Bankruptcy and Attorneys / What You Should Know -

     The economic downturn has resulted in a flood of new cases appearing in our federal bankruptcy courts. With this comes a demand for more bankruptcy attorneys to handle the legal work. The debtor facing a bankruptcy filing should exercise due diligence in selecting an attorney to maximize the chances of a good outcome. One factor to consider is whether the attorney carries malpractice insurance with respect to the service being provided. This can provide some relief to the debtor if there are errors in the handling of the case leading to damage to the debtor.

Bankruptcy Cases Require a Variety of Different Disciplines

     Bankruptcy cases require that the attorney have knowledge of a variety of different disciplines as well as practical real-life experience. While older attorneys may have more experience, this does not necessarily give them an advantage over younger counsel, who may be more conscientious and zealous in their representation. The attorney's record of success in the client's type of case should be reviewed, before an agreement for representation is signed.

The Attorney Should Understand Bankruptcy Law

     Bankruptcy law is a very complicated and specialized area. It takes years of practice to become capable and adept at providing the best service to clients. The attorney needs to be cognizant of many different facets of law: federal statutory bankruptcy law; state laws of exemptions and fraudulent conveyances, real estate mortgage foreclosure including possible anti-deficiency statutes; state law regarding marriage dissolution, support and property rights; franchises; corporate, partnership, and business law; state laws regarding "piercing the corporate veil" and "alter ego" claims; and other federal law, including patents and trademarks.

The Attorney Should Have Malpractice Insurance

     Before hiring a bankruptcy lawyer, a debtor should determine if that attorney is covered by an errors & omissions (malpractice) insurance policy, and, if so, the extent of coverage in the event of a claim. Policy limits can run the gamut from $ 35,000, up to millions of dollars. This could be important, because if the case is mishandled by the attorney, the client may have some recourse. Insurance requirements vary from state to state. Some states require attorneys to have malpractice insurance; others don't. Some states have minimum levels of coverage. Other states simply require that if the attorney does not have malpractice insurance, he must disclose that fact to the client in writing before entering into an attorney-client agreement with the client. This is a fact which should come into play in the attorney-selection process.

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The Attorney Should Be Aware of Bankruptcy's Consequences

     The attorney needs to be aware of bankruptcy alternatives and their upsides and downsides, such as out-of-court debt workouts, assignments for the benefit of creditors, receiverships, and the tax consequences of them. He needs to know which clients can benefit from bankruptcy filings, and which chapter would provide the maximum relief. He must also understand that there are some cases that should not be filed. These might include cases where the debtor is not likely to obtain a discharge of his debts, could face criminal prosecution, where the trustee would be likely to pursue preference or fraudulent conveyance actions or challenge exemptions, or where the filing itself could result in adverse action. An example of this is a business franchise, such as a Taco Bell or McDonald's. If a bankruptcy case is filed by the franchisee/operator, in most instances the franchisor can claim that the filing itself is a default under the agreement, which allows the franchisor to terminate the franchise. That is one area where the so-called "ipso facto" clauses are enforceable, to the detriment of the debtor.

The Timing of a Bankruptcy Filing Can Be Crucial

     The attorney must also be cognizant of the timing of the filing. Under certain circumstances, income and other taxes can be completely wiped out. However, if the case is filed too early, before the expiration of various milestones, the tax is not wiped out, the debtor faces administration of his assets by the trustee, and the debtor cannot file another bankruptcy cases for 8 years.

Bankruptcy Cases by Their Nature are Complicated

     Most bankruptcy attorneys face a dizzying array of factual settings every day. There are the low-asset and low debt, simple, uncomplicated Chapter 7 consumer cases where the assets are all exempt and the debts all dischargeable. There are many cases of this type. However, even the simplest case can present complications, for instance, if the debtor made payments to relatives during the 1-year period prior to the bankruptcy filing, or transferred assets to friends or family for less than reasonably equivalent value. These actions could result in the trustee filing actions against the debtor's family to recover the payments and assets. Also, even the simplest bankruptcy filing is usually at least 50 pages long.

The Attorney Should Thoroughly Investigate the Facts

     The attorney really needs to sift through the debtor's transactions and ferret out any information which could lead to a less-than-desirable result in the bankruptcy case. For instance, the debtor may fill out the attorney's questionnaire and list only nominal assets, including jewelry. The attorney should inquire as to whether or not the debtor has homeowner's or renter's insurance, and, if so, whether a special rider has been obtained for the jewelry or other valuables. The attorney should obtain copies of any financial statements that the debtor may have given to creditors over the past couple of years, and compare the assets on the financial statement with the assets being listed by the debtor on the bankruptcy forms.

The Attorney Should Have Practical Experience

     The attorney also needs to have real-life experience in the community to be able to advise clients about the impact of a bankruptcy filing. For instance, will the bankruptcy filing result in the loss of a security clearance? Would it make a difference if the filing was Chapter 13 as opposed to Chapter 7? It really might not do any good for a local business operator to file a reorganization-type bankruptcy (11 or 13 usually), if that particular community is not receptive to such action, and would cease doing business with him, and the vendors would stop making deliveries. In that case, it may be better to try an out-of-court workout with the creditors.

The Client Should Exercise Due Diligence in Selecting A Bankruptcy Attorney

     Attorneys who have been in practice for years have the advantage of having been exposed to all different kinds of cases. However, this is not the end of the discussion, as it does not mean that the attorney is necessarily better-qualified than a relative novice. The client should ask around about the attorney's track record of successful filings and outcomes, about his reputation with the court, the trustees, other attorneys, the legal community, and he should also check the state bar records to see if the attorney has been subject to discipline, including suspension. Also, just because an attorney is young and has handled fewer cases, he may be a better choice if he is devoted to his craft, up-to-date on bankruptcy law developments, diligent and conscientious. He may also charge a lower fee than the more seasoned practitioner.

     In conclusion, there has been explosion of bankruptcy cases in recent years, brought on by the burst of the real estate housing bubble and the general economic decline. More and more inexperienced attorneys are deciding to enter the field of bankruptcy law, where there is much work and a promising future, at least in the near-term. This may be good for the new inexperienced attorney but not so good for the individual or business filing bankruptcy.

Written by Henry Rendler