San Diego Bankruptcy Lawyer | What May A Bankruptcy Lawyer Say to Their Clients?
What May A Bankruptcy Lawyer Say to Their Clients?
The United States Supreme Court issued an important ruling, during the spring of 2010, which regulates consumers’ relationship with their bankruptcy attorneys. The Court focused on a provision in the Bankruptcy Code, section 526(a)(4) which was added by Congress in the 2005 amendments, that prohibits a bankruptcy attorney from advising his client to “incur more debt in contemplation of such person filing [a bankruptcy case].” This new language caused great concern among bankruptcy lawyers.
There are several situations where incurring debt, even though a bankruptcy may be imminent, is perfectly appropriate. For instance, no creditor or trustee could seriously object if someone used her credit card to purchase groceries for her family prior to filing for bankruptcy, especially if she had no cash because it had all gone to service the interest payments on her credit cards.
There are several situations were incurring debt prior to a bankruptcy is problematic, and perhaps fraudulent. One example would be purchasing several costly goods on credit knowing full well that the person was going to file bankruptcy without either the means or intent to pay the debt.
One reading of the new provision could have been read to prohibit a bankruptcy attorney even from advising a cash-strapped consumer that it was o.k. to use his credit card to buy necessities whenever he were considering bankruptcy. A Minnesota law firm that represents clients who file bankruptcies sued to have the law declared unconstitutional for that reason, as it potentially prevented lawyers from giving clearly legal and ethical advice. The Supreme Court, in an opinion authored by Justice Sotomayor, disagreed, and ruled that the statute was constitutional. However, in so doing, the Court clarified that the statute is not to be read so broadly.
The United States Attorney General argued that the statute was constitutional because it should be read as only prohibiting advice that was intended to manipulate the bankruptcy process. The Supreme Court essentially agreed with the Justice Department, and interpreted the statute as referring only the situation where someone purposely “loads up” on debt in order to manipulate the bankruptcy laws.
Justice Sotomayor wrote the important opinion for a unanimous court that is very important for bankruptcy attorneys and bankruptcy law. Milavetz v. United States. http://www.supremecourt.gov/opinions/09pdf/08-1119.pdf. The Court ruled that the prohibition only comes into play when a person is advised to incur debt if the “impelling reason” was the decision to file for bankruptcy. The Supreme Court could have been clearer on drawing the line of improper advice. The Court did assist bankruptcy lawyers by implying that the type of advice that would likely get a bankruptcy lawyer into trouble would be advice that would harm her client if followed.
There are situations where incurring debt, in particular secured debt that will be retained after bankruptcy, could be appropriate under some circumstances or inappropriate under others. The test is whether the purpose for acquiring the debt was to “load up” on debt to “manipulate” the Bankruptcy Code, and whether the decision to file bankruptcy in the future was the “impelling” reason for acquiring the new debt.
Congress, in 2005, may have intended to make bankruptcy relief less desirable and make bankruptcy lawyers more careful about how they advise their clients. However, after many years, the courts have given experienced bankruptcy lawyers sufficient guidance so that they can advise their clients how to legally and ethically take full advantage of the benefits the law provides.
