Bankruptcy Preparers Hit

Many Southern Californians who file for bankruptcy protection without a lawyer are being poorly served by so-called bankruptcy petition preparers who often give incomplete or bad advice, a report by the U.S. Trustee’s Office contends.

The report, prepared jointly with the Los Angeles County Bar Assn., alleges that some petition preparers charge “unconscionable” fees, make errors that cost their clients money and even defraud people who turn to them for help.

“People are being irreparably harmed because they didn’t see a lawyer,” said U.S. Trustee Maureen Tighe, who supervises all Chapter 7 trustees in the U.S. Bankruptcy Court’s Central District, which stretches from Orange County to Santa Barbara.

A leading bankruptcy petition preparer, however, said the report is part of a “turf war” between attorneys, who typically charge $800 to $2,500 for a bankruptcy filing, and preparers, who typically charge $200.

“The argument is that people are being harmed. The reality is people are being served,” said Ira Distenfield, chairman of We the People, a bankruptcy petition preparer with 10 offices in Southern California.

The issue is critical in Southern California, where the court’s Central District leads the nation both in total bankruptcy filings and in the number of people who file without being represented by a lawyer, Tighe said. Such pro se (“for self”) filings are “out of control” because of heavy advertising by petition preparers, Tighe said.

Nearly one out of three Chapter 7 filings in the Central District were prepared without a lawyer’s help, a ratio that rises to nearly one out of two in Santa Barbara, where We the People is based, according to the report.

The report claims some people have been defrauded by unscrupulous firms that accepted fees without filing bankruptcy paperwork or that filed for bankruptcy for clients who thought they were receiving help in preventing eviction or foreclosure.

Improper filings by bankruptcy petition preparers have “routinely” led to people being saddled with debts that otherwise would have been erased in bankruptcy or losing assets that should have been protected, the report said.

“Some of the trustees will simply overlook the issue” and allow people to keep assets that weren’t properly protected by a filing, the report said. “Others have liquidated assets where they have not been exempted, as is their legal duty.”

We the People’s Distenfield disputed the report’s contention that petitions prepared by nonlawyers are more likely to contain errors. Distenfield said his firm specializes in simple bankruptcy cases that are easily handled by its workers.

“We have yet to ever hear of a customer being harmed,” Distenfield said.

The report said most people who use petition preparers do so because they believe they will save money, but that some preparation firms charge fees that boost their bills. The firms levy high fees to provide interpreters, for example, or charge hundreds of dollars extra to amend forms that the firm prepared incorrectly in the first place, Tighe said.

“We often discover people have paid $800, $1,000, even $1,500” once the extra fees are included, Tighe said. “They could have easily paid for counsel.”

The report recommended increased prosecution of preparers who illegally practice law, greater public education and an expansion of low-income legal services.