The 2005 Bankruptcy Amendments: New Traps
Emerge for the Casual Practitioner
By Hugh Ray, III
Bankruptcy, like neurosurgery, is not for the dilettante.
That is true now more than ever. The Bankruptcy Abuse Prevention
and Consumer Protection Act, most provisions of which went into
effect October 17, 2005, will keep most general practitioners
out of the area. Here is a list of some of the reasons you,
as a general practitioner, may wish to reconsider ever filing
a bankruptcy case again.
Consumer Bankruptcy Traps
1. All lawyers who help people file consumer bankruptcies
(even a handful) are now "debt relief agencies" and
must state on all advertisements, web pages, and (possibly)
letterhead that "We are a debt relief agency. We help people
file for bankruptcy under the United States Bankruptcy Code."
Imagine the effect on your solo practice if you had to put that
disclaimer on every e-mail and advertisement!
2. The new law institutes means testing and mandatory credit
counseling for all consumer cases. This requires knowledge of
a new and undeveloped area of the bankruptcy code. What is "income"?
What counts as a "family" or "dependant"?
If your client runs to you the day before foreclosure, it may
be too late to get credit counseling, but without it your client
will have the case dismissed, and refiling will not necessarily
stop foreclosure. If your client fails the means-test, you are
forced to file a Chapter 13, which usually requires a plan of
reorganization that pays all nonessential income to creditors
for five years. A client only gets one free chance at the automatic
stay, so if it is not done right and the case is dismissed,
the client is significantly prejudiced.
3. Personal liability is now imposed on all lawyers who file
consumer cases if they fail to a) give specific statutory warnings
to their clients in writing before filing the case or b) fail
to independently investigate the debtor's claims of assets and
liabilities. Independent investigation means that the debtor's
counsel cannot trust the client's own sworn statement of assets
and liabilities. However, general practitioners often lack the
facilities to run asset searches, credit reports, and other
investigations of their clients.
4. New rules of bankruptcy procedure have been published in
every jurisdiction to implement the new bankruptcy amendments.
They require filings of payment advices, previous three years'
tax returns at the meeting of creditors, and so forth. These
rules (and the local rules) impose deadlines for the affirmative
duties of bankruptcy counsel. Accordingly, it is easy to miss
a deadline.
Business Bankruptcy Traps
1. One new trap appears for all business bankruptcies. If
your business's debt is below $2 million (or the unsecured creditors'
committee is "not sufficiently active") the case becomes
a "Small Business Chapter 11." Small business Chapter
11 cases are subject to strict reporting requirements on a monthly
basis. These new reporting requirements are tougher than the
statutory requirements imposed on large businesses. Frankly,
the small business Chapter 11 is daunting for experienced bankruptcy
counsel and requires significant lawyer time.
2. A solo practitioner cannot represent most debtors in Chapter
11 without finding the same traps that apply to consumers in
Chapter 13. The Chapter 11 case requires virtually all disposable
income to be paid to the creditors. That means the individual
debtor cannot maintain his lifestyle, even if he has significant
income. No more Mike Tyson Chapter 11's.
Conclusion
Congress has taken a specialized area of the law and made
it even more obtuse. Previously, small firm practitioners could
assist companies in small Chapter 7 or Chapter 13 bankruptcies.
Now, unless they are willing to change their entire practice
to accommodate a few bankruptcy cases, the cases need to be
referred to a specialist.
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