There’s no shortage of exploitive “get out of debt” offers.  One area ripe with abuse is the arena of non-attorneys who prepare bankruptcy papers.  These “bankruptcy petition preparers” are defined in the bankruptcy code as “a person, other than an attorney for the debtor or an employee of such attorney under the direct supervision of such attorney, who prepares for compensation a document for filing.”

The Bankruptcy Code puts special restrictions on these individuals.  This is because a person filing bankruptcy often under tremendous stress, stuck between creditors’ collection attempts and financial worries.  Desperate for a way out, the person become particularly vulnerable to “too good to be true” offers.  Many of these offers are a bankruptcy filing for a fraction of the cost of hiring an attorney.

The problem is that these bankruptcy petition preparers are supposed to do nothing except type! But often they intentionally or negligently give legal advice.  And, of course, the advice is often wrong.  The person filing bankruptcy files the prepared papers.  Serious problems arise resulting in loss of time, additional fees, liquidation of property, or a dismissal of the case.  The bankruptcy petition preparer keeps his fee and moves on to the next victim.

This has been an ongoing problems in the Eastern District of Michigan.  A particularly disturbing example was described in the case of In re Warfield, Case No. 09-75993-wsd (2010).  Ms. Warfield was considering bankruptcy, so her friend gave her the number from an advertisement he saw in an office window.  Ms. Warfield called, setup an appointment, and appeared a few days later to meet a man by the name of Derrick Hills.

Little did she know, Mr. Hills had a rather disturbing history as a bankruptcy petition preparer and had been banned by the court from providing any bankruptcy related services to any individuals.  In an effort to evade the ban, he setup a corporation to operate under a different name.

Mr. Hills took Ms. Warfield into a back room where she met his associate.  Hills pulled a copy of Ms. Warfield’s credit report, and then he and his associate “assisted” her in preparing her bankruptcy filing.  There was no talk about what chapter would be filed; Hills decided it would be a chapter 7 liquidation.  Hills then instructed his associate to fill in information based on the credit report.  Ms. Warfield was given a handout on “exemption planning” and instructed to list her assets with which exemption she wished to claim.  Hill’s associate then input the data into the forms.

Ms Warfield contacted Hills a few days later, expressing anxiety about completing the bankruptcy herself.  Hills reassured her it would only involve filing the paperwork and attending the meeting of creditors.  After filing, she attempted to contact him again with more questions.  Hills was annoyed and scolded her for not reading his instructions properly.

The court noticed Ms. Warfield’s case for a hearing, in part to investigate who had prepared her petition.  A day before the hearing, Ms. Warfield claims that Hills showed up at her door and demanded she sign a waiver indicating that his corporation had not given any legal advice.  He also instructed her to tell the court that he had been only a passive observer.

The court later held a hearing where Hills was called to be questioned.  After a statement basically denying all wrongdoing, he attempted to invoke something akin to the Fifth Amendment when the U.S. Trustee began questioning him.

What can bankruptcy petition preparers legally do? The court’s answer: “not much.”  There services must be limited to “scrivening/typing” services.  There service must be a pure transcription of handwritten or verbal instructions of the bankruptcy filer.  Hills and his associate when well beyond mere transcription: they chose the chapter of bankruptcy, how to characterize Ms. Warfield’s property, and provided written and verbal instructions on bankruptcy procedure.  The court found this both violated the bankruptcy code, and amounted to an unauthorized practice of law.  Hills and his associate were fined $2000, required to return the $375 preparation fee, and required to pay the U.S. Trustee’s attorney fees.  Hills was also referred to the U.S. Attorney for criminal investigation of his attempts to get Ms. Warfield to give false testimony.

Unfortunately, Ms. Warfield’s case, although extreme, is not unique.  For this reason, on April 20, 2010, the Bankruptcy Court for the Eastern District of Michigan entered an order limiting all bankruptcy petition preparer’s fees to $100.  Charging more can result in a return of the fee and penalties.  If the petition preparer wants more, he or she must file a motion with the court within 14 days after the case is filed to explain why under oath.

Consider if Ms. Warfield had just taken 45 minutes for a free consultation with a bankruptcy attorney.  I believe she would have had a better understanding of the bankruptcy process.  She would have probably identified Hills as a con, and avoided the entire mess.  Take a lesson from Ms. Warfield’s case and remember: if the deal looks too good to be true, it probably is.

Russ’s Remarks: Thanks to Northern Michigan Bankruptcy Lawyer and colleague Paul Slough for this excellent post. As many of you know, I’m licensed in Michigan as well as South Carolina, and I began my legal career way up there.  I’ve got a soft spot in my heart for my Michigan colleagues and always like to get great content like this.

This subject was on my “to-do” list for a blog post, but I couldn’t have said it better than Paul.  Bankruptcy petition preparers are nothing but snake oil salesmen with an internet presence.  The are accountable to no one and routinely harm debtors by giving horrible, incompetent advice.  In fact, I see this about once a month or so in bankruptcy hearings here in Charleston. I feel horrible for the debtors.  They are confused, embarrased, and scared.  Their cases get delayed, many times the U.S. Trustee’s office gets involved, and sometimes the debtors don’t get their discharge.  Many of these “preparers” operate from the safety of oversees offices and escape enforcement action because they have no physical presence in the U.S.

Why do people keep hiring these crooks?  In the words of Paul Simon in the song, “The Boxer:”

I have squandered my resistance for a pocketful of mumbles, such are promises,

All lies and jest, still a man hears what he wants to hear and disregards the rest.

It’s human nature to want to believe people, especially when you like what they tell you.  Sometimes the unpleasant truth just isn’t what you want to hear.  So when these crooks say “it’s easy and cheap” and “you don’t need a lawyer” and “it’s just one hearing,” you want to believe them. Don’t! Just remember poor Mrs. Warfield and the crooks she hired.  And, yes, they are all alike.  They are all unqualified to give legal advice in a very complicated area of law, yet they all plow right ahead and do it anyway.  It’s impossible to simply “prepare schedules” and not give legal advice. And if they get caught, they deny everything, and move to the next state–that is if they were ever in a state to begin with.  Just remember the time-honored saying, “You get what you pay for!”

And If you’re in Gaylord, Michigan, or anywhere else in Northern Michigan, and are having financial problems, contact Paul Slough at (989) 705-9025 and visit his website and blog at www.northernmichiganbankruptcy.com.

Related posts:

1. What to Expect at Your Bankruptcy Hearing
2. Fired for Filing Bankruptcy? No Way!
3. Should I Try Credit Counseling? (Part One)