Chapter 7 and Chapter 13 Bankruptcy, Giving Advice to Clients and Restrictions Under BAPCPA

The U.S. Supreme Court has resolved an issue earlier this week that was of great concern to the bankruptcy lawyers ever since enactment of BAPCPA in 2005.  This issue had to do with a provision of BAPCPA, which barred attorneys from advising their clients to take on more debt before filing for bankruptcy protection.  The Supreme Court held in Milavetz, Gallop & Milavetz v. United States, 559 U.S. ___ (2010), that giving such advice is permissible in appropriate situations.

The high court, in an opinion written by Justice Sonia Sotomayor, said the provision prohibiting such advice was valid, but should be read narrowly.  This provision should be read to prohibit bankruptcy lawyers from advising clients to abuse the bankruptcy system.  Justice Sotomayer indicated that it would be permissible for lawyers to advise clients contemplating bankruptcy to take on additional debt in certain situations.   She wrote that bankruptcy lawyers could advise clients to refinance a mortgage or purchase a reliable car prior to bankruptcy on the grounds that doing so would reduce the debtor’s interest rates or improve the debtor’s ability to repay.  According to the opinion, “[i]t would make scant sense to prevent attorneys and other debt relief agencies form advising individuals thinking of filing for bankruptcy about options that would be beneficial to both those individuals and their creditors.”  Professionals specializing in bankruptcy “remain free to talk fully and candidly about the incurrence of debt in contemplation of filing a bankruptcy case,” Sotomayor wrote.

This provision has been problematic in the past in situations where my client would have a vehicle that was likely to need repairs in the near future due to its age or mileage.  Under BAPCPA, I could not advise the debtor in Chapter 7 Bankruptcy or Chapter 13 Bankruptcy to obtain a new car lease or car loan, as getting a new car is easier to do before filing for bankruptcy than after.  Since BAPCPA contained a provision which prevented attorneys from advising clients to incur debt in contemplation of bankruptcy, I was unable to give debtors such advise since BAPCPA’s enactment.  Similarly, this provision prohibited me from advising a debtor to refinance his mortgage immediately prior to filing for bankruptcy in order to benefit from a lower interest rate in the future.

The Supreme Court decision now clarifies the scope of BAPCPA provisions and holds that as long as bankruptcy lawyer’s advice is not meant to abuse the system, it is considered appropriate.  Of course, a bankruptcy attorney cannot advise a client to go out and run up debt when the client has no reasonable expectation to repay it.  The decision also upheld the BAPCPA’s requirement that attorneys make certain disclosures in their advertisements and ruled that attorneys who provide bankruptcy assistance are debt relief agencies within the meaning of the law.  This requirement is the reason that whenever bankruptcy attorneys advertise their service, that sentence is included in the advertisement.

Overall, Milavetz was a positive result for bankruptcy lawyers here in Rochester, New York, and elsewhere across the country.  The Congress should not have limited bankruptcy attorneys’ ability to engage in frank and open communications with their clients and give debtors the best possible advice.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Related Posts
  • Changes to New York's Bankruptcy Exceptions Read More
  • Top Five Things Not To Do Before Filing Bankruptcy Read More
  • Bankruptcy Planning, Debt and 401(k) Read More