Bankruptcy Abuse Act Changed Bankruptcy Attorney Liability
Written by: Kristy Welsh
Last Updated: October 3, 2017
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) opened a new era in the history of bankruptcy law and practice. It was passed by Congress and signed into law by President Bush on April 20, 2005.
October 17, 2005 was the day the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 went into full effect, lowering the curtain on the previous era in bankruptcy law. The irony is that when that curtain came down, it crash-landed on the backs of perspective filers and bankruptcy attorneys alike.
What Did the Act Provide?
The BAPCPA gave the U.S. Trustee Program new responsibilities such as:
- Implementing the new means test to determine whether a debtor is eligible for Chapter 7 (liquidation) or Chapter 13 (repayment plan).
- Supervising random audits and targeted audits to determine whether a Chapter 7 debtor's bankruptcy documents are accurate.
- Certifying entities to provide the credit counseling that an individual must receive before filing bankruptcy.
- Certifying entities to provide the financial education that an individual must receive before discharging debts.
- Conducting enhanced oversight in small business chapter 11 reorganization cases.
The U.S. Trustee Program welcomed the opportunity to further enhance the integrity, effectiveness, and efficiency of the nation's bankruptcy system. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 represented an important development in the Program's efforts to improve bankruptcy procedures.
How Did the Act Come About in the First Place?
The new law was the brainchild of such non-legal eagles as lobbyists for credit card companies, and was riddled with hundreds of errors according to Corinne Cooper, professor emerita of law and author of "Attorney Liability In Bankruptcy (American Bar Association, 2006)." Ms. Cooper called the law, "Death by a Thousand Cuts" because there were so many changes that increased a bankruptcy attorney's obligation, which ultimately increased liability.
How the Act Affected Bankruptcy Attorneys
The first of these changes is one that puts the attorney on the spot before a perspective client walks in the door. Any attorney with a bankruptcy practice is required to advertise him or herself as a debt relief agency. The language is specifically spelled out in the statute: We are a debt relief agency. We help people file for bankruptcy relief under the bankruptcy code. This verbiage is not only for print ads, but must be included anywhere the general public may read about the attorneys services including his/her web site.
On the surface, this appears to be a good thing. However, the scarlet letter advertisement, as Cooper refers to it, is every bit as devastating in its effects as the letter Hester Prynne wore. It's ensnaring grasp lies in the definition of debt relief agency. The statue has redefined the term so broadly, that it now includes attorneys who don't have regular bankruptcy practices. A classic example of this is the Family Law attorney who has just represented a woman in a divorce proceeding. The client's ex-spouse is filing for bankruptcy and the woman goes to her attorney to find out how the bankruptcy will affect her. If the attorney counsels the client, s/he becomes a debt relief agency and is required to add the advertising verbiage to all print and electronic materials publicizing the practice. To avoid the trap, the attorney would have to direct the client to find a bankruptcy attorney to counsel her. Dollars and cents, it means two attorney fees instead of one.
The next minefield that attorneys worked to sidestep was the failure to comply with the new certification and debt relief provisions. There are provisions that must be stated in the contract and forms that must be given to clients by specific times. Failure to comply with these means sanctions and penalties. In some cases, the sanctions are so ambiguously written, as with the debt relief provisions, that no one seems exactly sure when a penalty is triggered. In other instances, the sanction is incredibly harsh. A contract between an attorney and client could become unenforceable because of failure to comply. What's more, there is an additional threat that a trustee may have the power to come after the fee the attorney was paid before the contract became unenforceable.
However, the most abusive part of this anti-abuse law is that attorneys are now prohibited from making certain statements to their clients that they would have made in the past because of an ethical obligation. Cooper points to the instance in which a perspective client doesn't have the money to pay a bankruptcy attorney. In the past, the attorney would have instructed the client that it was perfectly legally to borrow the money to pay for representation as long as the client paid the debt and didn't attempt to discharge it. Under the new statute, an attorney is barred from giving this information to a client or risk being sanctioned.
The certification provision for a reaffirmation agreement would be laughable if it were written into a Saturday Night Live skit. But since it's a reality that attorneys must live with, it is far from a laughing matter. Under this provision, when a bankruptcy filer reaffirms a debt after the initial filing, the new statute assumes that the debtor is unable to pay the debt. However, even though that may be the case, the statute still obliges the debtor's attorney to certify that the debtor can pay. Obviously the law assumes that bankruptcy attorneys have the power to predict the future. And we all know what happens when you assume.
There were several cases that challenged the law's constitutionality, but all had been dismissed but one.