Website that prepared bankruptcy petitions engaged in unauthorized practice of law

 by Craig D. Robins, Esq.

Many consumer debtors learn the hard way that they get what they pay for when hiring someone to prepare their bankruptcy petition.

The law is very clear that only an attorney can give legal advice, and this is to protect the public. Yet there are many non-attorneys who offer to prepare bankruptcy petitions for a fee, and many horror stories that go along with this.

There are strict rules about offering bankruptcy legal advice

When Congress gave the Bankruptcy Code a minor overhaul in 1994, it added several consumer protection requirements aimed at non-attorneys who prepare bankruptcy petitions.

The code labels a non-attorney who receives compensation to prepare a bankruptcy petition as “bankruptcy petition preparer” (BPP) and forbids BPPs from offering legal advice, defined as advising the debtor:

     •  Whether to file bankruptcy

     •  Which chapter to file

     •  Whether the debtor will able to keep his or her home

     •  How to characterize the debtor’s assets or debts

     •  About bankruptcy procedures and rights

My first experience with a non-attorney bankruptcy petition preparer

In the early 1990’s, a Long Island bankruptcy debtor came to me, literally crying, that he had filed a bankruptcy petition on his own, and the Chapter 7 trustee was about to take his house.

The client had used a “bankruptcy paralegal” to prepare his bankruptcy petition after seeing an ad in a local PennySaver. The paralegal incorrectly advised the debtor about New York bankruptcy law, and as a result, the debtor did not realize that his home was not totally protected by the New York homestead exemption.

As a result of that situation, I brought a class action proceeding against this paralegal who had prepared several hundred bankruptcy petitions on Long Island. When I filed the class action suit in bankruptcy court, the clerk’s office at first did not know what to do with it as they had never encountered a class action suit in bankruptcy court before.

As a result of that litigation, the paralegal was assessed fines exceeding $100,000 and was permanently enjoined from ever preparing petitions again.

Web-based Bankruptcy Petition Preparer Punished

St. John’s law student Thomas Szaniawski, in an American Bankruptcy Institute Case Blog article that was just published last week, discussed a case of first impression that addressed the intersection of cyberspace and bankruptcy.

The United States Court of Appeals for Ninth Circuit, in Reynoso v. United (Frankfort Digital Services v. Kistler) held that a provider of web-based bankruptcy software was a BPP under the Bankruptcy Code and that, under state law, the features of the petition preparation software constituted the unauthorized practice of law.

The defendant had a website that offered to prepare bankruptcy petitions for consumers. A consumer could use the browser-based software to prepare a bankruptcy petition based on information the consumer provided. The product’s website explained that the software would choose which bankruptcy exemptions to apply for and remove any need for the petitioner to individually select which schedule to use for the various pieces of information involved.

The court reasoned that providing personalized guidance in selecting specific exemptions or schedules constituted the unauthorized practice of law. Thus, the owner of the website, by providing software that held itself out as offering legal advice, projected an aura of expertise, and provided specific advice tailored to each customer’s situation. This led the court to conclude that the defendant had, in fact, engaged in the unauthorized practice of law.

This case is significant because it established that the mere act of providing software may qualify an individual as a BPP. This means that such software providers are subject to the strictures of the Bankruptcy Code and must obey the strict limitations on permissible BPP conduct. Thus, any conduct beyond mere typesetting can result in liability for the unauthorized practice of law. The fact that such conduct occurs by way of a software application, instead of traditional interpersonal interaction, is not a defense.

One jurisdiction is warning the public about BPP’s

 The problem with bankruptcy paralegals rendering bad and incompetent legal advice became especially acute in the Southern District of California, one of the busiest in the nation. There, the U.S. Trustee, who has since become a judge, took the extraordinary step of warning consumers about the perils of discount advice by issuing a report about the dangers of using bankruptcy petition preparers.

Bankruptcy practice is involved and should not be done by non-attorneys

Although courts have expressed sympathy with indigent debtors who may have difficulty paying legal fees, numerous judicial opinions clearly state that this is no justification to turn a blind eye to the unauthorized practice of law by bankruptcy petition preparers, especially as they often tend to cause far more harm than good.

An experienced bankruptcy attorney has years of legal training; is bound by professional ethics requirements; is licensed by the state; and is familiar with local rules and procedure. That is no comparison to a street-corner paralegal who thinks that whatever a lawyer can do, he can do. When that happens, there will ultimately be unfortunate consequences and their clients will pay the price.

About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the March 2009 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.

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