By: Robert L. Pryor
Your longtime clients call to tell you they are suffering financial problems and that they believe they need to file a simple, straight-forward bankruptcy case. The clients further advise you that after having done some online research, they are aware that there is an alternative to hiring an “expensive bankruptcy attorney” and that is to hire a “petition preparer,” an entity specifically authorized by the Bankruptcy Code to prepare a bankruptcy petition on their behalf and thus enable them to save a major portion of the funds otherwise required to pay an attorney for his services. What do you tell them?
One might expect the clients to ask in response, “Well, do we really need legal advice if we are merely going to be filling out a series of papers with the information the court requires’? The answer to that question might obviously depend on the level of sophistication of the clients. However, it may be safe to assume that the clients may be less sophisticated then they believe they are. Appropriate legal advice must begin with the following questions: First, is bankruptcy the best alternative for the clients to deal with their financial problems? There are various alternatives to bankruptcy. Next, insofar as there are various chapters that are available to a debtor, which chapter best accomplishes the debtors’ objectives? To answer each of these fundamental questions is to render legal advice. Unless your clients are absolutely sure of the answer to each of these questions, they will not be able to obtain such answers from a petition preparer.
The case law is clear that a petition preparer may not advise the debtor as to the appropriate chapter under which he should file.4 However, for purposes of this analysis, let us assume the debtor is confident as to the appropriateness of a filing of a bankruptcy petition as the best alternative to deal with his financial issues and has further determined to file a Chapter7 liquidation case. The next question the petition preparer cannot answer is whether any of the debtor’s assets are at risk. There are various bodies of law that enable a debtor to protect certain of his assets from creditors. These are commonly known as “exemption” statutes. However, it is absolutely clear that a bankruptcy preparer may not render any advice as to the availability of exemptions. Such legal advice is expressly proscribed under the Bankruptcy Code.5 Certainly it would be nothing short of a catastrophe if the debtor was forced to deliver to his Trustee appointed by the Court for the benefit of his creditors, assets that he never counted on losing when he chose bankruptcy as the vehicle to solve his debt problems.
To file for bankruptcy, a series of documents must be filed with the court. These largely consist of a bankruptcy petition, supporting schedules, a Statement of Financial Affairs, a Statement of Current Monthly Income and Means Test Calculation and “Statement of Your Social Security Numbers.” These must be correct and complete and the debtor is required to swear or affirm the truth under penalty of perjury. The first thing a debtor must do in connection with these papers is to list all of his assets and correctly reflect the value thereof. Certain assets are protected (are exempt) up to certain monetary thresholds. If the value of the asset is greater, the Trustee may sell the asset for the benefit of creditors, remitting to the debtor only the amount protected by the exemption statute. The preparer can give no advice as to how much is protected and he also cannot advise the clients whether to choose, as is their option,state or Federal exemptions.8 Moreover, the preparer cannot even give advice as to the proper standard to utilize to value the scheduled asset. Is it liquidation value? Is it replacement value? Is it the amount the debtor had to pay to acquire the asset? These questions cannot be answered by the preparer without violating the law.
The debtors’ schedules require them to outline their income and expenses on a current basis. There are consequences if those schedules are improperly completed. For example, if the debtors omit some of their expenses and thereby show that at months’ end they have surplus income, the Court may determine that they should be repaying their creditors in an alternative chapter proceeding over time, rather than obtaining a discharge without paying anything on their claims as is the case in Chapter 7. A petition, preparer can provide no advice when completing the schedules of income and expenses.
The Statement of Financial Affairs is an important document which provides to the Trustee and the creditor body, detailed background information that could give rise to various actions by the Trustee to recover assets and to investigate whether suits may be brought to bring assets into the bankruptcy estate. Typically, an attorney will counsel a proposed debtor as to the implications of various of his answers to the questions posed in the Statement of Financial Affairs. However, a petition preparer is neither sufficiently informed nor authorized to provide legal advice as to the completion of this form. An uninformed client could trigger unintended lawsuits against friends and relatives as a result of information provided in the Statement of Financial Affairs.
