September 19, 2006

Credit Counseling and Avoiding the Unauthorized Practice of Law: Suggestions for Minimizing Risk

12 min

For those who work in the credit counseling industry, an issue often forgotten in the midst of counseling sessions is that the credit counseling agency (“CCA”) is not a law firm and that its counselors are not lawyers.  Forgetting this key fact during the counseling process can put the credit counseling agency at risk for significant liability under state laws banning or restricting the unauthorized practice of law (“UPL”).

In addition, recent changes to the Bankruptcy Code (the “Code”), created by the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”), [1] require that debtors complete “an individual or group briefing” from a nonprofit budget and credit counseling agency approved by the United States trustee or bankruptcy administrator. [2]  The service must outline opportunities for credit counseling and assist in performing a budget analysis. [3]  In the process of providing counseling, a CCA must ensure that its actions do not constitute UPL. 

This article – prepared after a thorough analysis of the various state UPL laws as they apply to the typical activities of CCAs – is designed to provide general guidance on practices that can help a CCA fulfill its responsibility as a provider of financial counseling and education (as well as under the BAPCPA, if applicable), while minimizing its potential liability for UPL.  Following a general background discussion on the subject, the article highlights key “do’s and don’ts” that all CCAs should carefully examine and aggressively implement in order to reduce their UPL liability risk.

General Definition of UPL.

            UPL is prohibited in virtually every state and is classified as a criminal act in many, punishable by fines and/or imprisonment.  States that do not criminalize UPL typically remedy a violation by requiring a nonlawyer to disgorge all profits received from the UPL.  In some states, such as Missouri, the state may bring a civil suit for triple the amount that the client paid the person or entity who committed UPL. [4]

            There is no universal definition of UPL – activities that are permissible in one state may be proscribed in another. [5]  Further, state laws regulating UPL are not preempted by state laws regulating CCAs; [6] thus, a CCA’s compliance with state CCA regulation does not shield it from UPL liability unless the state UPL statute specifically exempts CCAs.   

Additionally, there is no scholarly consensus on a definition of UPL because scholars often disagree on what activities constitute UPL.  Even the American Bar Association has hesitated to provide guidance on how to define UPL, instead recommending that every state adopt its own definition. [7] 

            However, most definitions of UPL specifically prohibit a nonlawyer from providing legal advice, because the provision of legal advice is inherent in any form of the practice of law.  Thus, the provision of legal advice is the “clear starting point for any definition of the practice of law.” [8]  Generally, legal advice is “the application of legal principles and judgment to the circumstances or objectives of another person or entity.” [9]  In other words, under most state laws, a nonlawyer cannot tell a client anything that, if acted upon, would change the client’s legal rights or legal status.  It follows that a CCA must be extremely careful in discussing bankruptcy with its clients, as filing for bankruptcy significantly alters clients’ legal rights with respect to their credit and their creditors.

Examples of UPL in the Context of Bankruptcy.

            There are several UPL cases involving bankruptcy petition preparers, who, like credit counselors, are nonlawyers authorized by the Code to provide special assistance to debtors. [10]  These cases have found that bankruptcy petition preparers commit UPL when they perform any of the following acts: [11]

  • Determining when and whether to file bankruptcy cases;
  • Deciding whether to file a chapter 7 or a chapter 13 case;
  • Filling out or assisting debtors in completing forms or schedules;
  • Providing clients with definitions of legal terms of art;
  • Advising debtors which exemptions they should claim;
  • Advising debtors on dischargeability issues (e.g., which, if any, particular debts are dischargeable);
  • Advising debtors concerning the automatic stay;
  • Advising clients as to various remedies and procedures available in the bankruptcy system;
  • Habitual drafting of legal instruments for hire;
  • Correcting “errors” or omissions on bankruptcy forms; and
  • Preparing motions and/or answers to motions.
  • The effect of a bankruptcy filing upon a foreclosure and whether the debtor(s) may keep a home;
  • Whether the debtor(s) may avoid or eliminate any liens or recover any assets in connection with the bankruptcy case;
  • Whether the debtor(s) may redeem property;
  • Whether the debtor(s) may or should reaffirm any debts;
  • Whether the debtor(s) is entitled to a discharge under the Code, and what defenses the debtor may have to an objection to discharge; and
  • The tax consequences of any aspect of the bankruptcy case. [12]

Some states, such as Massachusetts and Rhode Island, have taken an alternative approach and instead of forbidding certain actions, have specifically authorized CCAs to perform a limited number of services without being subject to UPL sanctions. 

