DO I NEED LEGAL ADVICE WHEN DECIDING TO FILE BANKRUPTCY?
The decision whether or not to file bankruptcy is your first step towards your entire financial future. You need to know the consequences one way or the other. It's just not smart to make this decision without being fully informed. The consequences will affect you for many years. You need to know and understand all your legal options and their consequences.
BUT WHAT IF MY FINANCES ARE SO BAD I DON'T BELIEVE I HAVE ANY CHOICE?
You may well need to file some kind of bankruptcy. The truth is that, human nature being as it is, by the time most people come to see me they DO need some kind of serious relief, which often involves filing bankruptcy. But is being on the brink of desperation a good state of mind to be in when making a life-altering decision? Isn't that when you especially need some expert unbiased guidance?
Even if your situation is so serious you definitely need to file bankruptcy, there a couple of huge decisions that come next, including when to file and what chapter to file under.
IF I'M BEING SUED BY A CREDITOR OR MY HOME IS BEING FORECLOSED, I NEED TO FILE BANKRUPTCY NOW, RIGHT?
There are many, many laws related to bankruptcy involving timing issues. These can affect whether you qualify to file a 3-4 month Chapter 7 case instead of being required to file a 3-to-5-year Chapter 13 one, as well as whether a Chapter 13 case lasts 3 years or 5. The timing laws affect whether you can "discharge" (legally write off) certain kinds debts or cannot do so. The timing of your bankruptcy can affect whether friends or relatives or other creditors to whom you've previously made payments can be ordered to have those payments returned. The filing date can also determine whether prior sales or other transfers of assets can be "avoided" or undone.
You may well need to file bankruptcy quickly to stop a garnishment or foreclosure, but there may be more or less time than you think. And sometimes there are other very important timing considerations that have to be weighed. Doesn't it make sense to know these considerations so that your bankruptcy, assuming one is needed, is filed at the best time for you? Otherwise, once you file if you then run into some unintended and damaging consequences of its timing, it will likely be too late to correct the error.
AS FOR CHOOSING AMONG CHAPTER 7, 11, AND 13, IT'S CLEAR TO ME WHICH ONE I NEED, SO WHY DO I NEED AN ATTORNEY FOR THIS?
It's true that if you've done some research and know which Chapter is right for you, you may have picked the best one. Everything in your circumstances may point to a single option. When people come to see me after being informed of the advantages and disadvantages of the options they often end up choosing the one they were leaning towards at the beginning.
But very often that's not what happens. They find that the option they originally thought was best has disadvantages they didn't know about and another option has advantages they didn't know about. They may not even qualify for the chapter that they wanted. So they end up choosing to file under a chapter different than they expected, often very pleased that they could meet their goals better than they'd expected.
Virtually every single time when I meet with new clients considering bankruptcy they learn a lot about the unique advantages and disadvantages for them under the applicable Chapters. Doesn't it make sense to be fully informed about these before making such an important decision?
SO ONCE AN ATTORNEY HELPS ME DECIDE WHETHER TO FILE BANKRUPTCY, WHEN TO DO SO, AND UNDER WHICH CHAPTER, WHAT OTHER CHOICES DOES THE ATTORNEY HELP WITH?
Each bankruptcy Chapter involves a bunch of choices:
- how to protect your assets
- whether and how to keep collateral such as your home and vehicle(s)
- how to deal with certain special creditors
- how to make sure all creditors are included
- how to deal with co-signers and other special people like spouses and ex-spouses
- how to present your income and expenses
- how to complete documents truthfully while showing you in the best light for the purposes you are trying to achieve
Again, each of these choices has consequences, sometimes dire ones, and so you need a seasoned expert guiding you through them.
CAN I GET THE LEGAL ADVICE I NEED FROM A PARALEGAL?
No, you can't, and for good reason. Actually for two good reasons.
First, paralegals are simply not competent to give you the advice you need. And second, it's illegal for them to try.
They are not competent to give legal advice because they are not educated or trained or certified to do so.
Bankruptcy law is complex. It involves a mixture of federal and California law (and sometimes the laws of other states). It involves a combination of statutes, procedural rules, national and regional and local court rulings, and the practices of other players like the numerous local bankruptcy trustees, as well as creditors and their attorneys.
And bankruptcy cases require knowledge about numerous other areas of law: real estate, contracts, divorce, income tax, employment, business, personal injury, litigation. This is true even with relatively simple bankruptcies.
It's simply impossible to know all this and understand it thoroughly enough to give solid advice about it without legal training and without experience dealing with it all day after day, year after year.
So it should not be surprising that it's illegal for paralegals, or "bankruptcy petition preparers" as they are called in the Bankruptcy Code, to give any legal advice. That is true under both California and federal law.
WHAT MAKES IT ILLEGAL FOR A "BANKRUPTCY PETITION PREPARERS" TO GIVE ME LEGAL ADVICE?
California statutes state clearly that only attorneys can practice law, and that includes giving legal advice. See California Business and Professions Code Section 6125, and a California Supreme Court ruling,
Baron v. City of L.A., 469 P.2d 353, 357 (Cal. 1970). In this
Baron case the state Supreme Court approvingly quoted cases going back as far as the late 1800s that the practice of law "includes legal advice and counsel and the preparation of legal instruments and contracts by which legal rights are secured."
