LEGISLATION IN CONGRESS that would overhaul the US Bankruptcy Code contains provisions that impose serious new liability burdens on attorneys representing debtors in bankruptcy.

The American Bar Association, in opposing these provisions, says the bill, HR 333, would require all debtors’ attorneys to certify the accuracy of their clients’ schedules of assets and would hold the attorney personally liable for any inaccuracies. According to a recent legislative alert issued by the ABA’s lobbying arm, the Governmental Affairs Office (GAO): "If any factual errors result in the dismissal of the Chapter 7 petition or its conversion to a Chapter 13, the attorney would be subject to mandatory sanctions unless the attorney had conducted a lengthy investigation and appraisal of the client’s assets. These new liability provisions could add thousands of dollars to the cost of representing a debtor in bankruptcy, and many malpractice carriers have said they will exclude this new liability from coverage under their policies. If these provisions become law, most attorneys will no longer agree to represent debtors in bankruptcy, leaving many thousands of debtors without any legal representation at all."

The ABA adds that the bill’s provisions would apply even for legal aid attorneys and attorneys representing debtors pro bono.

HR 333 has passed both chambers of Congress and a conference committee is considering the differing versions.

Specifically, both the Senate and House versions would require debtors’ attorneys to:

• certify the accuracy of all factual allegations in the debtor’s bankruptcy petition and schedules, under penalty of mandatory sanctions;
• certify the ability of the debtor to make payments under reaffirmation agreements;
• identify, advertise, and conduct themselves as "debt relief agencies" subject to a host of new intrusive regulations.

Section 102 of HR 333 requires the debtor’s attorney to certify the accuracy of the debtor’s bankruptcy petition and schedules while subjecting the attorney to mandatory sanctions if any factual inaccuracies result in the dismissal of the Chapter 7 petition or its conversion to a Chapter 13.

Existing federal rules already require all lawyers, including bankruptcy attorneys, to certify that their pleadings are supported by the facts. The new proposal would create a newer and higher standard for debtors’ bankruptcy attorneys that goes well beyond the standards imposed on other lawyers. By holding debtors’ attorneys personally liable for the accuracy of their clients’ petitions and schedules, the provision may force the attorney to independently verify all of the client’s factual representations and to conduct a costly investigation and appraisal of all assets listed on the client’s schedules.

Section 203(a) of HR 333 requires attorneys to certify the debtor’s ability to make payments under a reaffirmation agreement. Under current law, a debtor may choose to reaffirm certain debts – and retain liability for those debts – if the attorney certifies that the decision is voluntary and will not create undue hardship for the debtor. By requiring the attorney to also certify the debtor’s ability to pay the reaffirmed debt, Section 203(a) could compel attorneys to conduct costly and time-consuming audits of their clients’ finances.

The ABA also opposes the provisions in Sections 227-229 of H.R. 333 that will require bankruptcy attorneys to identify and advertise themselves as "debt-relief agencies" and then comply with a host of new burdensome regulations. These provisions may interfere with the attorney-client relationship by requiring all debtors’ bankruptcy attorneys – and many non-bankruptcy attorneys – to provide their clients with written disclosure statements containing government-approved legal advice on bankruptcy law, while prohibiting the attorneys from giving their clients certain pre-bankruptcy planning advice.

The ABA contends that these provisions will have a chilling effect on lawyers choosing to represent debtors by requiring all of their newsletters, seminars and advertising materials to include the statement that "We are a debt-relief agency. We help people file for bankruptcy relief under the Bankruptcy Code."

For more information, visit the ABA Governmental Affairs Office site at www.abanet.org/po1adv, or check on the provisions of the bill at www.congress.gov. The text of the ABA’s legislative alert, along with the membership of the conference committee, appears under News Releases on this site.

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