Is A Bankruptcy Attorney A "Debt Relief Agency-? The Question Is Important, And The Supreme Court Will Soon Have An Answer

Submitted by Jen Jones on Mon, 06/22/2009 - 9:00am

Is A Bankruptcy Attorney A

So let's say you run into some financial troubles. You meet with a bankruptcy attorney to discuss your options. You're thinking that, if you're going to file, you should try to refinance your mortgage first to lower the payments and ease some of the pressure. You're also thinking you might want to go ahead and replace that old clunker with a reliable car to make sure you won't have a problem getting to work during your bankruptcy case. And let's say the attorney agrees with you. Can he tell you that? It seems like the answer should be obvious. After all, he's a bankruptcy attorney. And if your attorney thinks that these issues are important, he should be able to advise you one way or the other, right?

Well, maybe not. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), a "debt relief agency- can't advise a client "to incur more debt- -“ like, for instance, a new home mortgage or car loan -“ in considering whether the client should file bankruptcy. The question then becomes, is a bankruptcy attorney a "debt relief agency?- If so, BAPCPA says he can't advise you to take such actions; if not, he can. The distinction is important for another reason: debt relief agencies must include in all their advertisements to the general public a disclosure statement to the effect that, "We are a debt relief agency. We help people file for bankruptcy under the Bankruptcy Code.-

BAPCPA broadly defines "debt relief agency- to mean "any person who provides any bankruptcy assistance- in exchange for compensation, and carves out a list of exceptions for certain individuals and entities -“ attorneys not among them. The Act goes on to define "bankruptcy assistance- as any advice, counseling, or legal representation in connection with a case or proceeding under the Bankruptcy Code.

Given the sweeping definitions of these terms, bankruptcy attorneys could well be considered "debt relief agencies- under BAPCPA. This creates a predicament for attorneys in cases where it may be in the client's best interest to incur certain debts before filing: advising the client of this could violate BAPCPA, but failing to do so could violate the attorney's ethical obligation to assist the client in achieving the best results.

The courts are divided on this issue. The Eighth Circuit Court of Appeals is the latest to step into the fray. In that case, Milavetz, Gallop & Milavetz, P.A., a Minnesota bankruptcy law firm, sued the United States seeking declaratory relief that attorneys were not "debt relief agencies- under BAPCPA and that, if they were, both the advice restriction and the disclosure requirements were unconstitutional. The District Court agreed with the plaintiffs. But on appeal, the Eighth Circuit found the broad definition of "debt relief agency- did in fact include bankruptcy attorneys. It also upheld BAPCPA's disclosure requirements, finding they were reasonable requirements designed to avoid potentially deceptive advertising.

However, the Eighth Circuit struck down the advice restriction as an unconstitutional restraint against free speech under the First Amendment. The court concluded that the restriction "prevents attorneys from fulfilling their duty to clients to give them appropriate and beneficial advice . . .- For example, the court explained, "it may be in the [client's] best interest to refinance a home mortgage in contemplation of bankruptcy to lower the mortgage payments. This could free up additional funds to pay off other debts and avoid the need for filing bankruptcy altogether.-

Well, as you might expect, neither party was completely satisfied with this decision. The plaintiffs dispute the court's conclusion that an attorney is a "debt relief agency.- The government disputes the court's conclusion that the advice restriction is unconstitutional. Both petitioned the United States Supreme Court for review. Last week, the high court granted the petitions and will decide these issues once and for all. The outcome will be significant to bankruptcy attorneys and their potential clients, as it will directly affect the type of advice an attorney can give and that a client can expect to receive. A decision is expected during the Supreme Court's next term.

From: The Law Offices of John T. Orcutt, with convenient office locations in Raleigh, Durham, Fayetteville, and Wilson. Call (toll free) +1-919-646-2654, to set up a free, confidential debt consultation. Visit www.billsbills.com for more information.

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