The federal Bankruptcy Code specifically says that a "bankruptcy petition preparer . . . may not offer a potential bankruptcy debtor any legal advice." See Section 110(e)(2)(A).
The California backs this up by going so far as to make the unlawful practice of law and giving of legal advice a crime. See California Business and Professions Code Section 6126. And the federal statutes provide for significant sanctions for "bankruptcy petition preparers" for violating the law and attempting to give legal advice. See
Section 110(i) and (j) of the Bankruptcy Code.
WHY IS THE LAW SO STRICT AGAINST PARALEGALS?
For good reason. Over the years bankruptcy judges have seen countless situations in which paralegals tried to give legal advice—directly or more subtly—and caused serious harm to debtors. The serious sanctions against such behavior are an effort to reduce these kinds of harms in the future.
Look at one good local example highlighting the harms that people face when using a paralegal or bankruptcy petition preparer who attempts to give legal advice. The In re Bernales bankruptcy court opinion about a Chapter 7 case from the San Fernando Valley gives a list of the ways in which a bankruptcy petition preparer attempted to give legal advice and caused great harm to a Chapter 7 debtor. These included mistaken and/or unlawful legal advice about:
- paying the case filing fee in installments
- what documents to file for an emergency Chapter 7 filing
- filing an extension of time to file documents because the bankruptcy petition preparer failed to prepare the necessary documents on time
- how to interpret and calculate a legal deadline
- the debtor's duties, which excluded the preparation and filing of certain documents
- how to comply with the "means test" and whether the debtor could pass this test
- whether to include certain creditors
- how to answer questions in the bankruptcy forms
- the selection of property "exemptions" for the protection of debtor's possessions
As a result of these mistakes, the debtor's Chapter 7 case was dismissed, or thrown out. And the "bankruptcy petition preparer" was ordered to pay back to the debtor what he'd paid for the "services" plus $2,000, plus to pay another $2,000 to the U.S. Trustee which oversees such matters and litigated the matter. The "bankruptcy petition preparer" was also forbidden from ever again acting as a "bankruptcy petition preparer" in the region.
This case shows the kinds of risks you take if you use a paralegal who tries to give legal advice.
BUT AREN'T THERE PARALEGALS OR "BANKRUPTCY PETITION PROVIDERS" WHO DO FOLLOW THE LAW AND SO ARE WORTH USING?
There are undoubtedly some who follow the law, but if they do they provide a very limited service. Since you need legal advice even if you have what seems to be a very straightforward situation, and a paralegal or "bankruptcy petition provider" can't give you legal advice, in most situations it would be preferable to seek the assistance of an attorney.
Under California law and also under federal law all that a paralegal can do is type, or provide "clerical services." Such services cannot include deciding or advising about where (on the court documents) the information provided by debtor should go. It cannot include individualized questions by the preparer to the debtor to determine how the forms should be completed. "Providing such personalized guidance has been held to constitute the practice of law." See In re Raynoso, a federal Ninth Circuit Court of Appeals opinion applicable to California.
CAN YOU GIVE AN EXAMPLE OF SOME LEGAL ADVICE THAT PARALEGALS MAY TRY TO GIVE AND THE HARM THAT CAN CAUSE?
Yes, let's look at legal choices about property "exemptions."
In a Chapter 7 "straight bankruptcy" exemptions determine which of your assets you can keep and not be "liquidated" by the trustee on behalf of your creditors. Indeed the determination whether all your assets are protected is a big part of deciding whether you should file bankruptcy at all, and if so whether all your assets are protected under Chapter 7 or instead need the extra protections of Chapter 13 "adjustment of debts."
Property exemptions can also affect how much you must pay your creditors in a Chapter 13 case and how long a payment plan lasts.
Helping a debtor with decisions about what exemptions to use amounts to giving legal advice. So it is illegal for a paralegal or bankruptcy petition preparer to attempt to do this for a debtor. "[A]dvising of available exemptions from which to choose, or actually choosing an exemption for the debtor with no explanation, requires the exercise of legal judgment beyond the capacity and knowledge of lay persons" and so constitutes "the unauthorized practice of law . . . ." See In re Kaitangian, a ruling of the bankruptcy court in San Diego.
Picking exemptions may seem deceptively simple: you just select the exemptions that correspond to the assets you have. If the value of the asset(s) in every category of assets you own is less than the maximum amount that is exempt, then everything you own is exempt and you can keep it.
But exemption law can be infinitely more complex than seems at first glance:
- What kind of property each exemption covers is often not clear from the California statutes, and you need to look at both California and federal court opinions and even informal local practices to find this out.
- There are issues about determining the accurate value of your assets in order to see whether the exemption amounts are actually large enough to protect them.
- If you've moved to California in the last 2 years you may have to use another state's exemptions.
- Your homestead exemption in particular is capped if you've bought the home during the 40 months before your bankruptcy is filed.
- Exemption issues are that much more complicated in California because debtors have two distinct exception lists to choose from when filing bankruptcy.
- It can be crucial to be aware of assets that you may have sold or given away before filing bankruptcy and you may need to claim an exemption on them, or else you might forfeit your right to do so.
Choosing the wrong one of the two sets of California property exemptions can result in losing assets that you would otherwise be able to keep. Similar mistakes could have you filing under the wrong Chapter, which would have financial repercussions lasting many years. Conceivably you could lose a home, a family heirloom, or business equipment needed for your self-employment.