bankruptcy assistance

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

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

Series: #1 0f 13
This series of articles will take a look at the three sections of the bankruptcy code related to debt relief agents, sections 526, 527 and 528, and the requirements and responsibilities they impose on attorneys that act as a debt relief agency. We will then take an in-depth look at primary reasons why filing Chapter 13 rather than Chapter 7 bankruptcy may be the better (or the only) option for your client.
Pursuant to 11 U.S.C. § 101(12A), a “debt relief agency” means any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration. Accordingly, if the attorney charges any fees whatsoever or receives any other valuable consideration in the area of bankruptcy assistance, that attorney is a “debt relief agent” and must comply with the requirements of Sections 526, 527 and 528.
Future articles in this overview of bankruptcy will discuss:

Chapter 13; Section 526: Debt Relief Agent Requirements

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
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. We will take a more in-depth look at Section 526 in our next post.

Chapter 13; Section 527: Disclosure

Basically, Section 527 requires a debt relief agency to provide very specific written notices to the assisted person “not later than 3 business days after the first date on which a debt relief agency first offers to provide any bankruptcy assistance services to an assisted person.” While this may appear clear on its face, it can be very tricky to follow in certain circumstances.

Chapter 13; Section 528: Compliance

Section 528 has the final list of requirements with which the attorney may or may not be able to comply. We will go into more details about both Sections 257 and 258 in the third article of the series.

Initial Interview & Deciding Which Chapter to Use

Most debtors who walk into your office only know about Chapter 7 bankruptcy and have some common misconceptions about how a Chapter 7 works, how it differs from a Chapter 13 bankruptcy, and how much paperwork they will need to provide to properly prepare and advise the Chapter 7 trustee and the court.
Additionally, a debtor may not qualify for Chapter 7 protection due to any of a number of factors, which we will discuss later in this series.
Even though a debtor may not qualify for a Chapter 7 due to a prior filing or because the debtor has excess income, there are many reasons in which a debtor may find as much or more “stress-relief” in a Chapter 13 reorganization. The attorney must be careful to analyze all the benefits and risks (as required by 11 U.S.C. § 526*(a)(3)(B) and rules of professional responsibility before making such a determination as to which chapter is appropriate.
Next: Restrictions on Debt Relief Agencies: Overview of Bankruptcy: Chapter 13, Section 526

* Source: Cornell University Law School Legal Information Institute