Marrying Consumer Protection With Bankruptcy Practice

Published in New Jersey Law Journal February 15, 2020 

In this unique moment in time, bankruptcy practitioners and consumer protection counsel can, and should, work together and use their concerted expertise to move beyond the discharge.

By Joshua Denbeaux, Lee M. Perlman and Heidi Spivak | February 11, 2021 at 12:00 PM

With 2020, with its unprecedented and unforeseeable economic devastation, now in the rearview mirror, consumers face 2021 not as the dawn of a new day (cue the hallelujah choir), but with a sense of foreboding and the looming specter of total financial collapse (cue the John Williams score—Jaws, not Superman). As in past times of economic turmoil, it is anticipated that there will be a surge in residential foreclosures, debt collection activity, and the resultant wave of consumer bankruptcy filings.

Simply stated, the current way of practicing bankruptcy is not going to cut it for 2021.

With a relatively steady flow of bankruptcy filings, and a predictable level of personal financial angst (such as we have become accustomed to over the past 10-12 years), it is easy for consumer bankruptcy practitioners to become complacent. Many attorneys consider the bankruptcy discharge to be the ultimate goal of a consumer bankruptcy case, and the best way to protect the consumer client. But the new wave of bankruptcy debtors will be experiencing a new, post-pandemic, financial crisis—sudden, total, affecting all family wage earners, with diminishing hope for short term recovery. And as in any time of financial crisis, they will have encountered significant financial fraud, mistreatment, and mistakes.

Lawyers will be talking to so many people with so many similar complaints of false credit reporting, bad faith creditors and collection actions, and mortgage foreclosure servicing mistakes, that our current and standard model of obtaining a discharge to stanch the bleeding will no longer be enough. The consumer bankruptcy process can, and should, be used to achieve more than just a discharge. The bar must be set higher when it comes to protecting consumers.

The good news here is that taking the time to do a detailed review of the clients’ debts does not have to mean taking a hit to your bottom line. In fact, marrying consumer protection with bankruptcy practice will return a benefit to the consumer and a significant increase in fees to debtor’s counsel. Toward that end, it is critical to identify and pursue defenses to alleged debts owed to creditors, and it is equally important to identify affirmative causes of action that almost always include mandatory counsel fees and penalties.

This can, of course, mean complex litigation, which is not the forte of most bankruptcy practitioners. It is imperative to form relationships with consumer rights attorneys who can provide expertise, co-counsel relationships, or appear in adversary proceedings.

As bankruptcy practitioners, we have simple techniques and strategies in our toolbox that can have a big impact. And it starts, first and foremost, the same way you already run your practice: talk to your clients. Every potential bankruptcy client comes to your office, or your zoom screen, ready to open up about his/her financial situation. The clients are an open financial book, ready to talk and desperate for help.

Let us say Mr. and Mrs. Smith come to your office for a consultation, financially strapped and emotionally frazzled. There is almost nobody else in the world with whom Mr. and Mrs. Smith will be as eager and ready to discuss their most personal financial decisions. This information holds the key to a true fresh start and may also hold the key to multiple defenses to alleged debts owed, as well as affirmative causes of action.

The investigation begins before the case is filed. There are certain things that should be looked at for any significant debt. A mortgage loan is a good example—you would want to know the identity of not just the servicer, but also the investor; whether the loan is federally backed or private, the loan type and terms, the maturity date, whether there were previous loss mitigation efforts. Getting this type of background information and looking beyond simply the current status of the debt, will hold clues to help determine whether there is something more to pursue beyond a mere cure of arrears.

In a Chapter 13 case, after the case is filed, it is crucial to review filed proofs of claim.  A claim will be “deemed allowed” unless objected to, so it is critical to object to any claim timely so the objection, and any concomitant affirmative cause of action, is not lost. Let us use the example of a mortgage loan again: mortgage servicers are notorious for filing claims containing mistakes and misstatements. And the longer the loan has been delinquent, the higher the likelihood that the claim will reflect unapplied payments, a mishandling of suspense funds, an improper escrow calculation, and the like. Review the claim with the clients—they are your most valuable resource for information. Was there a COVID-19 forbearance? Review the underlying note and mortgage—is there a title issue which might impact the validity of the mortgage?

Mortgage loans are the low hanging fruit; consumer protection issues can be hiding in other types of debts as well. But you have to know where to look. The Retail Installment Sales Act (RISA) governs the financing of consumer goods with cash values of $10,000 and less. The RISA has very strict prohibitions on the inclusion of fees and charges not permitted by the statute. If you have a client with a financed purchase of a consumer good at an outrageous interest rate, or that seems questionable in any way, there is a potential opportunity for a cause of action.

Errors in filed claims range from mistake to outright consumer protection violation. And the way you handle them within the bankruptcy case also has a range—from motion to strike the claim, to adversary proceeding. When representing consumer debtors, you must be able to spot consumer protection issues, and should be able to determine which issues can be handled through motion practice, and which would more properly be brought in an adversary proceeding. With each case, you must also consider whether you want to litigate the potential claims on your own or hire special counsel with a concentration in consumer litigation. That distinction will add a lot of value to the consumer bankruptcy practice, value to the client, and it will also improve the bottom line of the business in the form of increased revenue.

The year 2020 is over, but the full extent of its legacy of financial trauma has yet to be seen. Perhaps more than ever before, consumers need a voice in the fight against unscrupulous creditors. And that can also mean financial benefit to the attorneys who represent them. It is in this unique moment in time that bankruptcy practitioners and consumer protection counsel can, and should, work together and use their concerted expertise to move beyond the discharge.

Originally published here by law.com

Joshua Denbeaux is a partner at Denbeaux & Denbeaux in Westwood, concentrating his practice on financial consumer rights issues. Lee M. Perlman is founder of the Law Offices of Lee M. Perlman in Cherry Hill (newjerseybankruptcy.com). The firm files approximately 500 bankruptcy cases per year for New Jersey businesses and consumers alike. Heidi Spivak is an associate with the Law Offices of Lee M. Perlman, where she focuses exclusively on the representation of consumer debtors.