Introduction
A ruling in a proposed class action against a defunct Orlando Florida attorney firm, claimed a lawyer goes against government law “if he instructs a client to pay his bankruptcy related legal costs making use of a credit card.” That would also include using a credit card, either directly or through a third-party site, to pay bankruptcy fees online with a credit card.
Note to professionals encouraging clients considering bankruptcy: tell them to keep that plastic in their pocketbooks.
United States Court of Appeals for the Eleventh Circuit ruling
In a judgment likely to resonate with bankruptcy and debt settlement legal representatives, the United States Court of Appeals for the Eleventh Circuit ruled a lawyer violates government regulation “if he advises a customer to pay his bankruptcy-related legal charges using a credit card.” This of course would include an instruction to pay bankruptcy fees online.
The opinion released March 30, 2018 reversed a lower court decision and renewed a Florida class action against shut down Kaufman, Englett & Lynd filed by a previous client. The Orlando Sentinel reported the firm dissolved in April 2016 after the suit was filed.
The panel found a lawyer who advised his client to “sustain more debt” by billing his lawful fees on a credit card contravenes of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
Yes, it is fraud
That individual would certainly be committing fraud, and so would the attorney. This is because they’re making a charge knowing they never ever plan to pay that credit card.
The problem was that Kaufman Englett violated the Bankruptcy Code that does not permit a debt relief firm– consisting of a law practice– to “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.”
My Canadian view
I would suggest that the outcome in Canada would be as disastrous for both the bankrupt and the licensed insolvency trustee (bankruptcy trustee or trustee). However, that does not mean that a bankruptcy trustee cannot encourage online payments; just not those using a credit card. Before getting into my reasons why, let’s first explore the issue of online payments.
Online payment choices
I think it is important to first understand what the various online payment choices are. The report “Canadian Payment Methods and Trends: 2017” by Michael Tompkins, Research Lead, Research Unit, and Viktoria Galociova, Research Associate, Research Unit, Payments Canada. In their report, they review the various online payments:
- credit cards;
- Interac® online debits;
- online transfers include online e-wallet and electronic P2P transactions initiated through online services and providers, which are either prefunded or linked to deposit accounts at financial institutions (e.g., Interac e-Transfers, PayPal and Tilt); and
- prepaid app store cards (or virtual cards)
Credit cards are the most used for online payments. But as you can see, there are ways of making online payments using cash.
You can but not by credit card
I submit that you can use an online payment method to pay for Canadian bankruptcy costs, just not by credit card. What this means is that you can transfer cash to your bankruptcy trustee (or consumer proposal administrator) using an online system.
Why not by credit card?
My view is that it would be unlawful to use a credit card for paying a bankruptcy fee in installments or in one payment. The more likely scenario would be paying it all at once just before filing.
My reasons are as follows:
- Using a credit card to charge expenses or take cash advances against knowing that you are about to file for bankruptcy and will not repay it is fraud. Fraud of course is illegal. So the insolvent debtor, about to become a bankrupt, will be in trouble. Just like in the USA as cited by the Court that I mentioned at the start of this blog.
- Likewise, any bankruptcy trustee who accepts payment by a credit card in the name of and from the insolvent debtor would be in trouble. The same trouble would befall the professional if he or she encouraged the insolvent debtor to take a cash advance against the credit card to pay bankruptcy fee online.
pay bankruptcy fees online
Here’s why:
- It is against the rules of professional conduct of the Canadian Association of Insolvency and Restructuring Professionals (CAIRP). The rules need a member to maintain the good reputation of the profession and perform professional services with integrity.
- The General Rules of the Bankruptcy and Insolvency Act (Canada) (BIA) requires that a bankruptcy trustee maintain the high standards of ethics that are central to the maintenance of public trust. It also requires that trustees shall not assist, advise or encourage any person to engage in any conduct that the trustees know, or ought to know, is illegal or dishonest, in respect of the bankruptcy and insolvency process.
What are the risks?
The risk for the trustee, of course, is serious – the loss of his or her license to practice. But what are the risks for the insolvent debtor?
For the undischarged bankrupt, in my view, the risks are twofold: (i) criminal; and (ii) civil. The criminal repercussions are obvious. The laying of one or more fraud charges would happen and the result would be a criminal conviction, jail time and a restitution order.
In the civil sense, I focus on the bankruptcy discharge process.
Forget about getting a discharge from bankruptcy
The credit card issuer would certainly oppose the bankrupt’s discharge. In the meantime, the credit card company would get a lifting of the stay of proceedings which protects an undischarged bankrupt from lawsuits, to start litigation to find that at least the debt incurred by the debtor to pay for the Canadian bankruptcy costs was a claim against the debtor for a debt not released by order of discharge. Sections 178(1) (a) and (e) are the most likely section of the BIA that would be relied upon.
So the credit card issuer and the trustee (probably by now the substituted trustee!) must oppose the bankrupt’s discharge. I am certain that the oppositions would be successful. The most likely result would be that the Court would flat-out refuse to hear the bankrupt’s application. The result of this is complex and should be discussed in a separate blog. Suffice to say that the bankrupt will have a very hard time ever getting out of bankruptcy without making full restitution. Even then, I would expect the Court to only grant a discharge upon certain conditions being met.
In other words, it would be a disaster and a mess for both the trustee and the bankrupt. These are my reasons why I feel that to pay bankruptcy fee online using cash is fine, but not by a credit card.
Pay bankruptcy fees online: What about you?
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