The National Pulse

The Exodus Begins


The shakeout began even before legislation to overhaul federal bankruptcy law made it to President Bush’s desk for his signature.

By the time the Senate version of the bill was passed in March, a lot of lawyers already had penciled in October on their calendars to mark the law’s likely effective date. That also may be the last time they’ll call themselves bankruptcy lawyers.

The Bankruptcy Abuse Prevention and Consumer Protection Act will make it harder for many individuals to discharge debts by filing under Chapter 7 of the U.S. Bankruptcy Code. Instead, the law establishes a rather complicated means test that will force more individuals to file under Chapter 13, which imposes repayment plans.

Beyond that, the law imposes new burdens on lawyers by requiring them to certify the accuracy of their clients’ bankruptcy schedules and, in Chapter 13 cases, their ability to make future payments under reaffirmation agreements. Even innocent errors in meeting those new duties put lawyers on the hook for fines and other sanctions.

From now on, it won’t be enough to take a client’s word for it. The lawyer must be able to prove that what the client said is true. In the face of those changes, lawyers who represent debtors in bankruptcy cases–from frequent filers doing high-volume work down to dabblers with one or two cases a year–are voting on the new legislation with their feet.

“I’ve done a lot of debtor work because there’s not enough creditor work up here to stay busy,” says R.W. “Dick” Shaffer, a lawyer in Ketchikan, Alaska. “But with this liability provision, I’m going to get completely out of representing debtors in Chapter 7s.”

A law of additional consequences is at work here, whether intended or not. The added responsibility for certifying–presumably after investigating–a client’s list of assets and debts will make costs prohibitive in a practice area that already operates on the thinnest of margins. Even those with high-volume bankruptcy practices expect to take on fewer Chapter 7 cases, and charge more for the ones they take.

The going rate for low-end Chapter 7 bankruptcies ranges from $700 to $1,100. The added burden of the new law could add another $1,000 or so to those fees, bankruptcy lawyers predict.

“This will force us to raise our fees for the cost of time on due diligence,” says William S. Wolfson, a bankruptcy lawyer in Flemington, N.J. “I will not be taking on some of the cases I have been.”

Going It Alone

Lawyers’ reluctance to take cases likely will lead to increased pro se filings and a surge in the use of non lawyer bankruptcy petition preparers, online services and software. Some of these alternatives are more creditable than others.

In California, for example, where do it yourself lawyering is huge, the U.S. Bank ruptcy Court for the Central District of California listed on its Web site petition filing ventures it has enjoined. The list is 38 pages long and cites most of them for having engaged in bad-faith filings. (Search “petition preparers” at www.cacb.uscourts.gov.)

“There’s going to be a proliferation of these bankruptcy preparers, and we already have enough problems with them,” says John Rao, a staff attorney with the National Consumer Law Center in Boston, which lobbied against the bankruptcy legislation. “I’m not speaking in defense of lawyers here–it’s just that this can be a very complex practice, especially preparing schedules.”

Many lawyers believe the new law will besiege the courts, leading to complaints from judges.

“When you dump all these bankruptcy debtors into court unprepared, it’s going to be like the Middle Ages,” says Frederick Rogovy, who runs New Hope Software Inc., which makes Bankruptcy 2005 software used by lawyers. “The courts will be swamped with people who don’t know anything. It’s going to be amusing to some people to watch the chaos.”

Rogovy, who predicts his software business will drop about 20 percent because many lawyers will stop taking bankruptcy cases, began redesigning software to deal with the new law months before it was enacted. “We’ll have that drop, even though our target market is the more professional lawyer at the higher end,” he says.

Malpractice insurers have made it clear that premium rates will now go up for what traditionally has been a low risk practice area, and that they are not likely to cover the new risks created by the bankruptcy law.

