this rule apparently requires debtor’s counsel to investigate and verify the accuracy of claims against the debtor. Since this information is largely in the control of creditors, it is not clear how an attorney is supposed to comply with this duty.
The courts will set the standards of conduct that apply to these two provisions, including defining what it means to conduct a “reasonable investigation” or when an attorney has “knowledge” of “incorrect” information in the schedules after “inquiry.”5 Still, it’s clear that the BRA creates a significant risk of liability for consumer bankruptcy attorneys faced by no other attorneys. New § 707(b)(4)(A) allows for sanctions to be imposed when the trustee wins a motion to dismiss the debtor’s case based on “abuse.” Specifically, if the court finds that the bankruptcy filing constituted:
- abuse on the part of the debtor, and
- a violation of Rule 9011 on the part of the attorney,
the court may order the attorney to reimburse the trustee all reasonable costs and fees associated with the motion to dismiss. At its heart, this provision is little more than a fee-shifting statute, but with a remarkable distinction: the fees are shifted not to the debtor, but to the attorney alone. It’s worth mentioning that this provision once mandated sanctions against the attorney; if there’s any good news, it’s the change to a discretionary standard.6
New § 707(b)(4) also has a generalized provision that appears to allow the court to assess a civil penalty if it finds the attorney for the debtor violated Rule 9011. The goal and operative effect of this provision are far from clear. Its language makes it subject to interpretive dispute and its point is in question, given that a violation of Rule 9011 already provides a basis for imposing sanctions. This provision was also mandatory in earlier versions of the BRA.
Chapter 13 discusses in detail new § 707(b)(4)’s certification requirements and its potential for sanctions against debtors’ attorneys.
Regulating Consumer Debtors’ Attorneys as “Debt Relief Agencies”
The BRA defines—and deprofessionalizes—debtors’ attorneys as “debt relief agencies” and dramatically regulates an attorney’s practice, from advertising to representation, mandating what the attorney must do and what the attorney is forbidden from doing, with no regard for the best interests of the client. To accomplish its mission, the BRA creates three important definitions:
- “Assisted Person” [AP] is any person whose debts consist primarily of consumer debts, and whose non-exempt assets are worth less than $150,000.
- “Bankruptcy Assistance” includes goods or services sold or otherwise provided to an assisted person, such as legal advice or representation, document preparation or filing, or attendance at a creditors’ meeting or the like, in connection with a case or proceeding under the Bankruptcy Code.
- “Debt Relief Agency” [DRA] is any person who provides bankruptcy assistance to an AP in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer under § 110 of the Code.
Chapter 4 discusses these definitions in intricate detail. Some folks are expressly (and inexplicably, in some cases) excluded from the BRA’s definition of “debt relief agency.” Chapter 5 discusses the counterintuitive and even dangerous results these definitions and their exceptions produce when determining who is and is not a “debt relief agency.”
For debtors’ attorneys, these definitions bring into play an alarming array of new restrictions and duties that apply in three main areas. The first is advertising. The second and third are flip sides of the communication coin: attorneys are prohibited from making some statements and forced to make others.
Any attorney who fits the definition of a “debt relief agency” under the BRA must comply with its regulation of advertisements. If the attorney’s advertisement is directed at the general public and:
- includes a description of bankruptcy assistance, or
- uses language that could lead a reasonable consumer to believe that debt counseling is being offered when in fact the services are directed to providing bankruptcy assistance, or
- offers assistance with credit defaults, mortgage foreclosures or eviction, excessive debt, debt-collection pressure, or an inability to pay any consumer debt,
then the attorney is required to disclose that the services relate to bankruptcy and to include this statement clearly and conspicuously in the advertisement:
We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.
This provision is not only offensive, it’s confusing. It may seem simple on its face, but there is plenty more to say about it. It’s discussed at length in Chapter 9.
No fewer than five written disclosures are required to be given by the DRA attorney to the client—“assisted person” in the new bankruptcy parlance—under the BRA. Each of these has different rules about when the attorney is supposed to provide a given notice, whether its contents must be clear and conspicuous, whether proof of delivery is required, and how long the attorney is supposed to retain a copy in the client’s file.
- The § 342(b) Notice7 must provide descriptions of the relief available under the different chapters of the Bankruptcy Code, and must also include language designed to scare the debtor about criminal liability and Attorney General investigations (although Congress sees this notice as informing debtors of “matters pertaining to the integrity of the bankruptcy system”8).
- Mini-Miranda II sets out specific “advice” the attorney must give, some of which is actually inconsistent with the law. As in the first notice, the debtor’s potential criminal liability must be mentioned.
- The BRA mandates the Prescribed Language Notice, which is very much like those required under federal consumer protection statutes.
- The content of this notice is set out in the statute; attorneys must use the statutory language or language that is “substantially similar.”
