An Ethical Overview of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

Laurie Borski

On April 20, 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was signed by President Bush. Most provisions of this bill will become effective 180 days after signing, or on October 17, 2005. If, like me, you do not practice bankruptcy law, you have probably only heard that this new law requires those who have the ability to repay at least a portion of their debts to do so. However, those who are not able to make these payments will have their debts discharged. The law makes special accommodations for family farmers, active duty military personnel, low-income veterans and those with serious medical conditions. The law also requires that debtors undergo approved consumer debt counseling within 180 days of filing bankruptcy and file any unfilled income tax returns within weeks of case filing. It is hoped that this new law will protect those who genuinely need help, stop those who try to commit fraud, and "help make credit more affordable, because when bankruptcy is less common, credit can be extended to more people at better rates. (1)

The ethics impact of the new law are in the restrictions placed on attorneys who represent debtors and on their clients. Lawyers representing debtors will be open to personal liability for monetary sanctions should their debtor client prove to be ineligible for Chapter 7 or if the facts in the petition are later disproved. As a practical matter, attorneys representing debtors will have to carefully screen potential clients, not only to determine whether they are eligible to file a Chapter 7 case and have an adequate amount of dischargeable debt, but also to ensure that the potential client has met the filing prerequisites such as receiving approved budget and credit counseling within 180 days of filing and that unfiled income tax returns have been or are ready to be filed. Business and bankruptcy lawyer Cathy Moran says that this new law imposes new duties on debtors and their attorneys, and failure to timely perform those duties will result in dismissal of the case or lifting of the automatic stay.  For lawyers the consequences of mistakes, inattention, or misfortune become far more serious, as the court and the trustee have less discretion to deal with human frailty and intervening circumstances. The presumption that the debtor is entitled to relief from his debts is effectively replaced by presumptions that the debtor’s filing is abusive until the debtor proves otherwise. (2)

The new law provides that the court may award the trustee’s fees and costs against an attorney who files a Chapter 7 bankruptcy in violation of the rules. The attorney may also be subject to civil penalties. By signing the bankruptcy petition, the debtor’s attorney will be required to certify that he or she has performed a reasonable investigation into the circumstances giving rise to a client’s bankruptcy petition and that it is well-grounded in fact. (3)

According to Sheila M. Williams, editor of CCH Bankruptcy Law Reporter, "[t]he Act essentially requires attorneys to guarantee Chapter 7 means testing. With attorneys facing the prospect of such penalties, the Act is likely to have a chilling effect on Chapter 7 filings making it the exception rather than the rule. Attorneys have great incentive to err in favor of filing Chapter 13 and, in close instances, will be forced to weigh their best interests against that of the client’s." (4)

The new law also reflects Congressional intent to strengthen professional standards of those who assist consumer debtors with bankruptcy cases. Now defined as "Debt Relief Agencies", these professionals, including attorneys, must provide notices to consumer debtors that include alternatives to bankruptcy and matters pertaining to the integrity of the bankruptcy system. Attorneys and others advertising bankruptcy assistance services must disclose that the services provided are for bankruptcy relief. In the advertisement, the agency must include the following statement: "We are a debt relief agency. We help people file for relief under the Bankruptcy Code." (4)

In the view of some, such as debt relief marketer Charles Essmeier, "[t]he net result will probably be chaos, as fewer attorneys will handle bankruptcy cases, credit counselors will raise their fees, and more consumers with problem debt will be clueless as to what they should do next." Essmeier cites statistics suggesting that a large number of bankruptcies formerly thought to be personal bankruptcies of the frivolous are in actuality filings by small businesses. "As a result, the new law may be unfairly targeting consumers for punishment when they are not actually the biggest part of the problem. Worse, it could be harming small businesses." (5)

One thing is for certain: attorneys who practice debtor bankruptcy law will soon be making changes in the way they practice law in order to protect themselves as well as their debtor clients.

Citations:

1. President Signs Bankruptcy Abuse Prevention, Consumer Protection Act, 04/20/05, www.whitehouse.gov
2. Cathy Moran, "Bankruptcy Law Changes", http://www.lawyers.com
3. George Basharis, J.D., Andrew Turner, J.D., and Sheila M. Williams, J.D., "Bankruptcy Reform Legislation Passes House"
4. Sheila M. Williams, J.D., "Bankruptcy Overhaul Enacted – New Rules for Bankruptcy Implemented", 04/21/05
5. Charles Essmeier, "New Bankruptcy Law – Targeting the Wrong People?"

Laurie Borski is Chair of the Professional Ethics Committee of the Paralegal Division, State Bar of Texas. She has served on the Division’s Annual Meeting and Election Committees and is a past president of the Alamo Area Professional Legal Assistants in San Antonio.