An entity need not physically prepare a bankruptcy petition for a pro se debtor in order to be a bankruptcy petition preparer, but a debtor must have paid some compensation for the “services” provided. (Rodriguez). In re Flores, 652 B.R. 276 (Bankr. S.D. Tex. July 14, 2023)

Case Summary

Mr. Flores was facing the imminent repossession of his automobile and began to examine options that might exist. His wife, Ashley de la Garza, searched for assistance on his behalf and discovered a company, Auto Recovery Partners, LLC, that appeared to present a solution. A representative of Auto Recovery Partners advised Ms. de la Garza that “bankruptcy was one way in which she could prevent Flores’ vehicle from being repossessed.” Auto Recovery Partners, LLC also provided a checklist of instructions on how to file a chapter 13 bankruptcy. In exchange for this assistance, Auto Recovery Partners, LLC charged Ashley de la Garza and Flores $1,250 but received only $925.

Flores filed a bankruptcy petition on his own behalf, pro se, which led to a hearing before the court to determine the status of the pro se filing. At that hearing, the judge discovered the existence of the advice from Auto Recovery Partners, the charges made, and the assistance provided. The court issued an order to show cause, directed to Auto Recovery Partners, to determine whether it was an undisclosed bankruptcy petition preparer subject to the requirements of 11 U.S.C. § 110. 

At the hearing, Ms. de la Garza appeared and outlined the history of her dealings with Auto Recovery Partners. An agent of Auto Recovery Partners also appeared. 

Auto Recovery Partners argued that it did not actually prepare a petition and such preparation was required to be a bankruptcy petition preparer. They argued that the information provided was merely in the form of administrative tasks and did not constitute the services of a bankruptcy petition preparer. Further, they argued that it had provided information to the debtor’s wife and not the debtor directly, so it could not have any § 110 responsibility.

Judge Rodriguez rejected the argument that only actual preparation of the bankruptcy petition or direct communication with a debtor was necessary to be a bankruptcy petition preparer. Quoting from In re Jolly:

“[T]he fact that the person does not place the data and numbers on the form does not excuse that person from advising the court of their participation in the process of preparing the documents for filing with the bankruptcy court.  . . . ‘[P]reparation’ of a document includes both the physical preparation and the dictation or the determination of the information to be placed on the document by the ‘preparer.’”

It became clear that the representative from Auto Recovery Partners had received no background information concerning Mr. Flores’ financial condition, the feasibility of a Chapter 13 plan, or even what filing a bankruptcy would mean before suggesting that Mr. Flores file bankruptcy. The representative also advised Ms. de la Garza as to the process of requesting that the filing fee be paid in installments. “This reckless behavior from Auto Recovery Partners, LLC is precisely the conduct Congress aimed to guard against with the passage of § 110. Therefore, even though a representative of Auto Recovery Partners, LLC did not physically fill out the forms, Auto Recovery Partners, LLC’s conduct still constitutes ‘preparing’ the chapter 13 petition under § 110(a)(1).”

 Auto Recovery Partners employed no licensed attorneys. Auto Recovery Partners received a fee for the “assistance”. 

Judge Rodriguez held that Auto Recovery Partners violated § 110(a)(1) and § 110(b) because they did not sign the documents and print on the documents its name and address. No officer, principal, or agent for Auto Recovery Partners signed the Chapter 13 petition as a petition preparer. 

Additionally, Judge Rodriguez found that § 110(c) was violated because no identifying number which identifies individuals who served as petition preparers were included in the document. He also found that § 110(e) was violated because the representative from Auto Recovery Partners told Ms. de la Garza to file a Chapter 13 petition and advised her that she could prevent her husband’s vehicle from being repossessed.  Auto Recovery Partners “specifically provided a checklist of instructions on how to file a chapter 13 bankruptcy in particular.” The court therefore found that Auto Recovery Partners improperly offered Ms. de la Garza and her husband legal advice.

Nowhere did Auto Recovery Partners disclose the funds they had received, violating § 110(h)(2). Judge Rodriguez held that Auto Recovery Partners forfeited the fee and must return those funds to the debtor. 

What This Case Means to Debtors

In most districts, the Chapter 13 program is implemented by high-quality, skilled, and considerate counsel who take the time to meet with prospective debtors to counsel them with the information necessary for them to make a reasonable and reasoned decision. 

In some jurisdictions, the total attorney’s fee is paid through the Chapter 13 plan, providing a level of access to justice reflecting the responsible way the debtors’ bar assists clients. 

In some ways, however, the message has not gotten out. Borrowers in default under their obligations do not know the remedies that exist for them to be able to help themselves. Often this delay results in a worse situation, ultimately leading to worse outcomes. If, however, delinquent borrowers could be made aware of the compassionate assistance that is available from the debtors’ bar, they could not only achieve a better outcome in the long run (by not throwing money down a black hole to a bankruptcy petition preparer) but also wind up in a better place by taking earlier action. 

It is uncertain how the debtors’ bar can make their services better known in their communities.  Unquestionably, however, this information is vitally important and should be readily available. Now, debt assistance programs, mortgage modification assistance programs, foreclosure prevention companies, and others are the ones that pop up on internet searches,enticing unknowing delinquent borrowers into bad outcomes. 

What This Case Means to Creditors

Most creditors would prefer to see a bankruptcy petition filed by a competent debtors’ attorney than one filed by a pro se debtor that has no idea what is going on or what they are doing. The costs to a creditor can often escalate when attorneys have to be retained and get involved due to some of the arguments made by pro se debtors or by inaction. 

Here, apparently Judge Rodriguez set pro se cases for a “status hearing”in order to ascertain if a bankruptcy petition preparer was involved and whether the pro se debtor understood what they were doing. More and more districts are now adopting this sort of accelerated procedure in an effort, to not simply keep a case moving, but to prevent borrowers from making drastic errors, having their cases dismissed, or even losing rights should a motion for relief from stay be filed and the case subsequently dismissed. The sooner a delinquent borrower knows the options from a reliable and competent source, the better the outcome for both creditors and debtors. 

What This Case Means to Trustees

Trustees spend an enormous amount of resources in “setting up” the cases to which they are assigned.  Just counting out-of-pocket costs, simply setting up a petition within the trustee’s office can cost in excess of $400. That is before any funds are received by the trustee. 

Accordingly, particularly in light of the consequences of Doll, Evans, and now Marshall,the sooner the bleeding stops, the better. This does not mean a case needs to be dismissed. In fact, by holding early hearings in pro se cases, Judge Rogriguez ensures that many debtors do not embark on an expensive and futile path.

Trustees should encourage this type of procedure and the assistance and cooperation of the debtors’ bar to help pro se debtors maintain access to the bankruptcy court.