For example, Rhode Island specifically permits a nonprofit CCA to provide:

* * *

financial and budgetary advice and judgment to individuals in connection with:

(a)        The creation of a budgetary plan; or

(b)        The creation of a plan whereby an individual turns over an agreed amount of his or her income to a nonprofit credit counseling corporation which distributes it to his or her creditors in accordance with a plan which they have approved and which may provide for smaller payments or a longer term than the original contract; or

(c)        The providing of educational services relating to the use of credit; or

(d)        Any combination of subdivisions (a) through (c), inclusive. [13]

            Of course, if “financial and budgetary advice” is exempted from UPL, then the negative implication of the statute is that any “bankruptcy advice” may constitute UPL.  The Rhode Island statute emphasizes this point, explaining that “[n]o corporation established for the purpose of providing credit counseling shall engage in the practice of law, and an individual receiving credit counseling shall, when necessary, be referred to an attorney of his or her own choice, the local bar association referral service, or a local legal aid program, whichever may seem most appropriate.” [14]

            Similarly, in Massachusetts the traditional services provided by CCAs, including DMPs, are limited to an attorney or a nonprofit charitable corporation organized under the provisions of the charitable corporation statute. [15]  Moreover, the relevant statute provides, “Any such corporation formed for credit counseling purposes shall not engage in the practice of law.  If it appears that an individual receiving credit counseling services needs legal advice or counsel, he shall be referred to an attorney of his own choice, the local bar association referral service, or a local legal aid program, whichever course may seem most appropriate.” [16]

Case Study:  Examples of UPL and Sanctions for UPL.

            In one pre-BAPCPA Texas case, a bankruptcy petition preparer handed out business cards that claimed she could “stop foreclosure.” [17]  Her “preparation” of the debtor’s petition included advice as to which chapter to file, telling the debtor what forms were needed, checking off boxes on the actual bankruptcy petition for the debtor, and preparing the debtor’s financial statement.  She did not sign the petition in the block designated for bankruptcy petition preparers.  Finally, she told the debtor to file the petition pro se (without an attorney) and sign a court questionnaire (under penalty of perjury) that the debtor had not received any assistance in the preparation of the petition.  For these services, the preparer charged the debtor in excess of $1,700.00.

            The bankruptcy court, applying Texas UPL rules, stated that “the practice of law embraces all advice to clients and all action taken for them in matters connected with the law. . . . Preparing bankruptcy documents and giving advice regarding bankruptcy of necessity constitutes the practice of law.” [18]  The court found that

[t]he only service that a bankruptcy petition preparer can safely offer and complete on behalf of a pro se debtor after the enactment of § 110 is the “transcription” of dictated or handwritten notes prepared by the debtor prior to the debtor having sought out the petition preparer’s service.  Any other service provided on behalf of the debtor by a non-attorney (even telling the debtor where the information goes on the form) is not permitted under state [UPL] statutes, and so is not authorized by § 110. [19]

Because the preparer did more than transcribe the debtor’s notes, she was adjudged to have engaged in UPL.  As a sanction, the court ordered her to disgorge the $1,700.00 fee she was paid to prepare the petition within 30 days.[20]  Further, the court ordered that she pay fines of $1,500.00 within 30 days.  She also was permanently enjoined from offering or providing any bankruptcy petition preparation services and making any representations about “stopping foreclosure.”[21]  Finally, the court ordered that any failure to comply with these terms would be considered contempt of court, which is penalized by fines and/or incarceration. 

This sentence, while fining the preparer and prohibiting her from working as a preparer, is relatively light for a person engaged in UPL.  By way of comparison, Alabama’s UPL statute states that any person who acts or holds himself out to the public as a person qualified to practice law or carry on in the calling of a lawyer without a license is guilty of a misdemeanor, and will be fined up to $500.00 and/or imprisoned for up to six months for the first offense.[22]

Steps for Credit Counselors to Help Avoid or Minimize the Risk of UPL Liability.

