Supreme Court Considers Law Limiting Bankruptcy Advice

January 11, 2010

Recently the Supreme Court of the United States heard oral argument concerning whether bankruptcy attorneys should be allowed to advise their clients to incur more debt before filing. Currently the law states that "debt relief agencies" are not allowed to advise clients to incur more debt in contemplation of bankruptcy. The case before the high court also questions whether attorneys are "debt relief agencies" according to the statute.

Justice Antonin Scalia said of the statute, “It’s a stupid law,” but also asked, “Where is the prohibition of stupid laws in the Constitution?”

The popular consensus is that Congress enacted this prohibition to prevent attorneys from advising their bankruptcy clients to incur debt that could be discharged in a bankruptcy. In short, that situation amounts to a fraudulent act, the debt would be determined non-dischargeable, and the attorney could be held civilly or even criminally liability.

However, the statute is not narrowly tailored to prevent this kind of abuse; it also stops bankruptcy attorneys from effectively advising honest debtors in anticipation of a bankruptcy filing. In other words, the law can prevent "bankruptcy planning." For instance, in certain circumstances it may be highly beneficial to refinance a house or car loan at a lower interest rate prior to filing bankruptcy. The current law ostensibly forbids this type of helpful advice.

The Supreme Court is now considering this case and will interpret the intent of Congress. Hopefully, the Supreme Court can make sense of "a stupid law" and bankruptcy attorneys will be able to provide full, legal, and ethical legal advice to their clients.

To receive free legal advice from a Texas bankruptcy lawyer, contact the law firm of Fears | Nachawati today. Simply email us or phone us toll free at 1.866.705.7584.

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