DEBTOR REPRESENTATION – CAN IT BE DONE SUCCESSFULLY?

 By Hon. Kurt K. Mohnsam

 For some unknown reason, my law practice seems to have always centered around representing the little guy.  The guy who couldn’t afford to pay me my full retainer all at once, but maybe a little bit every week. For the next fifty years.  So when I started to think about doing collections, it just seemed like I wasn’t in my comfort zone representing a huge banking corporation against some guy who ran up his credit card paying for his kid’s medication when he lost his job and medical insurance in the recent recession.  As usual, fate had a hand in what would happen next.

While I was spending time checking out books on collection law and practices at the local law school, I got a call from a friend of a friend, who was not a lawyer and had an ongoing debt settlement business.  Not exactly sure what to think about our initial phone conversation, I decided to meet with this fellow and see what it was he was trying to do. To make a long story short, a great deal of research and discussions with other lawyers eventually led me to take on the clients of what had been a debt settlement company in an attempt to provide these debtors with some sort of help in working out a deal with their creditors that both the debtor and creditor could live with.  That’s it.  That was my goal, and it remains so to this day.  It all seemed so simple.  And why shouldn’t it?  Banks are run by people who should have the human capacity to be reasonable, and debtors are people who should have that same capacity.  Reason dictates that the debtor cannot pay the full amount of what he owes, and will be forced to file bankruptcy if pushed too hard, and further dictates that the bank, which lent the money to the debtor in the first place, deserves to be repaid so much as is possible.

I could not have been more wrong.  Simply put, people are not reasonable, in any sense of the word, and seem to lose all comprehension of what reason might have been in any case where money is involved.  Most of my clients are stressed to the breaking point, and for reasons unknown, often decide to take that stress out on me.  Banks, on the other hand, absolutely hate the idea that a debtor may have some actual help in an arena where the banks are accustomed to having limitless resources and bullying those who have fallen on hard times into working out a payment plan on a debt that has long ago passed the statute of limitations for suit on it.  So, for my efforts, I am rewarded with clients who hate me because I am generally unable to make their debts go away completely, and with banks who hate me because I am trying to show them that my client cannot pay the debt completely.  Now, I am beginning to catch a great deal of fallout from some lawyers in Florida, about whom many of you may by now have read.  These fellows decided to make a quick buck by basically pretending to represent the best interests of their debtor “clients.”  They did things like telling the debtors to stop paying their creditors, and instead, pay the debt settlement company.  They “represented” people from across the country with no local counsel in the state where their clients resided.  Worst of all, they collected fees from those already in financial dire straits, and did nothing to attempt to resolve the issue with creditors.  Basically, a scheme of “Take the Money and Run,” and now, every lawyer who is actually attempting to help debtors while working out settlements that recognize the rights of creditors is being crucified.  Banks, of course, are jumping on the “crucifixion” bandwagon, because they see it as a chance to do away with all legal opposition to bulldozing the debtor into an unreasonable and impossible “settlement.”  They are doing everything they can to scare lawyers away from representing any debtor who would stand up to them, and, quite frankly, after a full year of trying to represent the unreasonable against the less reasonable, I would not blame any lawyer for avoiding the representation of anyone who owes a bank money. Nevertheless, this is an area of legal confrontation in which one side continues to go sorely underrepresented.  Banks have lawyers and law firms by the thousands, yet few debtors can afford legal representation, and some of the people who had been holding themselves out as helping the debtor have been doing as much harm to the debtor as any bank.  What, then, do we, as lawyers, do?

