Restrictions on Debt Relief Agencies: Overview of Bankruptcy: Chapter 13, Section 526

Series: #2 0f 13

As we mentioned in the first article of this series, “Chapter 7 and Chapter 13 Bankruptcy Code Overview: Introduction to Sections 526, 527 & 528“, Section 526 requires (among other things) debt relief agents to provide all services promised; properly advise the assisted person on benefits and risks associated with filing bankruptcy; refrain from advising assisted persons to make untrue or misleading statements; and may not advise the assisted person to incur more debt in contemplation of filing bankruptcy. While these issues seem clear and unambiguous on first reading, a closer understanding of this section shows the potential risks.

For example, is taking a retirement loan “incurring debt”? It would appear so as 11 U.S.C. § (12) defines “debt” as a “liability on a claim.” But see 11 U.S.C. § 362(b)(19)1 which states that there is no automatic stay in place for the withholding and collection of a retirement loan and that “nothing in this paragraph may be construed to provide that any loan made under a governmental plan under section 414(d), or a contract or account under section 403(b), of the Internal Revenue Code of 19861 constitutes a claim or debt under this title.” What advise can you give a debtor who needs a vehicle and asks you if it is advisable to purchase the vehicle prior to filing? Should an attorney stay silent in this regard?

Many of these questions were answered on March 8, 2010 by the United States Supreme Court in the case, Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. _____ (2010)2 on Writs of Certiorari to the United States Court of Appeals for the 8th Circuit. Justice Sotomayor delivered the Court’s opinion which held three tenants:

1) Attorneys who provide bankruptcy assistance to assisted persons are debt relief agents (“DRAs”) under BAPCPA. Milavetz relied on the fact that 11 U.S.C. § 101(12)(A)1 does not specifically include attorneys. The Justices brushed that issue aside easily stating that the only other group it would apply to would be petition preparers.

However, the definition includes both “any person” who provides bankruptcy assistance to an assisted person or who is a “bankruptcy petition preparer”. Accordingly the only “person” referred to would include attorneys;

2) Section 526(a)(4)1 prohibits a DRA from advising a debtor to incur more debt because the debtor is filing for bankruptcy, rather than for a valid purpose. The controlling question is whether the thought of bankruptcy was the impelling cause of the transaction. The DRA would be prohibited from advising the debtor to “load up” on debt with the expectation that debt would simply be discharged in bankruptcy. Does that answer the question?

What if a debtor, after completing the means test (Form B22) has disposable income available only because the debtor has no vehicle and would thus not qualify for a Chapter 7? Can the DRA advise the debtor to “load up” on an automobile payment for the purpose of qualifying for a Chapter 7?

3) Finally, the Court held that the notice requirements of Section 528 are valid and do not violate the First Amendment as the disclosure requirements are not unduly burdensome and are reasonably related to the government’s interest in preventing deception of consumers. Without such disclosures, consumers may believe that they are obtaining simple debt relief without the reference to the potential for filing bankruptcy which has inherent costs to consumers.

Section 526 continues by stating that any contract that does not comply with Sections 527 and 528 are void and may not be enforced by any person other than the assisted person. Further, a debt relief agent is liable for fees and charges paid for failure to comply with Sections 526-528.

Most importantly, Section 526 states that if the court, on its own motion or motion of the United States trustee or the debtor, finds that a person intentionally violated this section, or engaged in a pattern of violating this section, the court may enjoin the violation and impose a civil penalty on the debt relief agent. In other words, despite the “clarity” provided by the Supreme Court, the DRA must be cautious as to any advice regarding incurring debt prior to filing.

Next: Disclosure / Requirements for Debt Relief Agency: Section 527 / Section 528, Overview of Chapter 13 Bankruptcy

(links open in new windows)
1. Cornell University Law School Legal Information Institute
2. United States Supreme Court


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*Disclosure required by 11 U.S.C. § 528(a)(3): We, the law office of Tom Scott & Associates, P.C., are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.