Consumer Protection in Outsourcing and Out-Tasking: Statutory Rules Governing Document Preparation (Bankruptcy Petition Preparers)
The federal Bankruptcy Abuse Prevention and Consumer Protection Act, signed by President Bush on April 20, 2005, establishes a new outsourcing (or “out-tasking”) business for “bankruptcy petition preparers.” Such businesses (which could be in corporate or sole proprietorship format) would assist persons in the preparation and filing of bankruptcy petitions. While other laws relate to similar preparers of documents for filing with the federal government (such as for income tax return preparers), this law defines the practice of law by delineating what non-lawyers may do without being supervised by a lawyer.
Coming after an unsuccessful attempt in 2002 by the American Bar Association to use a definition of the practice of law to exclude non-lawyers from many document preparation services, the 2005 bankruptcy reform legislation sets a congressional imprimatur on permissible non-lawyer services. Anyone engaged in document preparation services (including procurement and sourcing consultancies) should consider how this legislation would establish new federal policy on document preparation services and, implicitly, the practice of law.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, S. 256, 109th Cong., 1st Sess, amending 11 U.S.C. 110, establishes and regulates a new regulated profession of “bankruptcy petition preparer.” The law identifies a public policy of avoiding abusive filings of fraudulent bankruptcy petitions and preventing “fraudulent, unfair or deceptive practices” by bankruptcy petition preparers. The regulatory regime establishes maximum reasonable fees and, for violations of regulations or assisting in fraudulent bankruptcy petitions, impose civil fines and even forfeiture of all document preparation services fees.
The Services Agreement.
A bankruptcy petition preparer must provide a written notice describing the scope of bankruptcy petition preparation services, along with a contrasting provision that specifies what types of services would constitute the practice of law that the preparer is not legally permitted to provide. Accordingly, to avoid abuse of “consumers” of these services, the definition of “practice of law” becomes critical.
Definition of the Practice of Law.
The new law would include (without limitation) the following services as being within the scope of practicing law:
The legal advice referred to in subparagraph (A) includes advising the debtor–
`(I) to file a petition under this title; or
`(II) commencing a case under chapter 7, 11, 12, or 13 is appropriate;
`(ii) whether the debtor’s debts will be discharged in a case under [the Bankruptcy Code];
`(iii) whether the debtor will be able to retain the debtor’s home, car, or other property after commencing a case under this title;
(I) the tax consequences of a case brought under this title; or
(II) the dischargeability of tax claims;
(v) whether the debtor may or should promise to repay debts to a creditor or enter into a reaffirmation agreement with a creditor to reaffirm a debt;
(vi) concerning how to characterize the nature of the debtor’s interests in property or the debtor’s debts; or
(vii) concerning bankruptcy procedures and rights.’;….
Analogy for Other Services Providers.
Management consultants, brokers, investment bankers, turnaround specialists and other service providers can get some comfort from the text of this reform law. While narrowly applicable to the protection of consumers, the law does express a congressional policy of permitting but regulating the performance of certain functions that might, in a prior era, have been considered the practice of law.
To review these areas by analogy in a more generic approach, one might rewrite this law for all document preparation services under the following “rewritten” version. The author takes the liberty of making this analogy only for comparative purposes and does not recommend that it should be sufficient to prevent the document preparer from withstanding a cease-and-desist order or other demand by a competent government authority for other document preparers:
Legal advice that a document preparer shall be prohibited from providing unless performed by a licensed lawyer includes advising any client–
`(I) to prepare any document that will be used to comply with any procedure that is governed by a law; or
`(II) commencing a case before any court, tribunal or arbitral authority is appropriate;
`(ii) whether the client’s obligations will be discharged in a case commenced using any document prepared by the document preparer;
`(iii) whether the client will be able to retain certain specific rights in property (including choses in action) after commencing a case using any document prepared by the document preparer;
`(I) the tax consequences of a case brought using any document prepared by the document preparer; or
`(II) the dischargeability of tax claims;
‘(III) the preservation of any rights against any third party that the document, prepared by the document preparer, is intended to assure; or
‘(IV) the limitation of any liability of the client in respect of any third party or the compliance by the client with any law, rule or regulation affecting the client.
`(v) whether the client may or should make any decision that affects its rights or remedies, including any election to promise to undertake future performance to any third party or enter into any agreement with a third party to reaffirm or clarify any obligation, right or remedy;
`(vi) concerning how to characterize the nature of the client’s interests in property or the client’s obligations for any compliance or reporting purposes; or
`(vii) concerning legal procedures and rights.’.
In granting this statutory exemption to the monopoly of lawyers, this new law will nonetheless require informed consent by the “client.” The nature of such informed consent in the context of outsourcing contract drafting is a matter of judgment under the circumstances.
Any “document preparers” should obtain legal counsel on whether their services constitute the unauthorized practice of law or an unfair trade practice that might be regulated by the Federal Trade Commission or other regulatory body.