You can’t really blame consumer bankruptcy attorneys for being finicky about how they get paid. After all, would-be clients wouldn’t be knocking on the door if the those debtors had managed their money well and been able to regularly pay their debts. As a result, many bankruptcy attorneys do way more gymnastics than other lawyers to ensure they get paid. For example, insisting upon upfront payment, payment by the debtor’s friends or family, automated payments that fall a debtor-client’s payday, or even the development of a new type of bankruptcy, bifurcated bankruptcy, that changes how clients pay in order to improve their odds of getting paid (we won’t get into bifurcated bankruptcy here but watch this space for a subsequent post on the topic). You’ve got to hand it to them.
Yet, recently we’ve heard an interesting rumor among bankruptcy attorneys that seems to make it harder and not easier for bankruptcy attorneys to get paid. We heard about a “rule” or “policy” that bankruptcy attorneys are prohibited from accepting credit cards to pay for a bankruptcy. On one hand, this makes sense. Again, it seems like a fairly smart idea not to trust debtors to make their credit card payments. Similarly, there certainly seems to be something inconsistent if not immoral about adding to a debtor’s debt load in immediate anticipation of it being relieved.
However, the “rumor” seems to have gone far beyond this simple reasoning. A few bankruptcy attorneys have told us that they’d heard that the United States Trustee Program, the division of the United States Department of Justice responsible for overseeing the administration of bankruptcy cases, had investigated consumer bankruptcy attorneys who had been taking credit cards. And upon learning that those attorneys had, in fact, accepted credit cards to pay for bankruptcies, the US Trustee Program had required those attorneys to disgorge fees accepted with a credit card.
Disgorging fees is never good so, for legal payments nerds like us, this is a really juicy and interesting issue. But not for the reasons you might think. Sure, we definitely make it easier for lawyers to accept credit cards. And even for bankruptcy firms to do so in a bankruptcy if it’s not improper. But we’re thinking bigger than that. We’ve seen that enabling firms to offer a variety of payment methods - and giving them flexibility in offering these methods - can help lower their overall cost of processing while still providing firms the benefits of electronic payments. In addition, flexibility in the payment methods they offer can also help firms avoid potential regulatory issues related to specific payment methods (like the one rumored about credit cards and bankruptcy).
So we dug in to get to the bottom of this question.
Our initial online research led us to this article, aimed at prospective bankruptcy clients. It discusses the possibility of a debtor paying for bankruptcy services with a credit card with the expectation that the debt would quickly be discharged in a subsequent bankruptcy. About the practice, the article stated: “What you’re talking about is committing fraud. When you charge on your credit card with no intention of paying it back, you’ve committed fraud against your creditor.” With a bit more research we learned about credit-card bust-outs, one of the most common types of bankruptcy fraud. While many bust-out fraudsters are far more crafty or intentional about establishing a normal credit usage pattern and a good credit history before trying to make off with a bunch of money, the core of bust-out fraud is simply racking up credit card debt with the expectation of not paying it back.
Given that attorneys are officers of the court, it would make sense that the US Trustee or any legal regulator would not look warmly on an attorney who encouraged a client to use a credit card to pay for a bankruptcy. and might even find that that attorney was a facilitator of or accessory to the fraud. That certainly seems like something law firms should avoid. However, we found nothing that said directly or even vaguely: “Bankruptcy lawyers who accept credit card payments for a bankruptcy are facilitating fraud and therefore doing so is prohibited.” In fact, and more on this in a moment, a court case we discovered seems to imply that it may not always be facilitation of fraud.
The second article that we found was this one from a bankruptcy and contingency firm in Florida that states that (a) the bankruptcy code prohibits lawyers from encouraging clients to go into debt (credit card or otherwise) to pay for bankruptcy and (b) a proposed class action lawsuit had been brought against a law firm, KEL Law Firm to be precise, because that firm had accepted credit cards for Chapter 7 bankruptcies.
Those are some heavy accusations! We’ll start by taking the second one first. While a class action lawsuit sounds threatening, it appears that by 2017 the suit in question was all but settled with most if not all of the plaintiff’s claims dismissed. And, we couldn’t find any additional evidence of similar lawsuits or class actions related to this firm or any other firm. This isn’t the last we’ll discuss this particular suit, but the broader risk of a lawsuit, let alone a class action, for bankruptcy attorneys who accept credit cards seems quite low.
