Because I also practice bankruptcy law, I am often referred to cases that involve legal malpractice of bankruptcy lawyers. Oftentimes these negligent lawyers do not have the experience to effectively and safely represent their clients. In this case, the negligent lawyer failed to understand how prefiling transfers of the property could be devastating to his client’s case.
The client sought bankruptcy advice after her bank account was seized by a creditor that held a judgment against her. The “consultation” was over the phone and the lawyer actually filed the case without ever even meeting his client. To prepare more court filing documents, the lawyer’s office sent the client a questionnaire for gathering all the important information needed. Responding to this, the client told the lawyer that she had been buying and selling real estate using her sister’s money. She also identified a property that she owned, which she transferred to an LLC just before the bankruptcy filing.
Unfortunately, the lawyer failed to appreciate a couple of very important rules about bankruptcy. First, transfers of property within two years of filing bankruptcy must be reported to the court. A transfer can be undone if it prejudiced creditors. Second, any real estate owned by a debtor that is not their homestead may be forcibly sold for the benefit of creditors.
The poor client was unaware of these rules, as was her lawyer. All she knew is that her case was getting worse and worse. The lawyer lied and covered up his negligence and refused to explain what was happening in the case. Finally, the client wised up and fired the lawyer and hired a new lawyer to complete the bankruptcy. By this time, the damage had been done and it was too late to avoid the penalties for ownership and transfer of property. The client had to pay six figures to settle the case with the bankruptcy trustee.
Fortunately, we were able to obtain compensation from the lawyer’s insurance company. They paid without us having to file a lawsuit because the negligence was so egregious. This case is a cautionary tale to any lawyer who thinks that they can practice bankruptcy law just by filling out some forms. Bankruptcy law is complex and full of rules and exceptions to rules. Experience and knowledge are indispensable to representing clients effectively. In some cases, that experience and knowledge is needed to advise a client not to file for bankruptcy when there are other good options.