High Court Issues Decision on Attorneys’ Ability to Give Legal Advice to Bankruptcy Clients
The U.S. Supreme Court ruled today that a provision of the 2005 Bankruptcy Act, which bars attorneys from advising clients to take on more debt before filing for bankruptcy protection, is permissible in certain situations.
I first wrote about this case, Milavetz, Gallop & Milavetz v. United States, a year and a half ago when the Eighth Circuit Court of Appeals ruled that the provision was unconstitutional: Portion of New Bankruptcy Laws Declared Unconstitutional. Court of Appeals Strikes Down Provision which Prevented Attorneys from Advising Clients .
The Court of Appeals had ruled that the provision barring such advice was unconstitutionally broad and violated free-speech rights
Now, the Supreme Court unanimously reversed that ruling, but with a caveat.
Today’s decision, which was written by Justice Sonia Sotomayor, said the provision prohibiting such advice was valid, but should be read narrowly. She said that the law only prohibits attorneys from advising clients to abuse the bankruptcy system.
However, Justice Sotomayer indicated that it would be permissible for lawyers to advise clients contemplating bankruptcy to take on additional debt in certain situations. She wrote that bankruptcy lawyers could advise clients to refinance a mortgage or purchase a reliable car prior to bankruptcy on the grounds that doing so would reduce the debtor’s interest rates or improve the debtor’s ability to repay.
“It would make scant sense to prevent attorneys and other debt relief agencies form advising individuals thinking of filing for bankruptcy about options that would be beneficial to both those individuals and their creditors,” Sotomayor wrote.
Professionals specializing in bankruptcy “remain free to talk fully and candidly about the incurrence of debt in contemplation of filing a bankruptcy case,” Sotomayor wrote.
How This Decision Affects Bankruptcy Attorneys and their Clients
I often encounter a situation where my client’s car lease is about to end. Before the 2005 Bankruptcy Amendment Act (BAPCPA), I would have simply advised the client to immediately surrender the existing car and obtain a new car lease or car loan, as getting a new car is easier to do before filing for bankruptcy than after.
However, BAPCPA contained a provision which prevents attorneys from advising clients to incur debt in contemplation of bankruptcy. So, for the last five years, I’ve been technically unable to give clients such advice.
Today’s Supreme Court decision now clarifies that as long as my advice is not meant to abuse the system, it is considered appropriate. Of course, a bankruptcy attorney cannot advise a client to go out and charge up debt when the client has no reasonable expectation to repay it — providing such advice would be considered abuse, and therefore a violation of the statute.
I view the decision as a victory of sorts because it enables us bankruptcy practitioners to do what we’ve wanted to do all along: give honest and appropriate advice to clients in order to reach a beneficial result, as opposed to taking advantage of the system and defrauding creditors.
Bankruptcy Attorneys Are Debt Relief Agencies
Justice Sotomayer also upheld the BAPCPA’s requirement that attorneys make certain disclosures in their advertisements and ruled that attorneys who provide bankruptcy assistance are debt relief agencies within the meaning of the law.
Having to label bankruptcy attorneys as “debt relief agencies” seems silly, and serves no useful purpose. However, the requirement is rather benign, and more of a nuisance than anything else.
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