- In the “How To” Notice, the attorney must provide “reasonably sufficient information” that, like the second notice, is inconsistent with what the law actually requires. Here, the attorney is also required to advise the client how to perform tasks—such as the valuation of assets—that have perplexed attorneys and courts for some time.
The attorney must provide the client with a written contract, which every lawyer should do anyway. This contract, however, has to make clear and conspicuous both the services that will be provided and the cost and payment structure for those services.
All of these notices are discussed more fully in Chapter 11.
The flip side of the required statements is the BRA’s prohibition on what an attorney can say or do. These prohibitions are discussed along with the mandated notices in Chapter 11.
In some respects, these prohibitions are unnecessary reiterations of ethics and disciplinary rules. For example, the BRA says an attorney can’t advise a debtor to make false statements in bankruptcy papers, which an attorney isn’t allowed to do under any circumstances.
But some prohibitions are also foolhardy—and dangerous. They reach “prospective assisted persons” in addition to actual clients, preclude what could be the best legal advice for a particular client, and create thresholds for liability that are frightfully low. The attorney can’t even tell the client, whose financial distress has become so dire that he sought out the attorney’s help, that it’s okay to borrow the money needed to pay the legal expenses of the bankruptcy.
In many respects, as highlighted above and discussed in greater detail throughout this book, the BRA cuts right into the heart of an attorney’s First Amendment rights. Most perniciously in the debt relief agency provisions, the BRA forces speech in some contexts and prohibits it in others. Chapter 8 looks at these very important issues.
Attorney Certification of Debtor Reaffirmation Agreements
Among the substantial changes the BRA makes to reaffirmation agreements is a new requirement for debtors’ attorneys.
Attorney certifications in this context are not new. For some time, the law has required that a reaffirmation agreement must be accompanied by counsel’s declaration stating that:
- the agreement represents a fully informed and voluntary agreement by the debtor;
- the agreement does not impose an undue hardship on the debtor or his or her dependents; and
- the attorney fully advised the debtor of the legal effect and consequences of the agreement itself and any default by the debtor.
The BRA adds an additional certification if the agreement triggers the statutory presumption of undue hardship; in those cases, the attorney must go further and give assurance that the client can perform the promise to pay the debt. The BRA provides:
If a presumption of undue hardship has been established with respect to [a reaffirmation] agreement, such certification shall state that in the opinion of the attorney, the debtor is able to make the payment.9
Obviously, this creates a serious problem for the attorney. If the client wants to reaffirm a debt, that is the client’s decision, even if doing so flies in the face of the attorney’s sound legal advice. After all, attorneys can’t force their clients to do anything. But the BRA goes a step further by requiring the attorney to certify that the debtor—who has a demonstrated inability to pay a reaffirmed debt—is nevertheless able to pay it. Chapter 14 provides more detail on reaffirmation agreements, including the potential liability for attorneys under the new certification: liability to the creditor for what the debtor owes.
Ethics and Professionalism
Ethics and professionalism issues permeate the attorney liability provisions of the BRA, irrespective of whether the attorney represents consumer debtors or has some other role in the case. Many of this book’s contributing authors raise ethical issues that arise in the context of the each chapter, but we also offer three distinct discussions in this area:
- Chapter 7 is an excellent primer on attorneys’ ethical duties, especially in the world of bankruptcy, where the issues can get very thorny.
- Chapter 16 is an important companion to the ethics chapter, providing a thorough and detailed analysis of attorneys’ criminal liability.
- This book concludes with a view of professionalism in an era of legislative regulation of attorneys, and the dangerous trend that is under way—for all attorneys, not just bankruptcy practitioners.
1. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23 [“BRA”]. The Act is rather euphemistically titled; some opponents refer to it as the Bankruptcy Act Reform Fiasco, or BARF; one named it “The Bankruptcy Prevention and Consumer Abuse Act.” The editors of this book have decided to use “Bankruptcy Reform Act,” “BRA,” or “the Act” as a neutral middle ground. References to a section of the law passed will say “the Act.” All references to “the Code” mean the Bankruptcy Code, codified at Title 11 of the United States Code.
2. Although not nearly so onerous as those directed at consumer debtors’ lawyers, there are provisions in the BRA that will affect attorneys representing creditors and other parties. Chapter 15 takes a closer look at some of the provisions affecting attorneys and others who act on behalf of parties other than consumer debtors.
3. Code § 707(b)(4)(C).
4. Code § 707(b)(4)(D).
5. An American Bar Association task force released a report recommending that “reasonable investigation” and “inquiry” be defined in a manner consistent with the standards developed under Rule 9011 and its “reasonable inquiry” standard. See Chapter 13 for more information about the task force report.
6. See Chapter 3 for more on this change.
7. The names of the required disclosures used in this Chapter were taken from Chapter 11, which talks about all of them in detail.
8. H.R. REP. No. 109-31, at 18 (2005).
9. Code § 524(k)(5)(B).