The U.S. Court of Appeals for the Eighth Circuit handed down Milavetz, Gallop & Milavetz v. United States yesterday, in which the majority held unconstitutional a provision that barred debt relief agencies — including lawyers — from
advis[ing] 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.
The court concluded that:
[R]egardless of whether the government's interest in prohibiting the speech was legitimate (Gentile standard) or compelling (strict scrutiny standard), § 526(a)(4) is unconstitutionally overbroad as applied to attorneys falling within the definition of debt relief agencies because it is not narrowly tailored, nor narrowly and necessarily limited, to restrict only that speech that the government has an interest in restricting. Instead, § 526(a)(4) prohibits attorneys classified as debt relief agencies from advising any assisted person to incur any additional debt in contemplation of bankruptcy; this prohibition would include advice constituting prudent prebankruptcy planning that is not an attempt to circumvent, abuse, or undermine the bankruptcy laws. Section 526(a)(4), as written, prevents attorneys from fulfilling their duty to clients to give them appropriate and beneficial advice not otherwise prohibited by the Bankruptcy Code or other applicable law.
The decision seems quite right to me. Thanks to How Appealing for the pointer.
Perhaps I'm not understanding this case, but it seems that the law is saying that on one can say someone about to go into bankruptcy "hey, why don't you rob your debtors and give me the money?"
Would that be an accurate restatement of what the law is banning?
Why should lawyers be allowed to adise their clients to commit this theft?
The car (reliable transportation) bothers me, I think it is too open for abuse, but I have to concede that there are cases where it could be in the best interests of the creditors to have the person going into bankruptcy assume a car debt before declaring bankruptcy. The problem would be to ensure that car debt is constructed in such a way that the creditor (for the car) is not harmed by the bankruptcy or is fully aware of the pending bankruptcy before the loan is made.
I do a lot of commercial creditor's rights work and have gotten over outrage at the very aggressive positions taken by debtors with the advice and participation of counsel. It would not surprise me in the least if debtors' counsel tell debtors to run up huge credit card debt right before they file. That kind of stuff is immoral and abusive--but the law allows you to get away with it.
More galling is the stuff I encounter -- debtors and their attorneys using blatantly frivolous legal proceedings to cause delay and increased legal fees by the creditor. The courts are NOT willing to sanction counsel for participating in that nonsense. It's really galling.
I think that if that's the best they can do, then their case is really weak.
If the Court had made the case that that kind of advise was what was routinely being blocked by this law, that would be one thing. But the Court didn't try, for the good reason that such a claim is obviously false.
"Here are the limits on what you can keep. Max out your credit cards getting things under these limits, and paying bills of businesses you like / what to have a continuing relationship with, then declare bankruptcy."
That's what the laws is designed to block. Anyone want to try to seriously claim that bankruptcy lawyers / "advisers" aren't saying those things? Anyone want to claim that people going into bankruptcy protection should be doing those things?