Increasing Abuse of Bankruptcy in Florida
Introduction
Bankruptcy is very popular throughout the current economy. The number of individuals who are filing Chapter 7 bankruptcy increases every year. In January of 2007, 1,382 individuals filed for Chapter 7 bankruptcy throughout the state of Florida. In June of 2013, 4,176 individuals filed for Chapter 7 bankruptcy in Florida (Bankruptcy Information, 2016). This has a lot to do with the amount of advertising that bankruptcy lawyers are doing in order to attract more customers to their firm. Not only does their advertising encourage traffic to their law firm, it also gives the lawyer the opportunity to give legal advice to the potential client. Due to this, there has been an increasing abuse of the bankruptcy system throughout the state of Florida. This paper analyzes the research of the increasing abuse of the Florida bankruptcy program, specifically Chapter 7, and the impact advertising for bankruptcy services has had on this increased abuse. This paper also discusses how lawyers may persuade a client to use the bankruptcy system contrary to its designated purpose.
Discussion
Chapter 7 bankruptcy (Student 1)
Chapter 7 bankruptcy is used for individuals to gain a fresh start when it comes to their finances. In return, these individuals are able to become productive citizens again. When filing Chapter 7 bankruptcy, “the debtor must file a schedule of assets and debts, a full listing or schedule of current income and expenditures, a full statement of financial affairs, and a schedule of executor contracts and unexpired leases” (Florida Court Forms, 2016). This allows the court to gain a full picture of the financial situation of the debtors.
There are certain debts, however, that cannot be discharged by Chapter 7 bankruptcy. These debts consist of: alimony, fraudulent debts, child support, student loans, and certain taxes. While mostly all other debts can be bankrupt, these debts are considered permanent debts and individuals are not legally allowed to wipe these debts out like credit cards or car loans. In most Chapter 7 bankruptcy cases, the debtor generally has a large amount of unsecured bills and credit card debt with few assets. This is the typical situation that allows someone to qualify for Chapter 7 bankruptcy. In the majority of the cases dealing with Chapter 7 bankruptcy, debtors are allowed to completely eliminate their debts by filing for Chapter 7 bankruptcy (Florida Bankruptcy Law, 2016).
When it comes to certain secured debts, like a car or a house, the debtor may be allowed to keep those items by reaffirming those debts. In order to reaffirm debt, the debtor must sign a voluntary “Reaffirmation Agreement”. In order to keep these items, the debtor must sign the agreement which states the debtor will continue to pay for those items and will not bankrupt, or wipe-out, that debt for another eight years. Furthermore, the debtor must become current or up-to-date on their payments in order to reaffirm it (Florida Bankruptcy Law, 2016). Thus, the debtor is able to not discharge needed debt and is about to still make current payments on those loans.
The state of Florida uses the application of a means test to verify whether or not the bankruptcy law is being abused. “If your total monthly income over the course of the next 60 months is less than $7,475 then you pass the means test and you may file a Chapter 7 bankruptcy. If it is over $13,475 then you fail the means test and don’t have the option of filing Chapter 7” (Florida Bankruptcy Laws, 2016). If an individual’s disposable income is between the amounts of $7,475 and $12,475, then they must go under further calculations in order to determine whether or not they qualify for Chapter 7 bankruptcy. However, just because a person can file for Chapter 7 bankruptcy does not mean that they should. Just like going into the debt, just because someone qualifies for bankruptcy benefits does not mean that bankruptcy is what is best for that individual person.
Lawyers have a responsibility when it comes to the abuse of Chapter 7 bankruptcy. They need to make sure that their clients pass the means test before filing bankruptcy through the court system. However, lawyers sometimes take part in the misrepresentation behind those filings. Not only are some of these lawyers knowledgeable that their clients documents are inaccurate, but some lawyers are the ones advising their clients to give false or misleading information to the court system. This classifies as abuse of the bankruptcy system. Some jurisdictions classify this as filing bankruptcy in bad faith (Findley, 2009, p. 860).
There are several ways an individual can abuse Chapter 7 bankruptcy. A lawyer might advise a client to withhold certain assets or earnings from the court in order to qualify for bankruptcy. A lawyer might also advice his or her client to create more debt before filing bankruptcy. The latter is one of the most common type of bankruptcy abuse due to lawyer advice. This aspect is discussed at a later point. All of the above are ways in which an individual and/or their legal representation can abuse the bankruptcy system.
There are serious consequences when it comes to people abusing the bankruptcy system. In the year 2012, there were more than 1.2 million bankruptcy filings. “Bankruptcy fraud results in serious consequences that undermine public confidence in the system, taint the reputation of honest citizens seeking protection under the bankruptcy statues, and have a negative impact on voluntary compliance in our income tax system” (IRS, 2016). Thus, bankruptcy fraud affects the economy as well as the individual committing the fraud.
