Lightning Strikes Thrice Emerging Issues in Bankruptcy Credit Counseling

Journal Issue

Feb 2006

Column Name

Feature

Citation

ABI Journal, Vol. XXV, No. 1, p. 16, February 2006

Topic Tags

Consumer Bankruptcy

Ethics

Practice and Procedure

Professional Compensation/Fees

Journal HTML Content

Allegations of the unauthorized practice of law, wrongfully withholding counseling
certificates, failure to provide pro bono services, generally poor customer
service: These are just a few of the issues that the mandatory credit counseling
provisions of BAPCPA have given rise to around the country since Oct. 17. An
industry already under the microscope of public opinion has proven a lightning
rod for the bar, bench, U.S. Trustee Program (USTP) and the bankruptcy administrators
(BAs). 
 
Strike One: Unauthorized Practice of Law 
 
The bankruptcy bar’s earliest, ongoing and most frequent complaints emerging
from mandatory pre-filing bankruptcy credit counseling sessions revolve around
the dispensing of legal advice by credit counselors. These instances of “inappropriate
comments on bankruptcy law” are one of several types of complaints being
registered with the USTP according to their spokesperson, Jane Limprecht.
BAPCPA authorizes the USTP to approve such credit counseling providers according
to criteria set forth in the law.

When defining the “unauthorized practice of law” (UPL), you would
think that one should first look to the definition of the “practice of
law.” In its most general sense, the practice of law is: 
 
the professional work of a duly licensed lawyer, encompassing a broad range
of services such as conducting cases in court, preparing papers necessary to
bring about various transactions from conveying land to effecting corporate
mergers, preparing legal opinions on various points of law, drafting wills and
other estate-planning documents, and advising clients on countless types of
legal questions.1 
 
However, the water quickly becomes murky when accounting for 49 state statues
that provide different definitions (only Arizona does not currently attempt
to define and regulate UPL). One can’t help but think of Justice Potter
Stewart’s famous quote regarding pornography: “I know it when I
see it.”2

Even the American Bar Association (ABA) has struggled with the issue. The ABA
created a Task Force on the Model Definition of the Practice of Law to study
and recommend to the full House of Delegates on what said definition would be.
After much work and discussion, the Task Force issued a recommendation to the
House of Delegates stating that, rather than have the ABA attempt to promulgate
a model definition, a recommendation should be made to the individual state
bars that they consider adopting their own definition of the practice of law.
At this time, the ABA is monitoring the issue of UPL, and at least one section
has held a symposium on the topic. 
 
John Orcutt, a debtor’s attorney from Raleigh, N.C., has encountered first-hand
the quandary of the UPL issue and credit counseling. “People coming to
[credit counselors] are thinking about filing bankruptcy. They have questions
and fears. The clients are going to ask legal questions and it’s going
to be hard for MMI (Money Management International) and the like not to answer
those legal questions.” Orcutt goes on to say what many others in the
legal profession have also expressed: “Credit counselors have a tradition
of answering these questions with no idea that they are in effect giving legal
advice.” 
 
A review of some approved credit counseling agency Web sites also calls into
question whether or not these organizations are crossing the line of UPL. Consumer
Credit Counseling of Springfield, Mo., has the following information posted
on their bankruptcy general information page: “Also you aren’t always
relieved of all your debts. Some obligations—like federal taxes, student
loans, child support and alimony—aren’t discharged even if you declare
bankruptcy.”3 Consumer Credit Counselors of Kern County, another approved
credit counseling provider, has posted a detailed list of some of the changes
under BAPCPA including “debts owed to a single creditor totaling more
than $500 for luxury goods incurred within 90 days of filing are presumed nondischargeable”
and “domestic child and spousal support obligations now have the first
priority in distribution over governmental owed obligations.”4 Whether
or not these pages can be construed as “legal advice” may be left
to the individual states that control their individual enforcement of UPL statues.
However, the USTP and BAs do include language in their counseling applications
that may allow them to hold individual agencies accountable. Each applicant
agency attests that it is “in compliance with all applicable laws and
regulations of each state, commonwealth, district or territory of the United
States in which

the (credit counseling) agency seeks approval....”5 
 
Orcutt further believes that he and other attorneys have an obligation to monitor
what is occurring during the credit counseling sessions due to the possibility
of UPL. “North Carolina is a state that allows for one-party consent tape
recording. Attorneys will start recording what is being said, and when the credit
counselors begin saying things like ‘we don’t think bankruptcy is
a good idea,’ we will then have the proof that they have gone over the
line.” 
 
Are attorneys justified in this approach? Perhaps, as the ABA Model Rules of
Professional Conduct state, “a lawyer shall not practice law in a jurisdiction
where doing so violates the regulation of the legal profession in that jurisdiction
or assist a person who is not a member of the bar in the performance of activity
that constitutes the un-authorized practice of law (emphasis added).”6
What remains to be seen is whether referring a client to a credit counseling
agency that then conducts UPL constitutes “assistance” under the
Model Rules.

