Can a North Carolina bankruptcy lawyer let clients complete the required credit-counseling course in the lawyer's office using a third-party provider, and collect the provider's fee?

Plain-English summary

The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act requires most individuals to complete a credit-counseling briefing before filing (the entrance requirement) and a personal financial management course before discharge (the exit requirement). A new nonprofit, Hummingbird Credit Counseling and Education, would deliver both over the internet. Because timing is often urgent, a bankruptcy lawyer proposes letting clients complete the entrance requirement on a computer in the lawyer's office, with the lawyer verifying the debtor's identity, billing the provider's roughly $40 fee to the lawyer's credit card monthly, and collecting it from clients. The lawyer would receive no compensation for referrals.

On offering the service, the opinion concludes the lawyer may do so. Rule 1.1 requires competence, Rule 1.7 requires independent professional judgment, and Rule 1.4(a)(2) requires reasonable consultation about the means of achieving the client's objectives. When recommending a third party's business services, the recommendation must rest on a determination that the client needs the service and on an informed, unbiased analysis of the providers and their quality. Because the Act requires the lawyer to advise the client of the entrance requirement before filing, it is appropriate to offer the opportunity to complete it in the office as a service related to anticipated legal services. The lawyer must determine that using the recommended provider is in the client's best interest, and to avoid conflicts of interest may not earn a commission or fee on the entrance requirement (RPC 238); there must be full disclosure that the fee is paid to the third party and no portion goes to the lawyer.

On related questions, the opinion concludes the lawyer may have an employee assist the client in completing the requirement and may bill for that staff time (Rule 1.5), may collect the provider's fee in cash while letting the provider charge the lawyer's credit card, and may verify the debtor's identity before the client completes the requirement.

In practice

Under the North Carolina rules as they stood at the time of the opinion, the analysis turns on keeping the recommendation client-centered and commission-free. The opinion holds that a lawyer may host and facilitate the required counseling through a recommended provider, provided the choice rests on an unbiased best-interest determination and the lawyer takes no commission.

Per the opinion, full disclosure that the counseling fee is paid to the third party (with nothing to the lawyer) is required, and the lawyer may bill separately for staff time spent assisting the client.

Common questions

Q: Can a bankruptcy lawyer let a client complete the required credit counseling in the lawyer's office through a third party?

A: Yes. The opinion concludes the lawyer may offer the opportunity as a service related to anticipated legal services, if using that provider is in the client's best interest.

Q: Can the lawyer make money on the counseling fee?

A: No. The opinion concludes the lawyer may not earn a commission or fee on the entrance requirement (RPC 238) and must disclose that the entire fee goes to the third party.

Q: Can the lawyer bill for staff time spent helping the client complete the course?

A: Yes. The opinion concludes the lawyer may bill the client for staff time devoted to assisting, under Rule 1.5.

Q: Can the lawyer collect the provider's fee in cash and let the provider bill the lawyer's credit card?

A: Yes. The opinion concludes this billing arrangement is permissible given full disclosure and no commission.

Background and rules framework

The opinion interprets Rule 1.1 (competence), Rule 1.7 (independent professional judgment and conflicts, corresponding to Model Rule 1.7), Rule 1.4(a)(2) (consultation about means, corresponding to Model Rule 1.4), and Rule 1.5 (fees, corresponding to Model Rule 1.5), against the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act's counseling requirements. It relies on RPC 238 for the bar on earning a commission when recommending a third party's services.

Citations and references

Rules of Professional Conduct:

• MR 1.1 / NC Rule 1.1 (competence)
• MR 1.7 / NC Rule 1.7 (independent professional judgment; conflicts)
• MR 1.4 / NC Rule 1.4(a)(2) (consultation about means)
• MR 1.5 / NC Rule 1.5 (fees; billing staff time)

Statutes:

• Bankruptcy Abuse Prevention and Consumer Protection Act of 2005; 11 U.S.C. § 109(h), §§ 727(a)(11), 1328(g)

Other opinions cited:

• RPC 238 (lawyer may not earn a commission for recommending a third party's services)

See also

• NC State Bar 2006 FEO 7: For-Profit Networking Organization
• ABA Formal Op. 484: Client Fee Financing Companies

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2005-formal-ethics-opinion-7/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Inquiry:

The Bankruptcy Abuse Prevention and Consumer Protection Act ("the Act") makes sweeping changes to the Bankruptcy Code, almost all of which will go into effect on October 17, 2005. Two of the more significant changes to the code are as follows:

1. The requirement that (with certain narrow exceptions) no individual may file any chapter of bankruptcy without first obtaining an "individual or group briefing (including a briefing conducted by telephone or on the Internet) that outline[s] the opportunities for available credit counseling and assist[s] such individual in performing a related budget analysis" (the entrance requirement). 11 U.S.C. §109(h) (1).

