No Privacy in Bankruptcy

EXECUTIVE SUMMARY

LAWS AND REGULATIONS PROHIBIT CPAs from disclosing clients’ personal financial information, but bankruptcy statutes require that very same information to go into the public record. CPAs can’t change the law, but they can help clients get through the bankruptcy process.

PUBLIC ACCESS AIDS THE ADMINISTRATION of bankruptcy cases, promotes public trust and accountability in the system and encourages legal compliance. Unfortunately, it also increases the likelihood of the debtor becoming a target of scams.

CPAs CAN HELP CLIENTS COPE with bankruptcy in a number of ways. They can inform them about the extent to which their personal and financial information will become public—and let them know that they must meet all the disclosure requirements of the bankruptcy statutes.

BANKRUPTCY ISN’T THE ONLY OPTION. Alternatives such as a nonstatutory contract to which both debtor and creditors consent give creditors a prorated share of their claims and discharge the debtor’s balance. Other alternatives are an agreement to pay down debt over a longer time and credit counseling to negotiate debt-reduction terms.

MANY CLIENTS BOUNCE BACK. Being available, expressing a willingness to maintain a working relationship, answering questions, preparing financial documents and easing the aftershock are important functions for CPAs to perform. CPAs who help clients handle the bankruptcy process are trusted advisers in more than name.

THERESA HOLT, JD, is an attorney and associate professor and PETER POZNANSKI, CPA, PhD, is an associate professor at the College of Business Administration, Cleveland State University, Ohio. Their e-mail addresses are t.holt@csuohio.edu and p.poznanski@csuohio.edu , respectively.

PAs who help clients make the details of their financial lives known to the court during a bankruptcy may understandably get headaches. The Gramm-Leach-Bliley Act and related Federal Trade Commission regulations generally prohibit practitioners from disclosing clients’ personal financial information. But bankruptcy statutes take precedence over those restrictions—and require that very same information to go into the public record. Can the conflict of individual right to privacy vs. statutory right to public access be resolved? Even with passage of the Bankruptcy Reform Act questions remain. CPAs who assist in a bankruptcy can present the issues and guide clients through the process professionally and compassionately.

WHAT BANKRUPTCY DOES
Bankruptcy is a judicial process to provide an individual or a business that no longer can pay its debts with relief from financial obligations. It distributes a debtor’s property equitably among creditors and enables the debtor to start afresh. The most common bankruptcies are Chapter 7 liquidations, Chapter 11 reorganizations and Chapter 13 adjustments (see “ Bankruptcy Reform Is Here ”).

In the bankruptcy process, debtors are required to submit a tremendous amount of information to the court. CPAs participate by providing a number of services, which can range from preparing financial documents on behalf of the debtor to helping the court-appointed trustee gather a debtor’s financial records (see “ The Business of Bankruptcy, ” JofA , Feb.02, page 35). The detailed information lists creditors, assets, liabilities and income, and any additional information explaining the debtor’s financial situation. All of this is a necessary precursor to distributing assets equitably among the creditors (see “ In the Public Record, ”).

Generally the public has the right to inspect documents filed with the bankruptcy court. Both statutory and constitutional laws protect this access to court records, and section 107(a) of the bankruptcy code affirms the right of public access. In most cases the news media may obtain court records under the First Amendment as well. Public access aids the administration of bankruptcy cases, promotes public trust and accountability in the system and encourages legal compliance.

If making the data available to the public serves as de facto oversight by shining a spotlight on the process and inviting scrutiny, it also increases the likelihood of the debtor becoming a target of questionable schemes and scams. In limited situations the judge may decide to “seal” documents in the interest of privacy—for example, when information is scandalous and defamatory. The new Bankruptcy Reform Act expands judicial authority to restrict disclosure for additional reasons, including prevention of identity theft.

THE PROBLEM WITH PUBLIC ACCESS
Opponents of public access say debtors in bankruptcy are vulnerable to illegal, discriminatory and objectionable practices when personal data such as medical expenses and bank accounts are part of the court record. Technology exacerbates the exposure, since anyone anywhere can access electronic court records on the Internet. Those who prey on system weaknesses—such as identity thieves or bogus creditors—use the information, too. Debtors even may experience threats of physical harm, harassment, lender redlining or discriminatory profiling.

Disclosure of highly personal and sensitive data may possibly facilitate identity theft. A Federal Trade Commission survey found that nearly 10 million people were victims of identity theft during 2002, costing businesses and consumers billions of dollars.

HOW CPAs CAN HELP
CPAs can take a number of actions to help individual clients cope with bankruptcy. They can

Inform clients about the bankruptcy process. Clients need to know the extent to which their personal and financial information will become public. Some clients may be tempted to withhold certain financial information from the court. CPAs must let them know they have to meet the disclosure requirements of the bankruptcy statutes.

Tell clients to expect—and be wary of—solicitations. Once their personal information goes into the public record, clients likely will be deluged with offers for credit cards, goods, services and high-interest deals to reestablish credit.

Provide financial planning. Clients may need long-range advice to avoid financial difficulty and prevent further bankruptcies.

Be available for clients. Bankruptcy doesn’t negate a client’s need for the services of a trusted adviser to reestablish credit, procure reasonable interest rates and prepare tax forms.

Be supportive when clients vent. Some clients may manifest shame, embarrassment and depression. If clients choose to talk about their distress, remind them that while bankruptcy may bring lifestyle changes, it provides some relief from financial pressures and its burdens are not permanent.

Suggest alternatives to bankruptcy. Filing for bankruptcy is not the only way to handle financial problems. There are alternatives such as a nonstatutory contract (a composition) to which both debtor and creditors consent; it gives creditors a prorated share of their claims and discharges an agreed-on balance. Another alternative is an extension that allows them to pay down debt over a longer period of time.

Suggest credit counseling. Credit counseling, from a for-profit or not-for-profit entity, can help debtors negotiate debt-reduction terms. CPAs can help them find a reputable source (see “ Resources, ” below).

Make attorney referrals. Assist in finding the best bankruptcy lawyers for the client’s situation. Besides offering counsel, attorneys can help the debtor negotiate debt-reduction terms with creditors. And networking with attorneys also can yield referrals for the CPA.

Stay in touch—and increase goodwill. Don’t write off clients who go bankrupt. Many bounce back from insolvency and experience financial success. They, their family and their friends may appreciate your loyalty and give you business—and a great reputation.

Inform clients of postbankruptcy legal protections. Clients should be aware that laws protect them. For example, the Federal Consumer Credit Protection Act prohibits an employer from firing or discriminating against a client involved in a Chapter 13 bankruptcy whose wages are garnished.

KEEPING A BALANCE
Although the bankruptcy process turns personal data into public information, CPAs can help clients handle the stresses in a number of ways. Being available, expressing a willingness to maintain a working relationship, answering questions, preparing financial documents and easing the aftershock are important functions for the CPA to perform. The position of trusted adviser can be earned by being there in hard times, too.