Strike Two: Pro Bono Credit Counseling Vagueries 
 
Another issue arising with the credit counseling provisions is that of fee waivers
and pro bono credit counseling services. BAPCPA includes language requiring
that “if a fee is charged for counseling services, counselors charge a
reasonable fee and provide services without regard to ability to pay the fee.”7 
 
Limprecht says that the USTP has “discussed a number of issues with the
credit counseling industry, including... disclosure issues regarding the potential
for fee waiver.” The USTP Web site does include some information regarding
what “ability to pay” means. According to the most recent FAQ post
on the USTP Web site, the “ability to pay must be determined on a case-by-case
basis. One factor that must be considered is the client’s personal financial
situation as reflected in the budget analysis that is completed pursuant to
the statute.”8

Some approved credit counseling providers have published their fee-waiver policy,
including Consumer Credit Counseling Service of Greater Atlanta (CCCS Atlanta).
CCCS Atlanta states on their Web site that “If you are receiving your
legal services pro bono, or if your sole source of income is disability,
this fee may be waived.”9 Other organizations are more ambiguous. GreenPath
Inc. states on their Web site that it “has established criteria for determining
if a consumer qualifies for free services. During the counseling session, the
counselor will ask the consumer questions to gather the information necessary
to determine if they meet the criteria.”10 It is worth noting that the
actual criteria is not published, and the counseling sessions start only after
a client has provided either an attorney’s billing code, a debit card
number or permission to do a check-by-phone transaction. 
 
Other organizations have taken a slightly different approach. Springboard Nonprofit
Consumer Credit Management will first have the client complete the credit counseling
session, then determine if the client meets their fee-waiver policy. If a client
doesn’t meet the Springboard guidelines but can’t afford the fee,
they will not receive their counseling certificates.

David Yen, an attorney with Legal Assistance Foundation of Metropolitan
Chicago, has some concerns over how the fee waivers will work. Clients working
with Yen are typically at 150 percent of poverty and are often dealing with
rental arrearages and threat of utility shut-offs. 
One such client completed the credit counseling session, but when they asked
for their certificate the client was informed that they would have to pay a
fee. When the client explained that they were working with a pro bono
provider and could not afford the counseling fee, the credit counselor began
negotiating with the client for a reduced fee. It was only after their attorney
spoke with the agency directly that the fee was waived and the certificate released.
Yen says, “I’m concerned about people who aren’t our clients
and don’t know about the fee waivers. We tell people you are entitled
to a waiver.” 
 
Strike Three: Quality of Service

Other complaints that have come to the surface include not receiving counseling
certificates in a timely manner. One such instance led to a unique motion being
filed in the District of Rhode Island requesting an extension of time to file
the actual physical certificate. 
 
In the motion filed by Attorney Christopher Lefebvre, he states: “For
some unknown, bizarre and extremely frustrating reason, the certificate of completion
has yet to be forwarded to the undersigned.”11 Lefebvre explains that
the client was faced with an imminent foreclosure of his home. Understanding
that this alone would not warrant an exigent circumstance waiver of the credit
counseling, he advised the client to seek and receive credit counseling immediately.
“The Internet wasn’t an option, because he didn’t have high-speed
access, and more importantly, he was emotionally a wreck.” Lefebvre says
that in-person counseling wasn’t available immediately either, leaving
only the choice of telephone counseling.

The client went home that day and completed a telephone session with Springboard
Nonprofit Consumer Credit Management. He called Lefebvre to inform him that
he completed the required counseling, but explained that due to his lack of
a debit card he could not receive his certificate. Lefebvre then contacted Springboard
directly using his own credit card to pay for the certificate and asked that
it be faxed immediately, explaining that he needed to file the petition immediately
to save the client’s home from the pending foreclosure. 
 
Lefebvre goes on to explain that they did not receive the certificate, even
after given assurances by Springboard staff that it would be faxed over within
the hour. The next day both he and his staff made repeated phone calls and were
assured that it was coming shortly. Assuming that it was, Lefebvre electronically
filed the chapter 13 petition, checking the box that indicated that the credit
counseling had “been completed.” After several days had passed and
no certificate was received, Lefebvre filed his motion. 
 
Did the certificate ever arrive? “Yes, a week after completed. It just
arrived on the fax without a cover letter. I wasted time [and] energy, and the
counseling was a colossal waste of time for the client. The mortgage delinquency
was due to illness because the client was out of work for several months. This
wasn’t due to mismanagement of their funds.” The court never ruled
on the motion, as Lefebvre withdrew it once he filed the actual certificate
with the bankruptcy clerk. 
 
