Debt Relief Agencies

One of the most controversial provisions in the new Act establishes the concept of debt relief agency, defined as any person who provides 'bankruptcy assistance' to an 'assisted person' in return for the payment of money or other valuable consideration. This definition is so broad it encompasses even non-bankruptcy attorneys. And any entity that qualifies as a debt relief agency must identify and advertise itself as such, as well as provide clients with notice and disclose its status.

Certification

Bankruptcy attorneys must perform a reasonable investigation into the circumstances that gave rise to their client's petitions. In addition, by signing off on the schedules and assets of a petition, an attorney certifies that he or she has no knowledge after an inquiry that the information in the schedules is incorrect. For re- affirmations, in addition to verifying that it would not be an undue hardship to re-affirm an existing debt, bankruptcy attorneys must also certify that the client can afford to pay the debt back.

Corinne Cooper, professor emerita of law at the University of Missouri-Kansas School of Law, said most of the problems result from poor drafting in the key definitions.

An assisted person is defined as any person whose debts consist primarily of consumer debts, and whose non-exempt assets have a value less than $150,000 - which includes creditors as well as debtors. And bankruptcy assistance includes any information, advice, counsel, document preparation or filing for an assisted person.

The result is that even lawyers who never handle a bankruptcy matter are implicated.

Family lawyers are tremendously at risk, with the potential for both parties' attorneys to run afoul of the new law, said Cooper, co- author with Catherine E. Vance of a new book, Attorney Liability in Bankruptcy.

Every time you get involved in a divorce, there are questions about debt and who is obligated to pay it, she noted.

Required disclosures

Dallas solo Howard Spector said he provides his clients with the required disclosures despite his objections to the Act, although he personalized them a bit.

I have a big bold section at the beginning that explains to clients that they need to read these disclosures and understand that they were written by creditors to scare people out of filing, he said.

Spector has filed a lawsuit challenging the constitutionality of the Act [see accompanying story], focusing on the required debt relief agency disclosures, some of which he claims are inaccurate and misleading.

For example, one of the required disclosures is that the debtor must pay a filing fee to the court, but you are not required to disclose the fact that the debtor can defer that fee, he said. Other disclosures include telling clients that a Chapter 13 filing requires them to pay whatever they can afford over the next 3-5 years.

That's just not true, Spector said. It doesn't have to be three to five years. Sometimes it is, but not always.

In addition to the required disclosures, lawyers must update all of their advertising under what Cooper calls the scarlet letter provision, identifying themselves as debt relief agencies.

 Some, like Stern - who admits that he hasn't updated his website or yellow pages listing - aren't concerned about repercussions.

But Jeffrey Freedman, who runs a 15-office firm in New York andadvertises in print, on TV and the Internet, said updating all of the firm's information was just part of doing business.

Bankruptcy more expensive

The increased work required to satisfy the certification requirements and limit lawyers' liability has increased their rates - and made bankruptcy even more expensive.

Freedman said that while his firm tries to have compassion for their debtor clients, the increased paperwork and time required for each filing has forced them to raise rates, from $850 for a Chapter 7 to $1,000.

Spector said he had also increased his rates.

Everything requires more time, he said. Now we have to file tax returns and wage statements, compile all of this information and perform the means test, which is just more calculation and more paperwork that raises the price for debtors.

Sommer downplayed concerns about the certification requirements, noting that even prior to the new law attorneys could be sanctioned under federal Rule 11 for filing inaccurate schedules and petitions.

But other lawyers aren't taking any chances.

I think that if you want to satisfy the requirement and certify a client's petition, you have to do quite a bit more background work to make sure the petition is correct, said Mark Laudisio, who practices at the law offices of Jeffrey Freedman in Buffalo.

And lawyers have a good reason to be concerned - under the Act, approximately one in 250 petitions will face an audit beginning in April 2007, 18 months after enactment.

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