Types of bankruptcy fraud (Student 3)
Chapter 7 bankruptcy fraud refers to an individual obtaining debt without the intentions of ever repaying that debt. “This includes applying for loans, credit cards, and other debts with the intention of filing for bankruptcy immediately after using the extended credit line” (McSpadden, 2016). Sometimes abuse of the bankruptcy system can lead to bankruptcy fraud. For example, an individual accruing debt with the hopes of getting it discharged in a Chapter 7 bankruptcy filings would be committing bankruptcy fraud.
One type of bankruptcy fraud is concealing assets. Information regarding the assets owned by the debtor must be provided to the court. The court then decides how the debtor’s assets should be disposed of in order to ensure that the creditors receive the available proceeds. This allows the court to make sure the filing is fair for all parties involved. Transferring property to someone else or secretly selling property are all examples of concealing assets in a bankruptcy fraud case (McSpadden, 2016). Some clients conduct bankruptcy fraud to limit liability through a bankruptcy filing.
Hiding lines of credit is also another type of bankruptcy fraud. The petition for bankruptcy must include a complete list when it comes to the creditors. The list must include every creditor the debtor owes money to. The petition cannot list the creditors the debtor wants to pay off. During Chapter 7 bankruptcy, a debtor cannot agree to pay one the creditor and refuse to pay the other. “This includes listing several credit cards on a bankruptcy petition while keeping a separate credit card and paying on it secretly to continue being able to use it” (McSpadden, 2016).
Advertising legal services
Between the years of 1908 and 1977, lawyers were not allowed to advertise their services to the general public. This was due to code of ethics that were set forth of the profession. In other words, it was deemed unethical for an attorney to advertise their services to the generally public. However, the U.S. Supreme Court ruled in Bates v. State Bar of Arizona that attorneys were allowed to advertise their services to the general public. “For the most part, the first lawyers to take advantage of the new rules were personal injury and bankruptcy attorneys advertising in the Yellow Pages and on cable TV” (Callahan, 2004). However, several larger law firms, especially corporate law firms, did not immediately take advantage of the new Supreme Court ruling. Actually, the small the law firm, the more likely they are to embark on the realm of advertising (Callahan, 2004).
There have always been questions regarding the ethics behind lawyer advertising, especially in Florida. In 2013, the Florida Supreme Court ruled that lawyer advertisements were constitutional. Prior to 2013, there has been a constant battle as to whether or not restricting lawyer advertising is unconstitutional. Attorneys have constantly battled the court system when it comes to advertisements. These attorneys argue that barring a law firm from using advertising is a violation of the 1st Amendment. Several cases have focused on what types of information an attorney can provide in their advertisements. “The new rules permitted attorney advertising to cite past results as long as those results were “objectively verifiable.” As revised, the rules did not restrict statements about past results to any particular advertising medium” (Hudson, 2015). However, some advertisements can be deemed unconstitutional if they are considered deceitful.
Lawyers have received excellent compensation with their ability to advertise their services. Some believe this is unethical due to the fact they are encouraging their clients to utilize their services in order to receive money. This would not be seen as being unethical in the majority of industries. However, some lawyer services have serious future implications for a client. Lawyers generally conduct services regarding bankruptcy, divorce, malpractice and civil litigation. All of these legal proceeds can be expensive and time consuming for the client. Lawsuits can also be emotional for a person. Encouraging individuals to participate in such expensive, emotionally draining, and time consuming legal proceedings for money does have ethical implications. Thus, there may be an ethical line regarding advertisements and these services (Hudson, 2015).
For example, Rubenstien Law in Miami had one ad that was considered questionable by the Florida Bar. The ad stated that the firm collected over $50 million for their clients within the past year. After this advertisement came out, the Florida Supreme Court revised their rules regarding past results. By stating that the law firm had collected large quantities of money for their previous clients encourages an individual to utilize their services. Thus, the ad is encouraging potential customer to file for bankruptcy, sue a relative, or file a malpractice suit. All of these services take time, money and energy from the client. They can also have serious future implications for any individual. Some people believe these services should not be advertised and should only be available when people need them. In other words, legal services are services that should be sought and not encouraged (Hudson, 2015).
Advertising bankruptcy services (Student 4)
Lawyer advertising has been shown to have a direct impact when it comes to Chapter 7 bankruptcy filing. One study found that cities with high bankruptcy filing rates are generally the cities that have higher levels of lawyer advertising. “A recent look through the Law Vegas Yellow Pages shows more than 100 pages of lawyer advertising, of which roughly one in 10 mentions or is devoted to bankruptcy. Las Vegas has one of the highest urban area bankruptcy rates” (Feldstein, 1998).
The state does have the ability to impose restricting when it comes to attorney advertising. For example, if an attorney’s advertisement is inherently likely to deceive, the state has the power to intervene and restrict the attorney’s advertisement. Just like other industries, lawyers are not allowed to use false advertising or misleading information in order to increase their customer flow.
