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Bankruptcy Traps

by Laura Loyek

It comes as no surprise that the Administrative Office of the U. S. Courts reported a continued increase in bankruptcy filings in 2010. The rise in the number of petitions means that established bankruptcy attorneys are taking on additional cases and other attorneys are handling bankruptcy matters for the first time. It also increases the potential for errors and bankruptcy-related malpractice claims.

In 2010, the most common bankruptcy claim we saw at Lawyers Mutual involved the late filing of Chapter 13 petitions. A common reason for filing bankruptcy is to avoid the loss of the client's home. By the time the client comes to speak with the lawyer, a foreclosure is almost always underway and in some cases a sale of the property has already occurred. If the Chapter 13 petition is filed within 10 days after the sale date (or the date of the last upset bid), the client may have an opportunity to save the house. However, if the petition is filed outside of the 10-day period, the sale becomes final and the Chapter 13 petition will not prevent the loss of the house.

The claim generally involves some variation on this scenario: The clients contact the lawyer for the first time a week or two before the petition must be filed. After collecting information from the clients, the attorney prepares a draft petition but is unable to finalize it because of missing tax returns. The lawyer's office contacts the clients by phone to request the additional information. The tax returns are eventually provided a day or two after the 10-day period has expired. The lawyer completes and files the petition. When the clients later receive a demand to vacate the premises, they assert a malpractice claim based on the lawyer's failure to timely file the petition. The clients deny that they were in any way responsible for the late filing and claim that, but for the lawyer's negligence, they would have been able to save their home.

There are several actions a lawyer can take to avoid this situation. First, do not take on a representation that involves an impossible deadline. This is true in all practice areas. If the client has waited too long to consult with an attorney, it may not be possible to save the home. Make sure the client understands this and has realistic expectations at the start of the representation. Second, if you agree to file a Chapter 13 petition, document everything. Inform the clients in writing as soon as possible when the petition must be filed, what documents and information they must provide, and when they are expected to provide those materials. Retain a copy signed by the clients acknowledging that they received and reviewed this letter. If there are gaps in the petition, document all efforts to contact the clients to obtain needed information. Send a letter or email (or both) confirming telephone conversations and voicemail messages. These written communications should state exactly what information is needed, reiterate the filing deadline, and inform the clients that you will not be able to complete and file the petition until they respond.

We also recommend that an attorney handling a Chapter 13 petition verify the date of the sale or upset bid that triggers the 10-day period. We have seen multiple claims where the information provided by the client was incorrect, and as a result, the petition was not timely filed. This situation can be avoided by independently reviewing the foreclosure file, rather than relying entirely your clients' memory.

Another common bankruptcy claim involves the failure to disclose assets in a petition. When the assets are later discovered and the trustee objects to the discharge, the client may allege that the assets were disclosed and the fault lies with the lawyer. Many of these claims could be avoided by using detailed intake forms and worksheets, which help to confirm what was and was not disclosed to the attorney. We also recommend that lawyers distribute a handout with general bankruptcy information or FAQs at the beginning of the representation, so that the client understands the importance of complete disclosures and the potential consequences of omitting information.

Lawyers Mutual often advises attorneys to avoid dabbling in unfamiliar practice areas, and this recommendation is especially applicable to bankruptcy. With its complicated statutory provisions and unique procedural rules, bankruptcy frequently feels like a completely different world. Those new to the practice should seek out mentoring and educational opportunities. You can also call on Lawyers Mutual's claims lawyers for advice and guidance. Our seven claims attorneys are available to help you brainstorm ideas and to answer your questions.

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