Requirements for Debt Relief Agencies

The Bankruptcy code, amended by The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, places extensive requirements on debt relief agencies and subjects those who do not comply with substantial penalties.

What is a "debt relief agency"?

A "debt relief agency" is a person who, for compensation, provides bankruptcy assistance to a person who owes debt incurred primarily for personal, family, or household purposes, and has less than $ in non-exempt assets.  The bankruptcy petition preparer is specifically included in the definition of a debt relief agency without regard to the nature or amount of the debt; the debtor's attorney is not specifically included, but would be included by the definition, subject to the requirements for nature of debt and amount of non-exempt assets.  [11 USC § 101(3), (8), (12A)]

Restrictions on debt relief agencies.  11 USC § 526(a), prohibits debt relief agencies from taking certain actions:

Failing to perform services.  An agency may not fail to perform any service which it informed the debtor that it would provide in connection with a Bankruptcy case.  [11 USC § 526(a)(1)]

Making an untrue and misleading statement.  An agency may not make any untrue and misleading statement in a document filed in a Bankruptcy, or make a statement which, upon the exercise of reasonable care, should have been known by the agency to be untrue or misleading.  [11 USC § 526(a)(2)]

Counseling or advising the debtor to make untrue and misleading statements.  An agency may not counsel or advise the debtor to make any untrue and misleading statement in a document filed in a Bankruptcy.  [11 USC § 526(a)(2)]

Misrepresent services, benefits or results.  An agency may not directly or indirectly, affirmatively or by material omission make a misrepresentation with respect to:

• the services that the agency will provide, or
• the benefits and risks that may result in filing Bankruptcy.

[11 USC § 526(a)(3)]

Advising to incur debt.  An agency may not advise a person contemplating the filing of a Bankruptcy to incur more debt in contemplation of filing bankruptcy, or to pay an attorney or bankruptcy petition preparer fee or charge for Bankruptcy services.  [The statute is less than clear regarding the fees for Bankruptcy services.  The restriction could be interpreted as only restricting an agency from advising that debt be incurred to pay for bankruptcy services--or it could be interpreted more broadly as prohibiting the agency from advising the debtor to pay for bankruptcy services.]  [11 USC § 526(a)(4)]

Notices and disclosures.  A debt relief agency must give the following notices and disclosures:

Bankruptcy court clerk notice.   The agency must provide the debtor with the written notice of the clerk of the court which contains brief descriptions of:

• chapters 7, 11, 12, and 13 and the general purpose, benefits, and costs of proceeding under each of those chapters; and
• the types of services available from credit counseling agencies.

[11 USC §§ 527(a)(1), 342(b)(1)]

The agency must retain this notice for 2 years from the date that the notice is given.  [11 USC § 527(d)]

The court clerk is required to give this notice "before the commencement of a case" under 342(b)(1), but no date is given in 527(a)(1) for a debt relief agency to provide that same notice, and we have been unable to locate any other section specifying when the agency must give the notice. 

[Printable bankruptcy clerk notice provided in the District of Arizona.]

Additional written notice.  An agency must provide the following information to the debtor, to the extent that the Bankruptcy court clerk's notice does not provide it:

• all information is required to be complete, accurate, and truthful;  [11 USC § 527(a)(2)(A)]
• all assets and all liabilities are required to be completely and accurately disclosed;  [11 USC § 527(a)(2)(B)]
• the replacement value of each secured asset must be stated where requested after reasonable inquiry to establish that value;  [11 USC §§ 527(a)(2)(B), 506]
• the debtor must disclose, after reasonable inquiry, his or her current monthly income, and the amounts specified to determine whether a case satisfies the means test under 11 USC § 707(b)(2),  Those amounts include:
  • debtor's nonpriority unsecured claims;
  • debtor's monthly expenses;
  • actual expenses paid by the debtor for care and support of an elderly, chronically ill, or disabled household member or member of the debtor's immediate family;
  • expenses of administering a chapter 13 plan;
  • expenses to attend a private or public elementary or secondary school for each dependent child less than 18 years of age;
  • housing and utilities expenses if in excess of IRS Local Standards;
  • average monthly payments on account of secured debts; and
  • expenses for payment of all priority claims (including priority child support and alimony claims).
• in a case under chapter 13 of this title, the debtor must disclose after reasonable inquiry, his or her disposable income (determined in accordance with section 707(b)(2)), which are required to be stated after reasonable inquiry; and  [11 USC § 527(a)(2)(C)]
• information may be audited, and failure to provide information may result in dismissal of the case or other sanction including a criminal sanction.  [11 USC § 527(a)(2)(D)]

The agency is required to provide this notice within 3 business days after the first date that the debt relief agency first offers to provide any bankruptcy assistance services.  [11 USC § 527(a)(2)]  The agency must retain this notice for 2 years from the date that the notice is given.  [11 USC § 527(d)]

Specific written statement. A debt relief agency must provide the written statement titled "IMPORTANT INFORMATION ABOUT BANKRUPTCY ASSISTANCE SERVICES FROM AN ATTORNEY OR BANKRUPTCY PETITION PREPARER" which is set forth in 11 USC § 527(b).  The statement shall be clear and conspicuous and shall be in a single document separate from other documents or notices which the agency provides.  [11 USC § 527(b)]

§ 527(b) requires that the agency give this notice at the same time that is is required to give the Bankruptcy Court Clerk Notice (described above), but as far as we can determine, gives no time at which that notice must be given.