The first thing we must do, if we are going to represent the interests of a debtor, is to explain, in great detail, what we can and cannot do for the client.  It has been my experience that a great many clients do not read the representation contract.  They have an idea in their mind that if they hire a lawyer, no harm can come to them.  In the debt settlement area of law, this translates into a belief that when one hires legal counsel, their debts will go away.  This may stem from the fact that sometimes, I can defend an action on a debt based on the fact that the lender’s statute of limitations has run.  The lay person understands little about such things as statutes of limitation or affirmative defenses in general, and simply sees the dismissal of a suit on grounds such as these to be somewhere in the realm of magic.  One day, debtor owed a large debt to a bank, and the next day, he hired a lawyer, and a judge told this person that he did not have to pay the money that he borrowed from the lender back.  Any attempt at a deeper explanation of the matter to the client is simply wasted effort.  They do not understand, and more importantly, they do not care.  The lawsuit is gone, and it must be because of something that their lawyer did.  This, I have found, is one of those areas in which one can explain the circumstances of the “win” to the client more eloquently than The Bard, himself, but no amount of explaining why this debt “went away” and the rest of the client’s debts will not, is going to be absorbed.  The lawyer has now taken on the role of Shaman, with mystical powers, and as such, he is required by the client to continue to perform his magic, and make all ten of the client’s credit card debts similarly disappear.  It is generally at this point that the client also loses all interest in helping the lawyer to help the client.  Eventually, the client will become angry that the rest of his debts are still owed, and that the best the lawyer can offer in these cases is, perhaps, to have the client pay off forty percent of the total debt, as opposed to the full amount.  It has further been my experience that no amount of explaining and reiteration of the explanation will result in any progress.  Sometimes, the client will hire another attorney to attempt to obtain a refund of the client’s entire fee, paid over the course of possibly two years of representation.  The lawyer he hires will receive a confused story, in which client paid me a certain sum to make his debts go away, and I took the money and ran.  The lawyer hired by ex-client will also hear the terms “settle my debts,” and immediately assume that I am in business with, or at least modeled after, one of those Florida firms mentioned earlier in this article, and threaten every type and sort of criminal action imaginable unless I agree to return the full sum I have charged to represent the client over the last two years.  Often, I have been lucky enough to be called by a lawyer who will let me send him a copy of the client file, and once he actually sees that of my ex-client’s ten credit card debts, I have had one dismissed, and have written settlement offers for between sixteen and fifty percent to settle the other nine accounts.  An apology then ensues, and it next becomes that lawyer’s problem to try to explain to his client that the client did, in fact, have a formidable force working in his best interests, and that he still owes what has now reverted to the full amount on the nine accounts on which the client refused to settle.  This is the best case scenario, and probably the only situation in which the debt settlement attorney is not left having to do the explaining to the confused and angry client.

Along the same lines of explanation, your representation contract should be long enough to reiterate, with plain wording, the terms of the agreement, including what the lawyer can and cannot do, as well as what the client is expected to do in his own behalf.  For example, my debtor representation contract is constantly undergoing changes and improvements such as the addition of a single page that begins with the caption “I Understand That:” with separate one-line statements after that.  This is the area in which I include statements such as something akin to: “I understand that I must continue to pay my creditors the minimum monthly payment required in my agreement with them, or I risk the bank exercising its right to sue me for the full balance of the loan.”  If I can make a client understand this one, simple, fact, we may very well be able to reduce the overall debt of the client on all of his accounts without any creditor filing a single lawsuit. In the end, everyone will be as happy as is possible, given the negative overall situation. This aspect of explanation and understanding is so important that I have implemented a policy under which someone from my office telephones each client on a monthly basis, and in that conversation, asks them whether or not they have been able to pay some minimal payment to each creditor, and if so, how much.  I have even begun keeping copies of the cancelled checks for those clients who are willing to send me copies for my records.  Keeping these cancelled checks can also aid in the client’s defense if he is sued on the debt for failure to make the full minimum payment in a timely manner.

Also of substantial importance is the necessity to explain to the client that you are not a charity.  There will always be a certain percentage of clients who pay you faithfully, a fee, each month, and at some time, add up the total sum they have paid you, and wonder why you have made no payments to their creditors.  To date, I am at a loss for the origins of this myth, but perhaps its inception comes from what used to be debt settlement companies that held a certain portion of the client’s monthly payments in escrow, sometimes making monthly payments to creditors.  I have tried several variations of my representation contract to explain that I am paid a fee for my services, and suggest a certain amount of funds be placed into the client’s savings account each month so that there will be some money available, should a settlement be reached with one of client’s creditors.  Nevertheless, as stated earlier, many clients simply do not read the representation contract, and chose rather to make up the terms of your agreement, whole cloth, from things they may have seen on the internet, or on television, perhaps.  This particular misunderstanding, should it come about, is again, one that will cause the immediate hiring of another lawyer in an attempt to force you to pay all of the fees paid to you over the entire course of the representation, back to the client.  This is true regardless of the number of successful settlements you have reached with the client’s creditors.  For this reason, I recommend most strongly that you make every effort to explain your fees to the client as often as is practicable. If you are making monthly informational calls to each client, and you should be, you can make an effort to either directly or indirectly feel out whether or not the client understands that he must pay you for your services.  This issue can also be stressed at length in the representation contract, but as you will soon discover if you take on any debtor representation work, you will be attacked by other lawyers both because your contract is too short and simple, and because it is too long and complicated, depending on that lawyer’s point of view.

