Can My Bankruptcy Lawyer Advise Me To Incur New Debts?

09 Oct Can My Bankruptcy Lawyer Advise Me To Incur New Debts?

You may have heard that a bankruptcy lawyer can’t legally advise a client to incur new debts before filing bankruptcy. In fact, Section 526(a)(4) of the new bankruptcy law contains this odd-sounding rule, but what does it really mean? Does it mean your lawyer is forbidden from fully advising you about your options? Are you prevented from getting legal advice about incurring a debt, before you file for bankruptcy? If so, how will you know if it’s a good idea? Isn’t that what lawyers are for, getting advice? But the law says your bankruptcy lawyer can’t advise you about it, right? What is the client to do?

Don’t despair; the answer is simple: a lawyer can, even under the new bankruptcy law, explain all the pros and cons of incurring new debts before you file bankruptcy. Advising you to incur new debts is different from discussing the legal effect of incurring new debts. If you ask your bankruptcy lawyer whether you should finance a new car purchase before filing your bankruptcy, the answer should not be, “I’m not allowed to discuss that with you.” Instead, your lawyer ought to be willing to explain that although he or she can’t advise you to do that, you can make your own decision, after being informed of the bankruptcy law rules which come into play, about whether to finance a new car purchase before filing bankruptcy.

But isn’t it bad faith to incur a debt just before you file bankruptcy? Not always, but the decision to do so should not be based upon an intention to file bankruptcy. Also, the new debt should improve rather than harm your overall financial condition. For example, refinancing your mortgage to get a lower interest rate, and a smaller monthly mortgage payment, would be incurring a new debt. Refinancing a high-interest car loan to get a smaller monthly car payment would also be incurring a new debt. However, it is doubtful a bankruptcy court would punish a bankruptcy debtor who incurred such a new debt, even if it were done just before filing the bankruptcy. Your bankruptcy lawyer doesn’t even need to advise you do so; he or she just needs to be willing to explain the possible bankruptcy law consequences of doing it, then you can decide for yourself whether you should incur the new debt.

Incurring a new debt before filing a bankruptcy is sometimes a good idea, even it’s a new car loan. What if you’ve been late for work because your 1995 Ford minivan, which is paid for, keeps breaking down? Your co-workers squint at you as you park this rusty heap in the office parking lot, and they wince when you lurch to a stop and force open its squeaky drivers door. You wonder if your kids are safe in it because the brakes may be failing (again). Should you consider financing the purchase of a new, or used, minivan to replace this vehicle? Again, it is unlikely a bankruptcy court would punish a bankruptcy debtor for doing so, even if done just before filing the bankruptcy, if the new minivan were needed for reliable transportation. Once again, your lawyer should be available to discuss the pros and cons of a specific pre-bankruptcy vehicle purchase with you, so you can make the decision of whether to do it.

In Minnesota, lawyers have been freed of worry over this issue by the U.S. District Court decision in Milavetz v. United States, 05-CV-2626 (Dec. 7, 2006). This case held that Section 526(a)(4)’s prohibition against lawyers advising clients to incur new debts pre-bankruptcy was contrary to the U.S. Constitution’s First Amendment free speech gaurantee, and as such could not be enforced. However, as noted above, a bankruptcy client need not live in Minnesota to enjoy the benefits of this ruling. No matter what state you live in, when you consult with a bankruptcy lawyer, the lawyer can and should explain fully the possible legal consequences of incurring new debts before you file bankruptcy.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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