[Printable 527(b) Statement.] 

Document preparation information.  The debt relief agency must give the debtor "reasonably sufficient information (which shall be provided in a clear and conspicuous writing) to the assisted person on how to provide all the information the assisted person is required to provide" for the documents required by 11 USC § 521, which include the list of creditors, schedule of assets and liabilities, schedule of current income and current expenditures, and statement of the debtor's financial affairs.  That information must include:

• how to value assets at replacement value, determine current monthly income, the amounts specified for the means test in section 707(b)(2) and, in a chapter 13 case, how to determine disposable income in accordance with section 707(b)(2) and related calculations;
• how to complete the list of creditors, including how to determine what amount is owed and what address for the creditor should be shown; and
• how to determine what property is exempt and how to value exempt property at replacement value as defined in section 506.

 § 527(c) requires that the agency give this notice at the same time that is is required to give the Bankruptcy Court Clerk Notice (described above), but as far as we can determine, gives no time at which that notice must be given.

[11 USC § 527(c)]

Written contract for services.  A debt relief agency must execute a written contract with the debtor:

Contents.  The contract must clearly and conspicuously explain:

• the services such agency will provide;
• the fees or charges for such services; and
• the terms of payment.

When provided.  The contract must be executed not later than 5 business days after the first date on which such agency provides any bankruptcy assistance services to an assisted person, and prior to the filing of the bankruptcy petition.

Copy.  The debt relief agency must provide the assisted person with a copy of the fully executed and completed contract.

[11 USC § 528(a)]

Advertising requirements. 

Disclosure that services are for bankruptcy.   A debt relief agency must clearly and conspicuously disclose in any advertisement directed to the general public that the services or the benefits offered are with respect to bankruptcy relief.  Advertising requiring the disclosure includes:

• advertisements in general media, seminars or specific mailings, telephonic or electronic messages, or otherwise;  [11 USC § 528(a)(3)]
• descriptions of bankruptcy assistance in connection with a chapter 13 plan whether or not chapter 13 is specifically mentioned in such advertisement; and  [11 USC § 528(b)(1)(A)]
• statements such as "federally supervised repayment plan" or "Federal debt restructuring help" or other similar statements that could lead a reasonable consumer to believe that debt counseling was being offered when in fact the services were directed to providing bankruptcy assistance with a chapter 13 plan or other form of bankruptcy relief.  [11 USC § 528(b)(1)(B)]

Debt relief agency statement.  A debt relief agency must clearly and conspicuously include in advertisements the following statement (or a substantially similar statement):

"We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code."

 [11 USC § 528(a)(3) & (4), 528(b)] 

Sanctions

Unenforceable contract.  If a contract for bankruptcy assistance between a debt relief agency and an assisted person does not comply with the material requirements of this  is void.  It cannot be enforced by or on behalf of the debt relief agency.  It can, however, be enforced by the assisted person.  [11 USC § 526(c)(1)]

Liability for fees received, actual damages, attorneys' fees.  A debt relief agency is liable to the assisted person for:

• the amount of any fees or charges in connection with providing bankruptcy assistance to such person that such debt relief agency has received;
• actual damages; and
• reasonable attorneys' fees and costs.

The penalties are to be imposed if, after notice and hearing, the court finds that the debt relief agency has:

• intentionally or negligently failed to comply with any provision of  sections 526, 527, or 528 (described above) with respect to the assisted person bankruptcy case;
• intentionally or negligently failed to file any required document (including those specified in section 521), which resulted in the dismissal of the case or its conversion to a case under another chapter; or
• intentionally or negligently disregarded the material requirements of the bankruptcy code or the Federal Rules of Bankruptcy Procedure applicable to such agency.

[11 USC § 526(c)(2)]

Actions by State law enforcement.  In addition to any state law remedies, the code specifically authorizes state agencies to:

• bring actions to enjoin violations;
• bring actions on behalf of its residents to recover the actual damages; and
• recover the attorneys' fees and costs of successful actions.

[11 USC § 526(c)(3)]

Actions by the court, United States Trustee, or the debtor.  Where a debt relief agency intentionally violates section 526 or engages in a clear and consistent pattern or practice of violating the section, the court may, on its own motion or on the motion of  the United States Trustee or the debtor:

• enjoin the violation of such section; or
• impose an appropriate civil penalty against such person.

[11 USC § 526(c)(5)]

This page was last revised: 08/26/05