A bankruptcy lawyer may not risk a class action but recommending that a prospective bankruptcy client pay for a bankruptcy with a credit card might violate the Federal Bankruptcy Code, just as the bankruptcy law firm’s blog post above suggested.
Section 526(a)(4) of the Federal Bankruptcy Code states:
A debt relief agency shall not . . . advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title or to pay an attorney or bankruptcy petition preparer a fee or charge for services performed as part of preparing for or representing a debtor in a case under this title.
And a subsequent legal case, (Milavetz, Gallop & Milavetz, P.A. v United States, 559 U.S. 229 (2010) for those of you following along at home) confirmed that attorneys who provide bankruptcy assistance are, indeed, “debt relief agencies” within the meaning of this section.
This definitely seems to establish that firms that encourage prospective bankruptcy clients to assume credit card debt to pay for a bankruptcy would be in violation of the bankruptcy code.
It seems that it does. But it may not. The court in KEL addressed this very issue. And, speaking of KEL’s advising clients to use a credit card to pay for bankruptcy, it said: “Thus . . . the mere advice to use credit cards to pay for legal fees does not violate the [bankruptcy code].”
Finally, we dug in on the specific rumor about trustee investigations. Spoiler alert: there wasn’t much. Initially, we did a cursory legal search using a legal research database and that came up empty. Our general online research efforts were similarly unsuccessful. We also looked at US Trustee Program press releases going back to 2017. These tend to highlight larger fraud situations and we didn’t find much there. At least as it relates to US Trustee investigations about the impropriety of bankruptcy lawyers accepting credit cards as a form of payment for bankruptcy, there was nothing to be found.
Ultimately, we concluded that either these investigations were conducted behind the scenes or, more likely, that they didn’t happen.
Absent the threat of investigation, a prohibition in the face of fraud, class action lawsuit, or a violation of the bankruptcy code, what’s to keep a bankruptcy attorney from accepting a credit card for bankruptcy fees?
Well, first, just because we couldn’t find examples of any of these more dire consequences doesn’t mean that these things haven’t happened. There are plenty of unethical attorneys who make bad decisions at a micro level or, even, at a level that rises to professional sanctions, investigations, or lawsuits but which don’t make the headlines. The US Trustee in particular undertakes a lot of these investigations and doesn’t publicize them.
But could it be that, even absent the risk of some “violation,” bankruptcy attorneys accepting credit cards to pay for a bankruptcy is just a bad idea? Sure, the threat of each of the legal ramifications we’ve outlined above is not insignificant but perhaps it’s not the risk of any one ramification in particular but the combined risk of all of them. Add the practical challenges that come with a debtor’s credit and the moral issues related to increasing a debtor’s debt load immediately prior to discharge and while a lawyer who accepts a credit card to pay for a bankruptcy may not be “in trouble” they’ve certainly introduced unneeded risk into the representation.
What are bankruptcy lawyers to do? One thing is clear: bankruptcy law firms need flexibility in payments. While we only mentioned it briefly above, even those bankruptcy lawyers who don’t accept credit cards jump through lots of hoops to ensure they get paid. Enabling those firms to accept payments on a recurring basis that lines up, for example, with their clients’ paycheck schedules is table stakes. But beyond that - and nearer to the topic of this blog post - processors need to enable firms not only to accept electronic payments but to provide them flexibility in which payment methods they offer. This flexibility must extend to exclusion as well. More options is good, but more options that enable firms to narrow the options that they offer their clients is better.
Can bankruptcy lawyers accept credit cards? We think it’s pretty hard to say definitively that they can’t. It may not be wise. It may not even be entirely ethical (either generally or, depending upon the circumstances, specifically, as it relates to the rules of professional conduct) but there doesn’t seem to be a hard and fast rule against it.
We at Gravity Legal think that it’s something that bankruptcy lawyers shouldn’t do. And, more to the point, we think it’s important to empower them to avoid taking credit cards if they want to be sure not to. And, that’s precisely what we’ve done. If you want to learn more about how Gravity Legal can help your bankruptcy firm (or any firm) strategically deploy different payment methods to protect your firm. Grab time to talk to us today.