Can a lawyer for a creditor credit union advise a debtor to file a wage-earner bankruptcy plan and then take the debtor's case?

Plain-English summary

A lawyer represented a credit union that referred its bad debts to him for collection. Many of the debtors were employed but heavily burdened by debt. He asked whether he could ethically suggest the advantages of a Chapter XIII "wage-earner" plan to those debtors and, if they chose to file, draft the plan and accept employment from them, while making clear he was not soliciting to be their lawyer and that they would need separate counsel. The committee answered no as to representing the debtor.

The committee saw no particular ethical problem in the lawyer merely explaining the wage-earner plan to a debtor. It concluded, however, that the situation compelled the attorney to promptly suggest the debtor engage another attorney for the plan, and that the attorney for the credit union should positively decline employment by the debtor. The committee observed that such circumstances create a fertile atmosphere for unethical conduct and were likely to be viewed with extreme suspicion.

The committee explained the conflict concretely. In many such cases it might be to the debtor's advantage to petition to be adjudged a bankrupt rather than to seek an extension under the wage-earner plan, and a bankruptcy petition would adversely affect the attorney's original employer, the credit union, creating what the committee called a hopeless conflict of interest. Quoting Wise, Legal Ethics (2d ed.), the committee restated that a lawyer must be independent and that, if there is the slightest doubt whether accepting employment will involve a conflict between two clients, the employment should be refused.

Currency note

This opinion was issued in 1971 under the former Code of Professional Responsibility, before the Kentucky Bar Association's 1990 adoption of the Rules of Professional Conduct (SCR 3.130) and the substantial 2009 revisions to those rules. The conflict-of-interest principle it applied is now found in Model Rule 1.7, with Kentucky's counterpart at SCR 3.130(1.7). Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against the current rules before relying on any specific rule or requirement mentioned here.

Common questions

Q: Can a collection lawyer for a credit union also represent the debtor in bankruptcy?

A: No. The committee held the lawyer for the credit union should positively decline employment by the debtor, because representing the debtor could conflict with the creditor's interests.

Q: Can the lawyer at least explain the wage-earner plan to the debtor?

A: Yes. The committee saw no particular ethical problem in merely explaining the plan, but said the lawyer must promptly tell the debtor to engage another attorney.

Q: What made the conflict "hopeless" in the committee's view?

A: It might be to the debtor's advantage to seek straight bankruptcy rather than a wage-earner extension, and a bankruptcy petition would adversely affect the lawyer's original client, the credit union.

Background and rules framework

The opinion applied the conflict-of-interest principles of the Code of Professional Responsibility to a lawyer who collected debts for a credit union and was asked to represent its debtors. It drew on Wise, Legal Ethics (2d ed.). The modern analog is Model Rule 1.7 (concurrent conflicts of interest), with Kentucky's counterpart at SCR 3.130(1.7).

Citations and references

Rules of Professional Conduct:

• Code of Professional Responsibility (conflict of interest); modern analog Model Rule 1.7

Other authorities cited:

• Wise, Legal Ethics (2d ed.), pages 272-273 (a lawyer must refuse employment where there is the slightest doubt of a conflict)

See also

• KBA Ethics Op. E-93: Attorney Employed Through a Collection Agency for a Creditor
• KBA Ethics Op. E-42: Representing the Successor Corporation Against the Prior Owner

Source

• Landing page: https://kybar.org/For-Members/Rules-Ethics-Information/Ethics-Opinions
• Original PDF: https://kybar.org/Portals/0/Admin/Ethics%20Opinions/KBA_E-046.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

KENTUCKY BAR ASSOCIATION
Ethics Opinion KBA E-46
Issued: July 1971

This opinion was decided under the Code of Professional Responsibility,
which was in effect from 1971 to 1990. Lawyers should consult the current
version of the Rules of Professional Conduct and Comments, SCR 3.130
(available at http://www.kybar.org), before relying on this opinion.

Question:

May an attorney representing a credit union suggest to a debtor that he file a
petition under the “wage-earner” plan of federal bankruptcy act and accept
employment to file petition if debtor decides to file petition?

Answer:

No.
OPINION

The Committee on Professional Ethics of the Kentucky State Bar Association has
received an inquiry from a practicing member of the Kentucky State Bar, which is
summarized as follows:
The attorney making the inquiry represents a credit union which has referred a
number of its “bad debts” to the attorney for collection. He observes that most of the
persons involved are burdened with debts which are substantial in comparison with their
earnings, although most of the persons involved are gainfully employed. He is concerned
about the propriety of his suggesting to the debtors the advantages of a “wage earner” plan
under Chapter XIII of the federal bankruptcy act, and is especially concerned about the
ethical propriety of his drafting the wage-earner plan for the debtors in the event they
request him to do so. He hastens to explain that he would not ask to be their lawyer, and
would merely point out to the debtors what a wage-earner plan is, and that they would need
an attorney. In the event that the debtors desire to employ the attorneys in question, he
wonders if he would be permitted to accept such employment.
The Committee is pleased to receive this inquiry, because we feel that this situation
has probably arisen on many occasions, and further feel that perhaps attorneys have not
given enough consideration to the ethical problems involved. Obviously, these
circumstances create a fertile atmosphere for unethical conduct, are quite likely to be
viewed with extreme suspicion.
While the Committee does not envision any particular ethical problem in merely
explaining the ‘wage-earner” plan to the debtor, the Committee nevertheless believes that
the ethical situation presented compels the attorney to promptly suggest that the debtor
should engage the services of another attorney in order to represent him in the
“wage-earner” plan, and that the attorney for the credit union should positively decline
employment by the debtor.

In many similar situations, it might well be to the advantage of the debtor to petition
to be adjudged a bankrupt, rather than petition for an extension of time to pay debts under
the “wage-earner” plan. Obviously, a petition in bankruptcy would adversely affect the
attorney’s original employer, and create a hopeless conflict of interest situation. See Wise,
Legal Ethics, Second Edition, pages 272 and 273:
A lawyer must be independent and must represent his client to the best of
his abilities regardless of who selects him or who pays him . . . no man can serve
two masters. If there is the slightest doubt as to whether or not the acceptance of
professional employment will involve a conflict of interest between two clients or
with a former client, . . . the employment should be refused.

Note to Reader
This ethics opinion has been formally adopted by the Board of Governors of the
Kentucky Bar Association under the provisions of Kentucky Supreme Court Rule 3.530
(or its predecessor rule). The Rule provides that formal opinions are advisory only.