In the recent case of Milavetz, Gallop & Milavetz, P.A. v. United States, the Eighth Circuit Court of Appeals struck down a major provision under the new Bankruptcy Reform Laws which prevented attorneys from providing certain legal advice to debtors contemplating Bankruptcy. Specifically, the Court held that “attorneys who provide bankruptcy assistance to assisted persons are debt relief agencies under the Bankruptcy Code, and § 526(a)(4) is unconstitutional as applied to these attorneys.”
11USC 526(a)(4) essentially provides that Attorneys are not allowed to ask for their own attorney fees or advise clients to incur any new debt(such as refinance a house to a lower rate, buy a vehicle with a lower payment, etc) prior to filing for bankruptcy relief. Specifically, it provides that an attorney can not
“advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title or to pay an attorney or bankruptcy petition preparer fee or charge for services performed as part of preparing for or representing a debtor in a case under this title.”
Nevertheless, this new ruling striking down 526(a)4 as unconstitutional is now the Law of the Land in the Eighth Circuit, with only the US Supreme Court as the only higher Court left to rule on this matter. But its probably a matter of time before it will soon be the law of the land across the United States. Indeed most Courts in America have likewise ruled that 526(a)4 is unconstitutional. See, e.g., Hersh v. United States, 347 B.R. 19 (N.D. Tex. 2006), appeal docketed, Nos. 07-10226 & 07-10265 (5th Cir.); Olsen v. Gonzales, 350 B.R. 906 (D. Ore. 2006), appeal docketed, No. 07-35616 (9th Cir.); Zelotes v. Martini, 352 B.R. 17 (D. Conn. 2006), appeal docketed, No. 07-1853 (2d Cir.).
On the West Coast, Olsen v. Gonzales, 350 B.R. 906, 2006 U.S. Dist. LEXIS 56197, Bankr. L. Rep. (CCH) P80692, 56 Collier Bankr. Cas. 2d (MB) 821 (D. Or. 2006) is presently before the Ninth Circuit Court of Appeals, with NACBA who submitted a brief as Amicus Curai. Hopefully we get an answer soon from the Ninth following the Eighth. Indeed, at the District Court level, 526(a)4 was also held unconstitutional as violating the First Amendment, which was later affirmed on a motion to reconsider.
What is interesting about the Olsen v. Gonzales case before the Ninth, is that not only did the court state that counseling of incurring certain new debt like refinances and vehicle debt were legitamate, but it also stated that counseling to take out a new debt to pay for bankruptcy attorney and filing fees would be proper as well.
“Sometimes taking on more debt could be the most financially prudent option for someone considering bankruptcy. That situation could be the case when: (1) refinancing at a lower rate to reduce payments and forestall or even prevent entering bankruptcy; or (2) taking on secured debt such as a loan on an automobile that would survive bankruptcy and also enable the debtor to continue to get to work and make payments. Thus, section 526(a) prevents lawyers from giving clients their best advice.
Other legitimate reasons for incurring debt may be taking out a loan to obtain the services of bankruptcy attorney, to pay the filing fee in a bankruptcy case or the conversion of a non-exempt asset to an exempt asset which is still allowed under the Bankruptcy code.“
In any event, an attorney might sleep better in also knowing the the US Trustee’s position likewise supports the fact that an attorney may render advice to incur new debt since the statute’s application is limited. In one of the first cases, In re Moore 04-24651, out of the Western District of Washington, the US Trustee argued that while 526(a)4 is not unconstitutional, an attorney can nevertheless provide legal advice to incur a new debt:
This provision does not establish a general prohibition against advising an assisted person to incur more debt. Nor does it prohibit an attorney from advising an assisted person on what the law states. Instead, it only prohibits a debt relief agency from advising an assisted person “to incur more debt in contemplation” of filing a petition for bankruptcy. 11 U.S.C. § 526(a)(4)(emphasis added). The phrase “in contemplation of . . . filing a case under this title” is the key to understanding this provision, and as always, Congress’s intention is the touchstone for interpretation, Chevron U.S.A. Inc. v. Natural Resources Defense Counsel, Inc., 467 U.S. 837, 842-43 (1984).
In light of Congress’s intention, the best interpretation of the “in contemplation”language is that it prevents an attorney from advising a debtor to take on debt because he or she intends to file for bankruptcy, as such advice is aimed at allowing the debtor to unfairly take advantage of discharge (by running up debt primarily because it will not need to be repaid) or ”game” the means test (by piling on enough debt to avoid a presumption of abuse, § 707(b)(2)). These opportunistic uses of bankruptcy are antithetical to the notions of “personal responsibility” and “integrity” that motivated Congress to pass the BAPCPA.
Accordingly, its probably all right to advise and incur new debt prior to filing for bankruptcy provided that that debt will be repaid and is in the best interests of the debtor.
Written by Michael G. Doan
No related posts.
Comments on this entry are closed.