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The Bankruptcy Law Firm - Los Angeles Bankruptcy Attorney

Questions and Answers (Q & A) about the New Bankruptcy Law Amendments:

(Bankruptcy Abuse Prevention and Consumer Protection Act of 2005)

By Attorney Kathleen P. March, former US Bankruptcy Judge, Los Angeles, CA

1. What is the name of the new bankruptcy law:

a. “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005”. We’ll refer to it in this program as “the New Law”.

2. “Consumer Protection” is in the title to the New Law, does the New Law protect consumers?

a. Overall, the New Law would more accurately be named “The Consumer Abuse and Creditor Protection Act of 2005". Overall, the New Law very substantially damages consumers, by reducing the availability and efficacy of bankruptcy for consumer debtors, and increasing the cost. The New Law does amend reaffirmation procedures, 11 USC §524( c ) to require more information to be given to debtors in reaffirmation agreements, and does require “debt relief agencies” to give more detailed disclosures, both of which could be considered to be consumer protection; but doesn’t reign in abusive practices by creditors, like failure to inform there will be interest rates above 20% on credit cards; so overall its NOT “consumer protection” legislation.

3. How significant are the changes that the New Law makes:

a. Extreme. The New Law is the biggest changes in bankruptcy since the Bankrutcy Code, which is the present law, was enacted in 1978. We’ll refer to the pre-amendment Bankruptcy Code as “existing law” in this program. There are over 150 changes that are significant, about 90% in consumer cases, and 10% in non consumer cases

4. Does the new law replace or amend the existing Bankruptcy Code.

a. In form the New Law amends the existing Bankruptcy Code. But there is so much of the Bankruptcy Code that is changed or added by the New Law that in reality the New Law revokes large parts of the Bankruptcy Code, and replaces them with provisions that are much worse for debtors. The convenience of the “amendment” format is that you can use the same Bankruptcy Code layout you are used to, to find the New Law bad-for-debtors provisions, where the old good-for-debtors provisions used to be.

5. What is the overall effect of the New Law:

a. The overall effect of the New Law--and I might add goal--of the New Law is:

i. (1) to substantially reduce the number of consumers who file bankruptcy by making bankruptcy procedurally more difficult, more expensive, and much less beneficial/efficacious for consumers;

ii. 2) for those consumers that do still file bankruptcies under the New Law, to push many more of them into Chapter 13, and to make most Chapter 13 plans 5 years, instead of present 3 years; and

iii. (3) to impose so much danger of personal liability on consumer bankruptcy attorneys for representing consumer debtors in bankruptcy , that many competent consumer bankruptcy attorneys will stop representing consumer debtors in bankruptcy.

6. ETHICS: How does the increase consumer debtor bankruptcy attorneys’ personal liability exposure?

a. At least 5 ways: First, Consumer bankruptcy lawyer is now classified as a “debt relief agency” under the New Law, which imposes additional duties on lawyer. [11 USC §

i. For example, the consumer debtor attorney violates New Law, 11 USC §526(a)(4), if attorney advises consumer clients to take on more debt before filing bankruptcy, assuming, as we expect, that Courts hold that consumer bankruptcy attorneys are within the definition of “debt relief agencies”. Section 526(a)(4) provides that:

“(a) A debt relief agency shall not–(4) advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this ttitle or to pay an attorney or bankruptcy peetition preparer fee or charge for services performed as part of preparing for or representing a debtor in a case under this title”.

We’ll discuss further on in this program how debtor attorneys sometimes need to advise consumer clients to take on more debt as part of pre-bankruptcy planning.

b. Second, Consumer debtor attorneys have more danger of having personal liability for paying the attorneys fees and costs of other parties than under existing law, if sit turns out that the Chapter 7 debtor’s schedules not accurate unless enough pre-filing reasonable investigation to get within Rule 9011 “reasonable Investigation” clause, per added New Law section 11 USC §707(b)(4)( C ), which provides:

“( C ) 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 give 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) [707(b)(1), which is the means testing provisions]”

i. Note, this provision does not have a consumer case limitation, so it would apparently apply in corporate and partnership Chapter 7s, where it can be very hard to know what is going on at the client.