“We will look at it on a precautionary basis up front and, as losses develop, we’d obviously look at what the formula should be because it will change risk, and the premium has to follow the risk,” says Robert D. Reis, president and chief operating officer of Attorneys Liability Protection Society, a malpractice insurer owned by the 15,000 lawyers in 27 states whom it insures. Reis predicts an immediate increase in premiums of 15 percent to 20 percent because a discount credit for low risk no longer will apply.

Return of Boutiques?

Some bankruptcy lawyers expect the field will return to what it was a generation ago: a niche practice area for the cognoscenti who understand the unusual forms and procedures.

“When I started out 30 years ago, there were just a few small bankruptcy firms in town with a few guys in each–that’s all they did, and they got all the business,” says Larry B. Feinstein of Seattle, who co-chairs the Bankruptcy Committee of the ABA’s General Practice, Solo and Small Firm Section. “Then it became more generalized and simplified, and now almost everybody does some. I think we’re going to revert back to the boutiques.”

For some, that shakeout has been under way even without this year’s bankruptcy legislation. Some jurisdictions, for example, have stopped permitting bankruptcy lawyers to forgo payment from clients up front, except for the $209 filing fee, and spread payments over time.

The Chicago-based 7th U.S. Circuit Court of Appeals ruled in 2003 that any fees not paid to the lawyer before a Chapter 7 bankruptcy petition is filed should be discharged along with the client’s other debts. Bethea v. Robert J. Adams & Associates, 352 F.3d 1125, cert. denied, 124 S.Ct. 2176 (2004). The 7th Circuit reached the same conclusion as almost all other courts that have addressed the issue.

Another blow to the low-volume bankruptcy bar is mandatory electronic filing, now in effect in about a third of the bankruptcy courts. The relatively few cases they handle don’t justify the learning curve.

“These developments were tsunamis cleaning off the beaches,” Rogovy says. “Now this new one is cleaning off what was left.”

Safety Net Disappears

The new bankruptcy law also threatens to sweep away the safety net of pro bono representation for Chapter 7 debtors. “The only good news is that this is inspiring law schools to get into credit counseling,” says Nancy B. Rapoport, dean of the University of Houston Law Center. The new legislation requires debtors to undergo credit counseling before filing bankruptcy.

Law firms that traditionally have taken some Chapter 7 cases pro bono are likely to stop doing so.

“We have made no official determination yet,” says Michael W. Anglin, partner in charge of the bankruptcy de partment and pro bono in the Dallas office of Fulbright & Jaworski.

“But I’m thinking that attorneys in large firms who do not handle consumer cases for profit, but take them on occasionally pro bono, would have to stop.”

The vacuum probably will lead to some innovation. Richard Granat, a leader in delivering legal services over the Internet, already is retooling the software for his consumer-oriented Web sites to deal with the intricacies of the new bankruptcy legislation.

“I think some nonlawyer preparers are going to be caught up by the new legislation,” says Granat of Baltimore, who co chairs the eLawyering Committee in the ABA Section of Law Practice Management. “But I predict there will be a big demand from pro se filers, and there are ways to develop software and document automation such that there is no person involved and no problems with [unauthorized practice of law] as consumers fill out forms on a Web site.”

Meanwhile, many bankruptcy lawyers are fuming. But Wolfson of New Jersey says there might be a way to even things with the credit card industry for supporting the new law. “Perhaps,” Wolfson says, “all bankruptcy lawyers, as a form of protest, should pay off their credit card balances and keep them paid off.”

Sidebar

Another Shakeout

Bankruptcy lawyers aren’t the only practitioners worried about a shakeout due to new legislation. Class action lawyers are making the same predictions following President Bush’s signing of a new law in February.

The Class Action Fairness Act of 2005 moves many class actions from state to federal courts. Some predict it will have a dramatic impact on the plaintiffs class action bar.

“I suspect it will,” says securities class action litigator William S. Lerach of San Diego. Federalizing class actions “makes cases more expensive, more difficult and more time-consuming to prosecute. Inevitably, that either eliminates or marginalizes certain law firms that have brought those kinds of cases.”

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