As in any area of practice, some clients will have more success at reducing their total debt than others.  Sometimes, regardless of anything we as lawyers can do, we may not be able to reach as favorable a settlement as we would like to reach.  Often, it is those cases that take the most negotiation time and skill to reach settlement that end in the least favorable terms to the client.  As we all should know, no lawyer can make any guarantee of success, although this is commonly done by those firms that allege to help the client while actually doing nothing.  It is also generally understood that, in a murder case, for example, the lawyer is paid whether his client goes free or serves a life sentence.  For some reason, even experienced lawyers do not hold the same view for those of us who practice in the debt settlement area.  If we spend two years, for example, dealing with a client and his creditors on a daily basis and doing everything in our power to avoid lawsuits on the debts, there are those out there who feel we should only be paid for our efforts if we manage to make the debt go away.  Again, this is an area in which I have never understood the prevailing view on payment for services.  In my representation contract, I make every effort to be unquestionably clear that I will use my best efforts to reduce, so much as is possible, the debts of the client.  I further state that I cannot guarantee any particular outcome.  This seems reasonable in the context of representation on a contract for the sale of a horse, for example, and I would think the clarity of the statements should not be diminished simply because my best efforts are being put forth in order to settle a debt for less than is owed. Once again, however, lawyers and clients seem to have the idea that I am being paid to win the murder trial, and not to put forth my best efforts at reaching a favorable outcome.  Again, this would be an area where it is of paramount importance to explain fully what it is that you are agreeing to do for your client.  The ethical rules of most states require that lawyers do not guarantee any particular outcome for their client.  Why then, is it lawyers, who become the most incensed when the debt settlement attorney is not able to bargain down a $65,000.00 debt to ten thousand dollars?

Why is it, that even lawyers, who are the most keenly aware that no positive outcome can be guaranteed, are the first to complain if I am unable to reach an impressively low settlement figure for my client?  Perhaps, once again, this harkens back to the fact that my representation agreement was not clear to the client, or I, did a poor job explaining to the client that I could not guarantee any particular result, but only that I would put forth my best efforts at reaching one.  Again, clients do not read representation contracts, and if you intend to practice in this area, you will need to verbally instill in the client’s mind, the fact that you can only promise to do your best, and your best efforts are the thing for which the client is paying a fee.  I have had wealthier clients who desired to pay 100% of the debt they had run up, but simply needed some time to get the money together.  They hired me to put forth my best effort at protecting, so much as would be possible, their credit score. They were even willing to pay the excessive interest and penalties in full, but wanted to see if they could have their hard times reflected as positively as possible to the credit bureaus. These have been some of my much more intelligent clients in this area of my practice, and they also took up the most time in discussing the terms and meanings of phrases in their representation contracts, which they understood with amazing ease, as I had hoped any client would understand them. Nevertheless, once a fee is agreed upon, along with a time period over which the fee is to be paid, the client will, so far without fail, cease to pay any fee as soon as the desired end is achieved.  This situation, I believe, is less related to explaining the terms of the contract to the client, than it is to the client simply wanting to avoid paying me the agreed upon fee. In one such case, the client not only failed to pay the agreed upon fee, but then sued me for the refund of her entire fee paid. I suppose this type of behavior should be expected of consumer clients, as I have heard from other lawyers.

One of the most important things you will need to do if you desire to correctly take on any debtor representation work is to begin to build a network of other attorneys with whom to work.  First of all, you will need to have counsel in each state where you have even a single client.  This is so not only to comply with out of state practice requirements, but also, I have found that there are a small number of clients who want to sit down with an attorney face to face, and discuss their financial situation.  For the most part, my clients prefer to deal with me and with their local counsel by email and telephone, but for those few who actually want to speak with an attorney face to face, it does help to calm their nerves if they can walk into a lawyer’s office with a box full of credit card receipts, and get an opinion on whether or not bankruptcy is the only way out.  Many of the out of state lawyers I deal with also work in the bankruptcy field, and having that experience is a big plus in giving the client the straight facts.  I have even had clients telephone me, personally, after working with their local counsel, either face to face or over the telephone, just to double check their understanding of what we can or cannot do for them.  It seems that the vast majority of clients I have represented have come to me with the statement that “I do not deny that I owe these credit cards the money, and I want to pay them back, but I need some help to do this.”  This is the type of client that I like to have.  In the long run, this person will have the best understanding that he or she needs to pay the creditors something while my team is working on coming to a reasonable agreement with the banks. Additionally, they also tend to appreciate the monthly calls to update them on their circumstances, rather than to view these calls as an annoyance.  As I mentioned earlier, these regular informational calls to the client are absolutely necessary. Many times, this is also the area that gets lawyers in any field of practice into trouble.  Clients are often both angry and scared, and sometimes they are not thinking clearly.  If you call the client on a regular basis, even if there is not much to report in their case, you stand a much better chance of understanding what the client really needs.  In my case, it is a chance to determine whether the client’s financial situation is improving and will soon be able to move toward settlement, or, on the other hand, spiraling out of control. If you aren’t making these calls, and your local counsel is not making clear to the client that he or she is there for them should things require a reevaluation of strategy, you could find yourself in a situation in which the client has no idea what you are trying to do for him.

