If anyone is going to go bankrupt, they’d better do it before October 17. That’s when a new federal bankruptcy law takes effect that experts say will make the bankruptcy process more difficult and more costly.
Especially of concern to bankruptcy lawyers is a new provision that attorneys must make “reasonable inquiry to verify that the information contained” in bankruptcy petitions and schedules is “well grounded in fact.” In other words, an attorney will be held personally liable for any client inaccuracies and, thus, will have to independently check all the client’s facts. In addition, the attorney would have to conduct investigations into all assets clients have listed. The American Bar Association opposes this and two other provisions of the new bankruptcy law.
The Congressional Budget Office estimates that complying with the new provisions would increase attorney costs as much as $500. Some bankruptcy attorneys are saying that figure is very conservative considering that they’ll have to hire experts, including accountants, to adhere to the provisions. One attorney estimates that a Chapter 7 filing cost of $800 to $1,000 today will be $2,000 to $2,500 come October.
“I know of many attorneys who have indicated they will no longer take (bankruptcy) cases,” says Marc S. Stern, co-chair of the ABA General Practice, Solo & Small Firm Section’s Bank-ruptcy Committee. “Plus, I know a number of large law firms that have indicated they will no longer allow their associates to take pro bono (bankruptcy) cases because the liability is too high.”
Malpractice policies traditionally cover negligence of an attorney, and almost all such policies exclude fines, penalties, or special damages, according to Carl Younger, president of Lawyers Mutual Liability Insurance Company of North Carolina, which is owned and controlled by the lawyers of the state.
“We are concerned that attorneys might assume that claims against them arising out of work under this act would be covered by their malpractice policy when in many, if not most, cases coverage would not exist,” Younger says.
The legislation makes it harder for someone to qualify for Chapter 7 relief, under which debtors may be able to wipe out their debts. Instead, debtors may have to file Chapter 13, under which they’ll have to work out a plan to repay creditors. Chapter 13 filings are more labor intensive than Chapter 7 filings and therefore more costly.
Another provision opposed by the ABA will require that the attorney certify the debtor’s ability to make payments under a reaffirmation agreement. This will force attorneys to conduct time-consuming, costly audits of their clients’ finances.
Finally, the ABA opposes a provision of the bill that will require bankruptcy attorneys to identify and advertise themselves as “debt relief agencies.” This will create myriad new, more demanding regulations. The ABA argues that the required wording for all written materials, “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code,” is burdensome and misleading.
Younger adds that most legal malpractice policies are limited in their coverage to the practice of law. “Coverage may be questioned for actions taken as a ‘debt relief agency’ when compared to normal coverage for ‘practicing law,’” he says. “It is distinctly possible that a debtor would be required to purchase another policy to cover liability of the ‘debt relief agency.’”
The ABA further argues that, under the provision, attorneys will have to provide government-mandated legal advice while not allowing them to give clients certain prebankruptcy planning advice.
“The debt relief agency provisions are insidious,” Stern says. “They compel speech and at the same time curtail free speech. If you cannot fully advise your clients as to their rights to lawful activities, how can you represent them?”
Stern says that the legislation is the camel’s nose under the tent. “It is a direct attack on the attorney-client privilege. First they came for the bankruptcy lawyers.. . . I do not think that I am being too melodramatic,” he says. “There is an attack on the independence of the profession and, by implication or maybe by design, the judiciary. If the implication of that is not apparent to bar leaders, they should not be bar leaders.”
While balking at provisions in the bill, the ABA does not oppose the overall bill and actually supports provisions in the bill that will (1) allow many final bankruptcy court orders to be appealed directly to the regional courts of appeal and (2) allow bankruptcy attorneys to pay referral fees to nonprofit attorney referral services.
“This is a major overhaul of a law that was really working pretty well,” says Atlanta attorney Shayna M. Steinfeld, who is a member of the Bankruptcy Committee. “The law had some loopholes that could have been fixed to cure the abuse, which is at most 5 percent of the cases, but the ‘fix’ is like killing an ant with a sledgehammer.”
Earlier this year, at President Bush’s urging, the Senate overwhelmingly passed the bankruptcy reform, 74–25, and the House easily passed the bill, 302–126.
The credit card industry has pushed for bankruptcy legislation for about a decade. “They have spent millions of dollars on campaigns of folks voting on the legislation and trying to convince Washington of the seriousness of ‘bankruptcy abuse,’ without any regard for the industry’s lending practices,” says Steinfeld, who notes that a bill to prevent the credit card solicitations to college students without jobs failed last year.
Ironically, banks and credit card companies may regret what they wished for, says Clark Howard, an Atlanta-based consumer advocate. He says that the new bankruptcy law has scared people into paying down their credit card bills at an unprecedented rate. This has contributed to a decline in profits for the companies. “Keep paying down your debts and let the credit cards reap what they sow,” Howard recently told his national radio audience.
While the bill is a certainty, there is still a chance that the attorney liability provisions will be amended in the technical corrections bill that is now being written. Therefore, the ABA continues to work closely with more than 25 state and local bar associations in an effort to reverse those three provisions.
“It is not too late to change the impact of these terrible provisions,” says Corinne Cooper, a member of the ABA’s General Practice, Solo & Small Firm Section, where the effort to oppose the attorney liability provisions began. “All state and local bar associations should be contacting their congressional delegations asking for these changes to be made, as vehemently and frequently as possible.”
“It sets a terrible precedent for Congress to be legislating what attorneys must and may not say to their clients, and raises profound constitutional issues as well,” she says. “This should concern all lawyers, not just those who practice bankruptcy law.”
In the meantime, many lawyers are dealing with the cards dealt them. The Rhode Island Bar Association planned a CLE program and had a brochure in production within a week of President Bush signing the bill into law. The program, held June 17, dealt with many aspects of the bill but focused on those already in effect.
“Our bar association felt that a CLE program was urgently needed,” says Helen McDonald, executive director of the Rhode Island Bar Association. “Part of the urgency is due to the fact some certain new key provisions are effective immediately, not in 180 days as widely advertised.”
McDonald adds that the association is concerned that the liability and administrative burdens on debtor bankruptcy attorneys will result in effectively denying legal representation to Rhode Island citizens, in particular those who are represented through the volunteer lawyer programs. “We think it is extremely likely that many of our volunteers will no longer take these cases,” she says.
Alex Macdonald, who oversees the Cuyahoga County (Ohio) Bar Association’s Bankruptcy Pro Bono Project, says that the by-product of some lawyers leaving the field of bankruptcy means there will be even less access to the system and higher legal fees that will have adverse consequences for the poor and lower-middle class.
“This is why bar associations should be reaching out to the community and developing bankruptcy pro bono projects to assist the people in their community who will be adversely impacted,” he says.
The Cuyahoga County Bar Association—in cooperation with the Legal Aid Society of Cleveland, the U.S. Bankruptcy Court for the Northern District of Ohio, and the Office of the United States Trustee—has been referring bankruptcy cases to pro bono lawyers since 2003. More than 40 volunteer lawyers have provided about 3,000 hours of pro bono assistance to more than 300 families.
To help educate members on the new bankruptcy law, the Cuyahoga County Bar is holding multiple CLE programs. Members who take pro bono bankruptcy cases will be able to attend a program at no charge.
Macdonald says that local bar members have expressed general concern about the new bankruptcy law but specific concern about the adverse effects the new law will have on the poor.
“As is true with most money-driven legislation,” he says, “it is the poor that suffer the greatest impact. And in my opinion, this legislation will be no different.”