Problems associated with deceiving advertisements and advice (Student 6)
One problem associated with lawyer advice and bankruptcy filings is that attorneys are barred against advising a client to incur more debt in order to qualify for bankruptcy. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 originally “prohibited attorneys from advertising to their clients to incur more debt in contemplation of filing for bankruptcy” (Findley, 2009, p. 845). This is very common with bankruptcy attorneys and generally considered unconstitutional. However, there are times when incurring more debt does not have any negative impacts of any party involved. “There are times when an attorney’s ability to advise a client to incur additional debt, even in the face of bankruptcy, could actually benefit the client without harming the creditor” (Findley, 2009, p. 860). Due to this, advising a client to incur additional debt may be considered legal. Therefore, lawyers should proceed with caution when it comes to the legal aspects of giving this type of advice.
The above situation is the leading reason bankruptcy attorneys end up in lawsuit. Accruing more debt may not always have a positive result for all clients. In some circumstances, the debtor may not qualify for bankruptcy. These clients, who cannot afford any more debt, may seek legal relief due to the fact they followed their lawyers advice. Thus, the clients incurred more debt because they trusted the legal advice of their lawyer. These lawyers advertised that they would be able to get their client debt relief. However, the lawyer’s advice only caused more harm on the client.
A bankruptcy filing will be deemed to be in bad faith if the circumstances regarding the bankruptcy indicate potential bankruptcy abuse. “If you file for bankruptcy simply to delay creditors, misrepresent or omit information on you petition, or otherwise try to take advantage of the bankruptcy system, the court may find your filing to be in bad faith (Bulkat, 2016). Bankruptcy courts look at a number of circumstances surround the bankruptcy filing in order to determine bad faith. These are some of the most common factors a court uses to determine a bad faith filing are: 1) frequency and number of bankruptcy filings, 2) misrepresentation or omitted information, 3) bankruptcy was filed to delay creditors, 4) financed luxury items, and 5) any other egregious conduct (Bulkat, 2016).
One example of withholding assets or earnings happened in Fort Lauderdale. A man was arrested for the operation of a Ponzi scheme and was later sentenced to 50 years in prison. His wife is now facing up to five years in jail for hiding more than one million dollars’ worth of jewelry from federal authorities and bankruptcy trustees after her husband was arrested. Several others, including lawyers, have pleaded guilty to helping the women hide these assets during the bankruptcy proceedings (Start Fresh Today, 2013). Such actions are considered abuse of the bankruptcy system.
New rules for bankruptcy lawyers (Student 7)
Bankruptcy laws have changed and there is an increasing concern as to whether debtors filing for Chapter 7 bankruptcy are actually abusing the system. A new rule have been created due to the increase number of individuals and attorneys abusing the bankruptcy program. The Rule 9011 of the Federal Rules of Bankruptcy Procedure states that all attorneys must submit documentation to the court making certain assurance regarding the bankruptcy case. “These rules are designed to prevent frivolous or bad faith filings; they require attorneys to conduct reasonable inquiries into the facts and law in their filings, and to file them only for a proper purpose” (Vance, 2012). In order to control the bankruptcy abuse program, courts are starting to create and regulate provisions regarding lawyers and how they file bankruptcy claims.
Rule 9011 of the Federal Rules of Bankruptcy Procedure gives attorneys set guidelines describing the steps required for filing a Chapter 7 bankruptcy case. These steps include: 1) performing reasonable investigation into the circumstances surrounding the bankruptcy petition, pleading, or motion, 2) determine that the petition for bankruptcy is grounded in fact and is warranted by good faith arguments and does not constitute abuse. In other words, attorneys in bankruptcy proceedings must conduct proper research in order to insure that the filing does not constitute abuse as defined by the good faith filing requirement and the means test (Vance, 2012).
In order for an attorney’s bankruptcy filing to be considered in good faith, all of the information regarding the debtor’s finances must be accurate and up-to-date. Also, the lawyer must conduct a reasonable investigation in order to determine whether or not the client’s financial statements are accurate. By the time the lawyer files the claim, the lawyer should now whether or not there is any abuse in the system in filing the claim.
Conclusion
Bankruptcy has been a continually popular topic in this current economy. More individuals are filing for bankruptcy than in previous years before. As these number go up, so does the number of individuals who abuse the system. Lawyers are partially to blame for this. Certain lawyers give their clients unethical or unconstitutional advice. Some lawyers encourage their clients to hide assets in order to qualify for bankruptcy, while other lawyers encourage their clients to incur more debt. While whether or not this is considered legal, these lawyers are telling their struggling clients to place themselves more in debt in order to qualify for bankruptcy. This can help them receive more benefits from the bankruptcy system. However, this advice does not always work for people and sometimes end up placing the individual more in debt without any relief. Several individuals believe that the use of advertising encourages individuals into declaring bankruptcy. For example, one law firm used the fact they had collect $50 million for their previous clients within one year. This was deemed persuasive and caused the Florida Bar to reevaluate their provision on lawyer advertising. These advertisements do encourage people to utilize these services.
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