Attorney Obligations During Bankruptcy

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 created new obligations for “debt relief agencies” engaging in bankruptcy related services. For a definition of a “debt relief agency,” see 11 U.S.C. §101(12A). The United States Supreme Court in Milavetz v. U.S., 130 S.Ct. 1324 (2010), held that “attorneys are debt relief agencies when they provide qualifying services to assisted persons.” As debt relief agencies, bankruptcy attorneys are instructed by the Bankruptcy Code to avoid certain conduct and are required to provide information and notices to clients (called “assisted persons”) found in Sections 526, 527, and 528.

Section 526 directs that a debt relief agency shall not (1) fail to perform any services promised to a client; (2) make any untrue or misleading statement, or counsel a client to make an untrue or misleading statement in connection with a bankruptcy case; (3) misrepresent any promised services or the benefits and risks of filing bankruptcy; or (4) advise a client or prospective client to incur more debt.

Section 527 mandates that the debt relief agency must give written notices to a client within three days of first offering to provide bankruptcy assistance, including:

1. A written notice required by Section 342(b) which is filed with the clerk at the time of the bankruptcy filing (currently Official Form B201A, Notice to Consumer Debtor(s) under §342(b) of the Bankruptcy Code; and Official Form B201B, Certification of Notice to Consumer Debtor(s) Under § 342(b) of the Bankruptcy Code );
2. A clear and conspicuous written notice advising the client of the necessity to be truthful in all statements and disclosures throughout the bankruptcy process; that assets and replacement value must be completely and accurately listed after reasonable inquiry; that Means Test information must be truthfully listed after reasonable inquiry; and that the client’s case may be subject to audit and sanctions. A copy of this notice must be retained by the debt relief agency for two years;
3. A statutory form listed in Section 527 describing rights and debt relief agency duties; and
4. A description of how to identify and schedule all the information the client is required to provide under Section 521, including a list of creditors, the schedule of assets and liabilities, the schedule of income and expenses, and the statement of financial affairs. Additionally, the debt relief agency is directed to instruct the client in writing how to determine replacement value and exempt property.

Section 528 requires that a contract between a debt relief agency and client must be in writing and “clearly and conspicuously” explain the scope of services that the agency will provide and the fees or charges for such services.

Violations. The penalties for violating these sections are harsh. “[A]ny contract for bankruptcy assistance between a debt relief agency and an assisted person that does not comply with [Sections 526-528] … shall be void” and may only be enforced by the assisted person. See 11 U.S.C. § 526(b). Additionally, Section 526(c)(2) states that a debt relief agency may be required to pay back all fees and charges received from the client, plus pay any actual damages and reasonable attorney fees and costs, under either of these circumstances:

• if a material requirement of the Bankruptcy Code or the Federal Rules of Bankruptcy Procedure is intentionally or negligently disregarded; or
• if the client’s case is dismissed or converted on account of intentionally or negligently failing to file a required document.