2. The requirement (again, with certain narrow exceptions) that no individual may receive a discharge under chapter 7 or chapter 13 of the amended Bankruptcy Code without first completing "an instructional course concerning personal financial management described in section 111" (the exit requirement). 11 U.S.C. §§727 ((a)(11) and 1328(g) (1).

A newly formed North Carolina non-profit corporation, Hummingbird Credit Counseling and Education ("HCCE"), intends to offer the entrance and exit requirements via the Internet. HCCE will market low-cost and free financial education to the consumer. HCCE's goal is to provide the necessary entrance requirement in a completely unbiased way.

When a client seeks information and/or advice from a bankruptcy attorney, the attorney must inform the client that the client cannot file a bankruptcy case without first completing the entrance requirement. Time is usually of the essence when filing for bankruptcy. Consequently, the client must immediately comply with the entrance requirement and the Internet offers the best solution. A bankruptcy attorney could refer a client to HCCE and allow the client to complete the interactive program that HCCE provides on a computer in the attorney's office. The bankruptcy attorney would verify that the debtor, and not someone else, participated in the program. At the conclusion of the case, the client would return to the attorney's office and perform the exit requirement, utilizing the HCCE service, on the attorney's computer and again pay the appropriate fee to the attorney.

The costs associated with using HCCE's programming and support will be approximately $40.00 per entrance requirement. Potential bankruptcy filers usually do not have credit cards or should not use them. Since the only practical way to collect fees for Internet services is via a credit card, HCCE proposes that HCCE's certification fees be billed to the attorney's credit card on a monthly basis and the attorney will then collect the fees from his/her clients. The attorney will not receive any financial compensation for referrals to HCCE.

Due to the billing and identity verification concerns, the entrance and exit requirements will only be available at the attorney's office until such time as HCCE develops adequate direct delivery to consumers.

May a bankruptcy attorney offer prospective clients the opportunity to perform the entrance requirement via the Internet utilizing a computer provided by the attorney for this purpose and the services of HCCE?

Opinion #1:

Yes. Rule 1.1 requires competent representation and Rule 1.7 requires the exercise of independent professional judgment. Further, Rule 1.4 (a)(2) requires that the attorney reasonably consult with the client about the means by which the client's objectives are to be accomplished. When recommending that a client use the business services of a third party, the attorney's recommendation must be based upon a determination that the client needs the service, and upon an informed, unbiased analysis of the businesses that offer the service and the quality thereof.

Before the attorney may undertake representation of a prospective client for purposes of filing a bankruptcy petition, the attorney is required by the Act to advise the prospective client of the entrance requirement. It is therefore appropriate for the attorney to offer prospective clients the opportunity to perform the entrance requirement via the Internet in the attorney's office, on a computer provided by the attorney for this purpose, as a service that is related to anticipated legal services.

However, the attorney must determine that the use of the services of HCCE, or whatever third party company he recommends, is in the best interest of the client. To avoid conflicts of interest, the attorney may not earn a commission or a fee on the entrance requirement. See RPC 238. There must be full disclosure to the prospective client that the fee for the entrance requirement is being paid to the third party provider and that no portion of that fee goes to the attorney.

Inquiry #2:

Is it proper for the bankruptcy attorney to allow one of his/her employees to assist a prospective client in completing the entrance requirement via the Internet in the attorney's office?

Opinion #2:

Yes. The attorney may also bill the prospective client for any time devoted by the attorney's staff to assisting the prospective client. Rule 1.5.

Inquiry #3:

May the attorney collect HCCE's fee in cash from the prospective client and allow HCCE to charge the attorney's credit card?

Opinion #3:

Yes. See Opinion #1.

Inquiry #4:

May the attorney also verify the identity of the debtor prior to allowing the individual to complete the entrance requirement via the Internet?

Opinion #4:

Yes.