The Statement of Intention which must be filed as one of the official forms requires the debtor to take a position with respect to whether he wishes to reaffirm mortgage obligations and car loans, and whether he wishes to continue to honor or disclaim vehicle leases. Once again, there are very distinct bodies of law governing a debtor’s obligations with respect to the completion of this form, and whether and under what circumstances he is required to reaffirm his mortgage obligation to preserve his right, to keep the mortgage in force and effect. Similarly, there are implications to timely completing this form to preserve or surrender rights in vehicles. It is almost certain that a petition preparer will not be versed in the legal nuances governing the completion of this form. Moreover, he certainly has no legal authorization to opine on how it should be completed.
In 2005, the Bankruptcy Code was amended under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Public Law 109-8. These amendments included the
creation of the so-called “Means Test” to determine the debtor’s eligibility to file a ‘Chapter 7 petition. The Means Test, among other things, requires a complicated calculation of “Current Monthly Income” based upon a debtor’s last six months income and provides
certain express deductions there against, often not bearing any relationship to the debtor’s actual expenses, to determine whether the debtor is eligible to file a Chapter 7 petition. The proper completion of the Means Test is challenging even to bankruptcy attorneys who file multiple Chapter 7 cases in a course of a year. It is inconceivable that a petition preparer could even address some of the nuances involved. Certainly, to the extent that he attempts to ‘he will be rendering unauthorized legal advice.
Finally, the Bankruptcy Code is explicit that a preparer cannot collect or receive any payment from or on behalf of the debtor “for the court fees in connection with filing of the petition.”11 Thus, the petition preparer cannot even file the petition on behalf of the debtor. In this era of electronic filing, this limitation creates a substantial inconvenience and
impediment to debtors’ expedited filing of papers with the Bankruptcy Court.
As the legislative history to §110 makes crystal clear, to operate within permissible guidelines, a bankruptcy petition preparer is little if anything more than a typist (‘while it is permissible for a petition preparer to provide services solely limited to typing, far too many of them also attempt to provide legal advice and legal services to the debtors.”).12 While in practice many petition preparers go beyond the limitations of the statute, not only is this illegal, but it subjects the preparer and his client to investigation by the Office of the United States Trustee, the watch dog of the process. Your clients do not need to face the potential anxiety and uncertainty while a U.S. Trustee examines them as to their potential illegal relationship with the preparer. Just as importantly, any advice, albeit improperly given, will not be as sound as ‘that being rendered by an experienced bankruptcy attorney. Finally, it should be noted that properly undertaken, in most cases, an attorney’s representation in a consumer bankruptcy need not be an expensive undertaking. It may very well be that the total fees charged by an experienced bankruptcy attorney may amount to not very much more than that charged by a non-lawyer preparer.
Robert L.Pryor is a partner and founder of the “Westbury law firm of Pryor & Mandelup, L.L.P., concentrating In bankruptcy, reorganization and insolvency-related litigation. Mr. Pryor is past Chairman of Bankruptcy Committee of the Nassau County Bar Association.
1. See 11 USC § 110(a)(1) and 11 USC § 110(e)(2) (A).
2. See 11 USC § 110(i)
3. See 18 USC § 156
4. See US Trustee v. Costello, (In re Rankin) 320.. BR,171 (Bankr.D. Mont. 2005); In re Guttierez, 248 BR. 287 (Bankr. W.D. Tex. 2000).
5. See In re.Gross, 2009 Bankr. LEXIS 2761. (Bankr. E.D.Va. 2009); In re Brummitt, 323.BR 522. (Bankr. MD. Fla. 2005).
6. See 11. UBC §109 (h)(1).
7. See In re Martin, 424 BR 496 (Bankr. D.NM.2010).
8. See In re Bonarrigo, 282 B.R. 101 (D. Mass 2002)
9. See Bonarrigo, 282 B.R. at 101.
10. See Taub v. Weber, 366 F. 3d. 966 (9th Cir,2004).
11. See 11 USC § 110(g).
12. House Report No. 109-31, PT 1, 109th Cong.,1st SESS 62-63 (2005); See also Taub v. Weber, 366F.3d at 966;-Guitierrez, 248 B.R. at 237.