Industry Boom or Bust?

Brad Botes, the executive director of the National Association of Consumer Bankruptcy
Attorneys (NACBA), has heard many stories of abuse regarding the credit counseling
provisions from his members. “NACBA is in the process of putting together
a list of complaints to present to the UST(P).” He goes on to say that
“there are many instances of [counselors] poorly prepared to give advice,
and often the advice is contrary to the advice the attorneys have given.”
Botes is also concerned that what he and many attorneys feared about the credit
counseling provision may be coming to pass. “It is proving to be what
we thought it would because everyone has to go though it. A debtor who files
bankruptcy because their child fell ill is treated the same as a consumer who
ran up their credit cards.” 
 
Another common complaint being registered by attorneys are long hold times on
the phone, or appointments being scheduled weeks in advance for in-person credit
counseling. Botes is also concerned that because of the now-mandatory bankruptcy
credit counseling requirement, “those who really need the credit counseling
may not actually be getting it.” 
 
Susan Keating, president and CEO of the National Foundation for Credit Counseling
(NFCC), recently stated that “[t]he volume is significantly higher than
their original projections. We originally expected our client volume of 1 million
to double in 2006 (because of the new requirement). Now we’re thinking
we may be looking at even more.”12 NFCC-affiliated agencies currently
represent almost 80 pecent of the approved credit counseling providers. Could
this mean an industry boom?

Mark Guimond, executive director of the American Association of Debt Management
Organizations (AADMO), might disagree. AADMO is the largest trade association
for the credit counseling industry, yet only half of its members have sought
approval to provide the bankruptcy credit counseling, unlike its NFCC counterpart.
Guimond explains that “the volume of pre-filing counseling sessions is
consistent with our projections, and the number of debtors actually entering
debt-management programs is so small as to be almost nonexistent and may show
that this provision of bankruptcy reform has no significant impact on filings.” 
 
Guimond goes on to express concern that several agencies approved by the USTP
to provide the pre-filing credit counseling have been questioned in several
states about their legal authority to act as credit counselors. Limprecht has
indicated that this issue has been raised at the USTP as well, and that they
are looking into the “state licensing and registration issues” of
several approved providers. 
 
Asked if the additional scrutiny of the USTP process contributed to the industry’s
concern, Guimond replied that “while the majority of licensed and authorized
credit counseling agencies in the United States are AADMO members, they are
holding back and waiting to see what happens with the credit counseling application
and approval process.”

Growing Pains; Warning Signs 
 
Though one can expect that credit counseling agencies might need to make a certain
amount of adjustment during the first few months after the enactment of BAPCPA,
they should quickly settle into a smooth and efficient delivery of services.
The allegations of UPL should most certainly raise alarm. The bar and bench
have yet to come to terms with the many complications and intricacies of this
new law; consumers can only be harmed if the untrained are allowed to freely
cross the line and impart their interpretation of the Code. It will be crucial
that the bar and the bench work cooperatively with the USTP and bankruptcy attorneys
to give them feedback about the credit counseling requirements and approved
providers. 
 
Although the validity and necessity of credit counseling have been called into
question by many in the bankruptcy community, proper budget counseling can be
an effective tool for the clients it serves. Clients who may not reach the debtor-education
program may still benefit from the budget counseling as it can help them identify
areas of their personal finances that need additional attention. For these clients,
the lightning will only strike once, and woe to the approved credit counseling
providers who misses this opportunity to truly help them.
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<h3>Footnotes</h3>

1 Black’s Law Dictionary 955 (7th ed. 2000). 
2 Jacobellis v. Ohio, 378 U.S. 184 (1964). 
3 www.cccs-swmo.com/bankruptcy.php (1/2/06).

4 www.californiacccs.org/bankruptcy (1/2/06). 
5 Acknowledgments, Agreements, and Declarations in Support of Application
for Approval as a Nonprofit Budget and Credit Counseling Agency, Appendix A, #1
(June 2005). 
6 Model Rules of Professional Conduct Rule 5.5 (a) (2004). 
7 11 U.S.C. §(c)(2)(B) 
8 www.usdoj.gov/ust/eo/bapcpa/ccde/cc_faqs.htm (1/2/06).

9 www.cccsatl.org (1/2/06). 
10 www.greenpathbk.com/faq_attorney.htm (1/2/06). 
11 Motion to Extend Time to File Counseling Certificate, In re Robert K.
Posta (BK NO: 05-15734). 
12 Weston, Liz Pulliam.“Bankruptcy Law Backfires on Credit Card Issuers,”
MSN Money Online (Dec. 8, 2005).

Journal Authors

Leslie Linfield

Journal Date

Wednesday, February 1, 2006 - 12:00

Bankruptcy Rule

2006

none