Is 2015 Pre-bankruptcy Planning Going to Result in “Good advice=bad faith?”

A good friend of mine, Larry Karandreas, said “good advice = bad faith?”.  This is a warning to all consumer debtor attorneys and their clients.  The adage refers to the reality that the consumer bankruptcy world is changing.  Reduced bankruptcy filings result in the bankruptcy trustees, their attorneys and the US Trustee’s Office having more time to spend nit-picking every bankruptcy case filed.  What was good solid pre-bankruptcy planning yesterday may result in a bankruptcy action alleging “bad faith” today.
The behind the scenes reason for this increased scrutiny is that the bankruptcy trustees and their attorneys are hungry.  Their firm and life style were built  on earning a certain amount of money.  For instance, 0ne trustee attorney in Arizona received over One Million dollars in 2013.   When bankruptcy filings were up there was plenty of work to be done on those files where debtors actually did something inappropriate.  The bankruptcy system was well-served by the trustees and their attorneys pursuing the bad actors who had committed a bad faith act.  This was healthy for the system and the creditors.  The debtor received their discharge and all was well with the world.
Not so much today.  Bankruptcy filings are down.  This is good for the economy, but the trustees and their attorneys still have a lifestyle that reflects a more affluent time.  The only way they can feed that lifestyle is to pick at the small and most innocent of acts.  Including those acts that were never considered inappropriate or “bad faith” yesterday.  Innocent debtors receive good legal advice from their experienced bankruptcy counsel.  According to the law or prior cases this advice was long settled as good advice.  These innocent debtors follow their attorneys direction and take the appropriate action.  Actions such as using their vehicle as collateral for funds; funds used to feed their family.
Unfortunately, the hungry trustees and/or their attorneys jump on the innocent debtor alleging “bad faith”.   Defending this action will cost the debtor, and perhaps their attorney.  Threatening this action really amounts to blackmail.  Trustees and/or their attorney know the debtor cannot afford to litigate.  They realize they can strong-arm the debtor into paying something in order to make the lawsuit stop.  Unfortunately, most of the Arizona bankruptcy judges have not admonished these trustees and their attorneys.  This only encourages their continued blackmail.
How are these blackmail funds used?  The funds are paid first to the trustee, then to the trustee’s attorney and, lastly, to the creditors.  The trustee is paid 25% of the first $5,000 collected, with a sliding scale from there.  The trustee’s attorney is paid all of their fees and costs.  Which really rewards the attorney for bringing or threatening to bring a bad faith action.   How about the creditors?  One of the trustee’s duties is to maximize the return to creditors.  With these types of actions is there normally something left to pay to the creditors?  Typically very little, if any.  In fact, it may cost the creditor more money than they receive due to the overhead related to applying accounts receivable.  Too complicated to explain here, but just know the creditors are really irritated by the trustees sending them checks in small amounts ( e.g. under $250).
The point of this blog?  A good bankruptcy attorney is supposed to give their clients good legal and practical advice.  Unfortunately, even if they give good advice and the client correctly follows that advice, bad things may happen.  A system is broken when it encourages (perhaps through non-action) blackmail of those who can little to defend.  I don’t the answer to this problem, other than to stand up to the blackmailers and force them into court.  We can only hope the judge will see what is really happening and send a message to the trustee and their attorneys.  Only time will tell.
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