VOL. 124 | NO. 94 | Thursday, May 14, 2009
Local Lawyers Speak Out Against Bankruptcy Act’s Limits
By Rebekah Hearn
As bankruptcy filings soar across the country, many bankruptcy lawyers stand critical of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Lawsuits are popping up throughout the country, attacking the attorney-related provisions of the BAPCPA.
Commonly referred to as the “new bankruptcy law,” BAPCPA altered the earlier U.S. Bankruptcy Code – and many of the alterations directly affect bankruptcy attorneys.
Lawyers mostly challenge two aspects of the newer code.
Licensed bankruptcy attorneys are now considered “debt relief agencies” (DRAs) if they provide bankruptcy advice to clients. In addition, many question the constitutionality of the code, which restricts an attorney’s ability to provide advice to bankruptcy clients.
What does this mean?
Memphis attorney Ben Sissman, a private practitioner at The Law Offices of Ben Sissman, said the biggest issue attorneys have with the changes in the code is “it (means) the individual (filing for bankruptcy) has to pay more to get the same relief.”
BAPCPA discourages debtors from filing a Chapter 7 bankruptcy, under which most debts are forgiven, in favor of Chapter 13. A Chapter 13 bankruptcy means the monies owed are forgiven after the debtor has repaid some portion of their debts.
Prior to BAPCPA, a debtor with any income could file for Chapter 7 bankruptcy, but the new law places more stringent limits. The formula for determining whether a debtor is eligible for Chapter 7 now takes the debtor’s income and compares it to the median income of the debtor’s state of residence. If the debtor’s income is higher than the state’s median, the debtor is subject to a “means test” to determine if they qualify for a Chapter 7.
Attorneys argue this amendment falls under the category of “presumption of abuse.”
Also, bankruptcy lawyers are now termed “debt relief agencies.” Many people think of DRAs as places that advertise they can significantly reduce a person’s debt without having to file bankruptcy.
Placing bankruptcy attorneys in the same category as DRAs has angered many lawyers, including Sissman.
“It is designed to make people think there’s something sleazy about you,” Sissman said. “It’s designed to be offensive. No lawyer wants to stand out there and say, ‘Hi, I’m a lawyer, but I’m also a debt relief agent.’ It doesn’t accomplish anything other than to make lawyers look bad.”
But that’s the law now. Sissman’s own Web site, www.sissmanlaw.com, bears the required disclaimer that reads, “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.”
Do’s and don’ts
Holly Schumpert, a private practitioner at the Holly Schumpert Law Office, explained what bankruptcy attorneys are now required by law to do – and what they can’t.
“Mainly, when you’re dealing with the constitutional concerns (of the code), you’re dealing with the ability – or the inability – of an attorney to provide legal advice to a possible debtor,” Schumpert said.
She gave the example of someone who is anticipating a bankruptcy filing, but owns an old or broken-down car they need to replace. However, if the client tries to purchase the car before bankruptcy, it could look bad to the bankruptcy courts; if the client waits until after filing, they could end up in a bad financing plan.
“If you can’t advise them to incur debt, but you know they can’t get through (a bankruptcy) with the vehicle they have, what do you tell that person to do?” Schumpert said.
Counseling a client in such a way could cost a lawyer his or her career.
“As any lawyer will tell you, it happens all the time; there are reasons why you would need to (incur debt),” Sissman said. “But I can’t tell you to go out and incur debt, no matter how badly it may be needed, in contemplation of bankruptcy. I could lose my license.”
Even if the attorney consults with a client on a non-bankruptcy related issue, there are multiple bankruptcy disclosures the client is now required to sign.
If a client is seeking advice on a different issue, but bankruptcy is even mentioned, at that point, Schumpert said, she must provide the client with “ridiculous disclosures that are really there to, I believe, scare people from filing.”
Many clients could indeed be frightened by bankruptcy disclosures, especially when they are not even seeking bankruptcy help.
“It’s just redundant,” Schumpert said. “I have a three-page form that has all the required disclosures, (and) before I sit down and talk with anybody, I have to hand them these … and people say, ‘Well, I don’t want to sign this,’ and I have to just say, ‘I’m sorry.’ All it is saying is that you received these disclosures, but it scares people.”
Also, under the new code, debtors filing bankruptcy must attend credit counseling sessions and receive a certificate of completion, which is valid for 180 days. Clients have to pay for the sessions, and they can’t file without the certificate.
“So now, you’re having to come up with more money to say, ‘I don’t have any money,’” Schumpert said.
She said the credit counseling is helpful to some, but she calls most of the classes “absolutely ridiculous.” Schumpert said when she asks clients if the class helped, she is often told the courses consisted of evergreen advice such as, “Go find a third or fourth job,” “Change your light bulbs for lower wattage to save electricity,” and “Don’t grocery shop while you’re hungry.”
“By the time they’re taking that counseling, they know they’re filing for bankruptcy. It’s just that they have to jump through that hoop,” Schumpert said.
Attorneys have filed lawsuits throughout the country against the bankruptcy code amendments. Three petitions for a review, including one case that lost on a First Amendment issue, are currently pending before the U.S. Supreme Court, according to The National Law Journal.
Also, three other suits are pending in the 2nd and 9th U.S. Circuit Courts of Appeals.
Most of the court challenges focus on three attorney-related provisions of the code: sections 526, 527 and 528, which deal with terming lawyers DRAs. Section 342 addresses the disclosure requirements.
“The 5th and 8th Circuits (the only circuits to have ruled thus far) have interpreted ‘debt relief agencies’ to include licensed attorneys who provide bankruptcy help to an ‘assisted person,’” according to The National Law Journal.
An “assisted person” is someone whose debts are mostly consumer debts and has nonexempt property valued at less than $150,000.
Henry Sommer, immediate past president of the National Association of Consumer Bankruptcy Attorneys, has questioned the constitutionality of the code.
“We have a lot of affidavits and declarations from attorneys in all types of practices showing how the provisions have affected them and confused clients,” Sommer told The National Law Journal.
“We want this whole debt relief scheme declared unconstitutional.”