Federal Appeals Court Upholds “Debt Relief Agency” Rules, But Strikes Down Rule Against Advising Clients To Incur More Debt

05 Sep Federal Appeals Court Upholds “Debt Relief Agency” Rules, But Strikes Down Rule Against Advising Clients To Incur More Debt

On September 4, 2008, the U.S. Court of Appeals, Eighth Circuit, issued its ruling in the Milavetz v. United States case, No. 07-2405. The appeals court upheld the 2005 Bankruptcy Reform Act’s requirement that attorneys identify themselves as “debt relief agencies,” but struck down the prohibition on attorneys advising clients to incur more debt in contemplation of bankruptcy.

The lower court had held that because the Act did not specifically include attorneys within its definition of debt relief agencies, Congress did not intend to change the long-standing practice of leaving regulation of bankruptcy attorneys to the states, and to the federal court’s general powers to oversee the conduct of all attorneys.

Disagreeing, the appeals court held that the Act’s definition of debt relief agencies was broad and comprehensive. The appeals court held that attorneys fell squarely within the Act’s definitions; it was also within the power of Congress to require attorneys to identify themselves as debt relief agencies.

The appeals court, however, upheld the lower court’s ruling that the Act’s prohibition on attorneys advising clients to incur more debt “in contemplation of bankruptcy” was unconstitutional, as a violation of the First Amendment’s freedom of speech guarantee. Restrictions on freedom of speech, even lawyers’ freedom of speech, must be narrowly drawn to advance an important governmental interest.

The appeals court observed that the Act forbade attorneys from ever advising clients to incur new debt, even in situations where such advice would not be abusive to the bankruptcy process. For example, advising a client to refinance a mortgage, possibly thereby avoiding bankruptcy altogether, was forbidden, as was advising a client to finance a new car before bankruptcy, even if the new car would allow the client to continue working and making payments to creditors. The appeals court held that to prohibit such benign advice was overbroad, and it held that this provision of the Act could not enforced.

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Craig Andresen is a Minnesota bankruptcy attorney who represents both consumers and small business owners in chapter 7 and chapter 13 cases. With thirty years experience, Mr. Andresen is a frequent speaker on the topics of stopping mortgage foreclosures, and stripping off second mortgages in chapter 13. His office is located in Bloomington just across the street from the Mall of America. Call his office at (952) 831-1995 for a free consultation about protecting your rights using bankruptcy.
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