DEBT RELIEF AGENCIES UNDER THE BANKRUPTCY CODE: 

WHO ARE THEY?

By John B. Montgomery, Esq.

Donna M. Donaher, Esq.

In our last edition of Tucker Arensberg's Perspective on Banking Law (September 2005), it described the changes affecting the "small business debtor" under the new Bankruptcy Abuse Prevention and Consumer Protection Act (hereinafter referred to as "BAPCPA" or the "Act"). The Act took effect October 17, 2005. Another area of congressional concern was the activities of attorneys and non-lawyers providing advice and counseling to debtors' seeking the protection of the Bankruptcy laws. It appears that Congress believed that bankruptcy advisors both took advantage of unsophisticated debtors and failed to insure that their client/customers played within the rules when it came to fair and complete disclosure of their assets and affairs to the bankruptcy court.

As a consequence, the Act includes a number of new provisions, specifically Sections 526, 527 and 528, that impose requirements on "debt relief agencies". These are entities that in exchange for a fee, provide "bankruptcy assistance" to an "assisted person."

Because the definition of debt relief agency is quite broad, it is possible that some in the business community with minimal contacts to the bankruptcy system may get caught under the new rules. We want to point out some of the pitfalls and describe the express carve-outs that Congress has provided under these new rules.

• The Act defines a "debt relief agency" (DRA) as any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer under Section 110,
   
• An "assisted persons" means any person whose debts consist primarily of consumer debts and the value of whose non-exempt property is less than $150,000.
   
• The term "bankruptcy assistance" means any goods or services sold or otherwise provided to an assisted person with the express or implied purpose of providing information, advice, counsel, document preparation, or filing, or attendance at a creditor's meeting or appearing in a case or proceeding on behalf of another, or providing legal representation with respect to a case or proceeding under the Bankruptcy Code.
   
• Finally, "a bankruptcy petition preparer" means a person, other than an attorney for the debtor, who prepares for compensation, a petition or other document prepared for filing in a bankruptcy case.

The Act requires DRAs to enter into written agreements with their clients/customers which disclose the extent of the services to be provided and the fees charged. The DRA must also disclose clearly and conspicuously in all their advertising that their services contemplate bankruptcy. They also are required to provide a written detailed notice to all customers of the disclosure requirements of the Code, the obligation for accuracy and truthfulness in all disclosures and that failure to make full and complete disclosure may carry potential civil and criminal sanctions. In addition, DRA are required to advise the client/customer that they may proceed without counsel in the bankruptcy proceeding, or may hire an attorney, or may utilize the services of a bankruptcy petition preparer and that only attorneys and not petition preparers can render legal advice.

Failure to abide by these rules subjects the DRA to civil damages and to possible federal and state sanctions.

Certain parties are expressly excluded from the definition of DRAs. Those excluded include (i) any non-profit entity providing services or advice to debtors; (ii) any creditor of a debtor assisting the debtor to restructure the debt of that creditor (and no one else); (iii) a depository institution, its affiliates or subsidiaries; (iv) any author or publisher that publishes or distributes copyrighted material relating to bankruptcy advice; and (v) the officers, directors, employees and agents of the DRA or any bankruptcy petition preparer. Some of those not expressly excluded are: (i) attorneys, (ii) financial planners and advisors, (iii) creditors assisting the debtor to restructure debt other than the debt of that creditor, (iv) accountants, and (v) stockbrokers and insurance agents who on occasion might counsel their consumer customers as to bankruptcy alternatives.

Within five days of the first date on which the DRA provides any bankruptcy assistance to an assisted person, the Act imposes on DRAs the requirement that they formalize their retention in writing and provide certain disclosure information to the client. Even a casual phone conversation can trigger the beginning of the grace period. Given the short time period, it is critical to understand whether someone giving financial advice or advice in any way related to or concerning a pending or potential bankruptcy case might be considered a DRA.

One bankruptcy court has ruled that attorneys, regularly admitted to practice in that court's jurisdiction, are not DRAs, so long as the activities of the attorneys come within the scope of the practice of law and do not constitute a separate commercial enterprise. Whether other Federal districts will follow the ruling of the Georgia court remains to be seen. However, based upon the all encompassing definitions of "debt relief agencies" and "bankruptcy assistance", we find it highly unlikely that other courts will follow its lead.

It appears that Congress intended to impose substantial responsibilities on DRAs to police the bankruptcy system when it comes to consumer debtors and consumer debts. Until the courts or Congress have clarified the scope of these professional responsibilities, it would be best to take a conservative approach before ruling out the possibility that a financial advisor might possibly be a DRA under the new Act.
 

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