So, what, exactly, are we as lawyers to do with clients who owe money to banks?  First, talk to others in the legal profession who have a great knowledge of the law.  I was lucky enough to be able to take advantage of the generosity of Judge Stan Billingsley (Ret.), who spent many hours researching each and every question I had. I also spoke to other lawyers, who may have had no direct experience in this area, but practiced in the field of business law, in general. You will find that even the most well know attorneys out there can often be far more generous with their time than one might expect. Once you have researched the topic fully, take on a few clients, and make certain to explain, in ordinary terms, what it is that you can and cannot do for your client. There must be a “meeting of the minds” and genuine understanding of this issue before you even begin to contemplate taking on the client’s case.  Next, draft a representation contract that is clear and unambiguous in its terms.  If you are using a “form” contract, you must write it so that the least sophisticated consumer can understand what it says. This is often a challenge, and it will probably lead to a longer agreement than you may truly desire, but any representation contract is there for the client to be able to understand, not just for the lawyer to comprehend.  Then, explain your fee, and make every effort to again make this understandable to the least sophisticated consumer. Of equal importance, is the need to keep constant contact with the client.  If you have the manpower in your firm, assign someone with full knowledge of your representation agreements and how they are meant to work, to call each and every client that you have at least once every month.  This is necessary even if there is very little to report in that client’s case.  It is better to tell someone that “I am still waiting to hear back on our offer to settle with Chase Bank for $5,000.00” rather than to avoid calling the client until something happens.  It also gives the lawyer a chance to get a feel for the overall state of mind of the client.  If you are representing people who owe a great deal of money to credit card companies, you need to be the first one to know if the client begins to fall apart emotionally.  Sometimes, you simply need to know when to pull out and refuse to represent the client further.  Never make guarantees of any kind regarding the success you may have at handling the client’s financial matters.  This should be self explanatory to all of us who have been to law school, but nevertheless, there are lawyers who are tempted to be overzealous in describing the potential benefits of their representation. And finally, make certain that you are following the law.  If you have one client who is out of state, you need to have local counsel in that state to do the real representation in the event things go horribly wrong.  Many states might see what you are doing as merely ADR, acting as a mediator between the bank and your client, but even in those states where you might get by with that interpretation of what you are doing, it is unquestionably the better policy to have local counsel.  It has two important functions: It serves to keep you out of trouble for the unauthorized practice of law in that state, and it gives the client someone, probably within driving distance, with whom he or she can sit down, face to face, and discuss whatever financial issues may be the source of the client’s problem.

Most of all, we need to remember to take at least some of these clients if you have the ability to do so.  It will not make you any friends in the banking industry, but this is a class of people who have, historically, gone woefully underrepresented, and there are those who would like to keep it that way.  These are people who desperately need legal help, and who may have been taken advantage of at every turn. We, as lawyers, need to stop being afraid to represent them, and take a chance on what is, admittedly, a difficult area of practice. Last, but not of least importance, the best move that I made in taking on clients in this area of law, was to consult those who had more experience in general than I did.  I spent hours talking with Judge, Stan Billingsley (Ret.), and even brought it up in a breakfast conversation with someone who has always been very generous with his time, our President Elect of The American Bar Association, Bill Robinson. Should you decide to take some of these cases on, think the matter through, plan out your strategy, and perhaps you can learn from some of my growing pains in this area of practice.    

Kurt K. Mohnsam, Esq.

The Firm, PLLC

203 Alpine Drive

Shelbyville, KY 40065

502-633-2260

kkm@thefirmpllc.com

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