ii. How big a danger is this for cases where the debtor is an individual? Big danger, if debtor is self employed or 1099 basis, because hard to verify income and expense. Even for salaried debtors, very hard to confirm they don’t have a bank account, cash, brokerage account, jewelry, or extra vehicles because no on line source to check these. Aren’t Westlaw data bases for these things. Re real property, could do a Westlaw data base or Lexis real property/real property liens check, if you subscribe to those data bases, which are expensive to subscribe to, and, in my experience, are NOT complete. But I guess prudent attorney will run a real property check for county debtor lives in and keep the printout, to show you tried to verify what real property the debtor has. Of course if the real property is in a different state or country, you are not going to find it.

iii. Real question is what constitutes a “reasonable investigation” before filing a Chapter 7 bankruptcy case. It will take years of case law to flesh this out, and judges won’t all agree, depending on their personal viewpoints.

(1) Practice Pointer 1: Attorneys should urge their local bankruptcy court to pass a local rule saying if you get x, y, z from your client before filing a consumer chapter 7 case case, that is sufficient reasonable investigation to not flunk this section.

(2) Practice Pointer 2: Certainly any prudent attorney would get the pay stubs for both H and W, plus evidence of any additional income, the tax returns for 4 years back (more about this later), checking account records, credit report, mortgage or rent bills, car payment bills. And make your client sign a statement under penalty of perjury that they have told you everything they own and owe, and have accurately told you all sources of income and all their expenses. That way, if it turns out to be false, you can claim they lied to you, and it will be harder for the client to claim they told you and you omitted it. Make every client fill out a detailed worksheet of all needed information for the petition docs/schedules/statement of financial affairs, and make them sign at the end of it, under penalty of perjury, saying they have fully and accuately filled it out. Keep it in your file.

c. Third, New Law adds 11 USC §707(b)(4)(D), which provides that:

“(D) The signature of an attorney on the petition shall constitute a certification that the attorney that the attorney has no knowledge after an inquiry that the information in the schedules filed with such petition is incorrect”.

Practice Pointer: If you file a case knowing that data is wrong in the schedules, you clearly flunked Rule 9011 and you deserve to be sanctioned.

i. Important to Note: that this is a 700 series provision, which only applies in Chapter 7 cases, NOT in Chapter 11 or 13 cases. So in Chapter 11 and 13 cases the attorney signature is NOT making such a certification. Note also, this provision does not appear to be limited to a consumer chapter 7, it would apparently apply in a corporate or partnership chapter 7, so beware.

d. Fourth, if Court grants an 11 USC §707(b) debtor-is-abusing-Chapter-7-motion,

“ The Court, on its own initiative or on the motion of a party in interest, in accordance with the procedures described in rule 9011 of the Federal Rules of Bankruptcy Procedure, may order the attorney for the debtor to reimburse the trustee for all reasonable costs in prosecuting a motion filed under section 707(b), including reasonable attorneys’ fees, plus “civil penalties”, if–(I) a trustee files a motion for dismissal or conversion under this subsection; and (ii) the court–(1) grants such motion; and (II) finds that the action of the attorney for the debtor in filing a case under this chapter vioalted Rule 9011 of the Federal Rules of Bankrutpcy Procedure.”

i. “Civil penalties” is a somewhat of an oxymoran. Usually penalties are criminal, aka “fines”, not civil.

8. What is the significance of putting all these “personal liability of consumer debtor attorney” provisions in Section 707 of the Bankruptcy Code?

a. 700 series provisions only apply in chapter 7. So an attorney signing a Chapter 13 or Chapter 11 petition is NOT running the risk of all this personal liability if the schedules turn out to be inaccurate. Obviously, the idea is to scare consumer debtor attorneys into filing Chapter 13 and 11 cases, instead of filing Chapter 7 cases, for their consumer debtor clients by threatening the attorneys with personal liability if they file 7s, but NOT if they file 13s or 11s.

b. One can also infer that main goal of the amendments is to individuals into Chapter 11 and 13, where they will have to pay years of plan payments, NOT to increase honesty, because if they primary goal was increasing honesty the amendments would have imposed personal liability on attorneys regardless of chapter and regardless of whether the case was an individual, corporate or partnership case.

(Section 1 of 10)
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