  • Avoid conclusory statements about what course of action a debtor should choose, even if asked for an opinion.  For example, a counselor should not tell a debtor that he or she is (or is not) eligible to file for bankruptcy, nor should a counselor state that bankruptcy is a client’s “best option.”  Instead, the counselor should state that the debtor might be (or might not be) eligible for bankruptcy, and should recommend consultation with a bankruptcy attorney to obtain a definitive answer.  Even if the counselor thinks that the debtor is not eligible for bankruptcy, a bankruptcy attorney may have tools at his/her disposal that the counselor is unaware of. 
  • Clearly state in the CCA’s written DMP agreement, its other written materials (including Web sites), and its counseling sessions that the counselor is not an attorney and that neither the counselor nor the CCA are providing legal advice.
  • Make sure that the CCA’s counselors are comfortable refusing to answer questions about bankruptcy and that, where appropriate, they recommend to clients that they consult a bankruptcy attorney.
  • Avoid creating the impression in the debtor’s mind that an attorney-client relationship exists between the counselor and the debtor.
  • Always recommend that a debtor consult with a bankruptcy attorney before making a final decision on a course of action.  Signing up for a debt management plan and filing for bankruptcy are choices that can have a significant effect on a client’s rights, and therefore a counselor should avoid steering a client towards a particular action without recommending a consultation with an attorney.
  • Avoid discussing the bankruptcy process to the largest extent possible.  Instead, focus on the financial/budgetary analysis and eligibility for debt management programs (without pressuring the client to choose a debt management plan).  If a counselor must discuss the bankruptcy process, make sure that he or she does so in very general and factual terms, avoiding any discussion of how bankruptcy could affect the particular client.
  • Avoid splitting fees between lawyers and non-lawyers.  Most state bar rules state that “a lawyer shall not aid any person, association or corporation in the unauthorized practice of law.”  Thus, a corporation, which is not a law firm, may not be paid fees to provide its clients with legal services, and may not be paid a portion of the legal fees paid by its clients to a law firm. [23]
  • Have clear, direct and understandable rules, procedures and safeguards in place (e.g., careful monitoring of counselors, disciplinary action for violations of the rules) to ensure that the above guidance is followed by all counselors and others within a CCA who may be at risk of creating UPL liability for the CCA.

*  *  *  *  *  *

If a CCA follows the recommendations above, it will significantly minimize its risk of potential UPL liability.  While there is no absolute shield from such liability, implementing these rules and procedures will go a long way toward reducing the CCA’s UPL risk.  If it has not already done so, every CCA should evaluate its current operations for the potential for UPL and, where feasible, modify its operations accordingly.


[1] Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23.

[2] 11 U.S.C. § 109.

[3] See 11 U.S.C. § 111.

[4] See Mo. Rev. Stat. § 484.020.

[5] Task Force on the Model Definition of the Practice of Law, American Bar Association, Recommendation As Adopted August 11, 2003 and Report 3 (2003), at (last visited Feb. 1, 2006) (hereinafter, the “ABA Report”).

[6] Nearly every state regulates CCAs in some capacity; however, most have a trigger point that requires the CCA to engage in “debt adjusting,” which generally includes the practice of providing debt management plans (“DMPs”). 

[7] See ABA Report at 12.

[8] Id. at 4.

[9] Id. at 1, 12.  See also Taub v. Weber, 366 F.3d 966 (9th Cir. 2004) (applying Oregon law and determining that the practice of law is the exercise of any discretion in filling out forms or applying legal principles to address another person’s individualized needs through analysis, advice or other assistance).

[10] Our initial research revealed no cases involving a credit counselor accused of UPL.  Thus, cases regarding bankruptcy petition preparers are the closest analogous body of law.  There are many cases involving accountants and mediators who, like credit counselors, must fulfill their job duties without providing legal advice or otherwise affecting the legal rights of their clients.  However, accountants and mediators are unlike credit counselors in that the individual practitioners are regulated by state law.  Further, IRS regulations specifically preempt state law in allowing accountants to represent clients before the IRS, whereas the Code does not.  Therefore, cases regarding accountants and mediators cannot be relied upon by credit counselors to the same extent as cases involving bankruptcy petition preparers.

[11]  1-110 Collier Bankruptcy Manual, 3d Edition Revised ¶ 110.12 (Matthew Bender 2005).

[12] United States Bankruptcy Court for the Northern District of California, Bankruptcy Petition Preparers Guidelines, available at 

[13] R.I. Gen. Laws § 11-27-16(9).  Note that the RI statute governing CCAs will be replaced by the Uniform Debt-Management Services Act, effective March 31, 2007.  See R.I. 2006 SB 2731.

[14] Id.

[15] Mass. Gen. Laws Ann. Ch. 180, § 4a.

[16] Id.

[17] In re Guttierez, 248 B.R. 287, 291 (Bankr. W.D. Tex. 2000).

[18] Id. at 295.

[19] Id. at 298 (emphasis in original) (internal footnotes omitted).

[20] Id. at 300.

[21] Id. at 301.

[22] Code of Ala. § 34-3-1.

[23] Maine Board of Overseers of the Bar, Opinion #180 (July 18, 2002).