By: Donald L Swanson
Over the years, I’ve heard lots of people say, “Bankruptcy abuse is a huge problem,” as a self-evident and undeniable proposition.
But here’s the thing. Debtors who try to abuse the bankruptcy system rarely get away with it. That’s because there are too many gatekeepers—and no debtor can fool them all!
The gatekeepers are debtor’s counsel, creditors and their attorneys, U.S. Trustees, bankruptcy courts, and appellate courts.
This is the first of a multi-part series of articles on how the gatekeepers prevent abuse. This article focuses on debtor’s attorney.
Debtor’s Attorney
The rampant bankruptcy abuse suggestion is a huge insult to debtor attorneys! Here’s why. The debtor’s bankruptcy bar is comprised of high-quality people who:
- take their professional responsibilities seriously; and
- do their best to represent debtor clients zealously and within the bounds of the law.
The last thing a debtor’s attorney needs is a client who wants to cheat:
- practicing law is tough enough;
- clients who want to cheat put their attorneys in a bind; and
- what’s at risk is the attorney’s right to continue practicing law.
An Illustration
Here’s a personal illustration of how I, as debtor’s counsel, stumbled through the gatekeeper role.
As a young attorney, a father/son entrepreneur team comes to me for bankruptcy representation. I’m thrilled at this prospect because it’s a major business and a huge opportunity.
But the first thing the son says to me is this: “We want one of them-there Chapter 11s!”
That comment is a heavy blow, because I realize: “Oh, crap! They have no idea what Chapter 11 does—and they aren’t going to like what I’m about to say.”
I then try to educate them on the realities of them-there Chapter 11s—on things like the absolute priority rule, extra costs (e.g., paying creditor’s committee counsel), plan voting, etc. As I’m talking, the son is becoming visibly agitated. Finally, they get up and march out the door in a huff.
I’m crushed. There goes my big chance.
They soon file Chapter 11 bankruptcy through another attorney. And they promptly get in trouble for bankruptcy fraud.
Here are three points about this story:
- My effort to educate them on Chapter 11 has nothing to do with gatekeeping or preventing abuse. Instead, it has everything to do with protecting myself from over-promising, from going into court with a strategy that has no chance of success, and from ending up with both a client and a court mad at me for pursuing a defective strategy. But, nonetheless, it does serve a gatekeeping function.
- They end up in trouble for bankruptcy fraud—in other words, I dodged a bullet.
- They intend, at all material times, to cheat the system (whether they recognize their intent as cheating or not) . . . but are prevented from doing so by other gatekeepers.
Taking Advice
On the other hand, many debtors take their bankruptcy attorneys’ advice and, thereby, refrain from actions that smack of fraud and abuse. For example, many debtors heed legal advise:
- against conveying debtor’s interest in the homestead to debtor’s spouse (e.g., Nebraska’s homestead exemption is only $60,000), on grounds that any such conveyance:
- looks bad—i.e., like fraud and abuse;is often avoidable as a fraudulent transfer—and may even be “presumptively fraudulent,” and attracts heightened suspicion and scrutiny from all gatekeepers—which spreads to other issues and subjects as well; and
- impedes pursuing, through legitimate means, the goal of keeping the homestead;
- to do their best in fully disclosing all assets and liabilities; and
- against filing bankruptcy, if and when debtor feels strongly that an important set of facts must remain hidden at-all-costs.
Conclusion
The gatekeeping function of debtor’s attorney is alive and working well throughout our bankruptcy system. Identifying an outlier attorney, here or there, who intentionally fails at that function merely proves the point.
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