Bankruptcy

Supreme Court: Bankruptcy Law Doesn?t Violate Lawyers? Rights

By Chris Kramer

A case decided by the Supreme Court this week settles a question of attorneys' free speech rights raised by a Minnesota law firm concerned about restriction in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), according to the Washington Post.

Here are the pertinent details:

• The law states that bankruptcy lawyers are prohibited from advising clients to take on more debt before filing for bankruptcy. In theory, the restriction is meant to prevent advice that would lead to actions that might constitute fraud under U.S. bankruptcy laws.
• The question raised by the Minnesota law firm was one of free speech for lawyers. Apparently, the firm suggested that the aforementioned restriction amounted to an unconstitutional violation of the free speech rights of bankruptcy lawyers.
• The court decided that the law was not, in fact, unconstitutional, and that lawyers can give their clients any advice that does not promote defrauding the bankruptcy court.
  • Filing incomplete or inaccurate information
  • Attempting to pay a "favorite" creditor in full before filing for bankruptcy
  • Failing to disclose assets or expected income
  • Attempting to ?give away? assets before filing

The Broader Issue

While the law firm?s concern with free speech may seem piddling here, in the context of bankruptcy cases, it has merit. In some cases, as the WSJ article points out, taking on certain kinds of debt immediately before a bankruptcy filing could benefit both the filer and his or her creditors.

For example, refinancing a troublesome mortgage to better allow a debtor to make payments could benefit all parties. The Supreme Court Justices reportedly acknowledged the truth of this and agreed that taking on more debt can, at times, be the wisest decision for a potential bankruptcy filer.

But, the court noted, the law can be read to mean that bankruptcy lawyers are restricted only from giving their clients advice that would lead to bankruptcy fraud.

What Constitutes Bankruptcy Fraud?

Bankruptcy fraud is a serious matter ? in fact, it can lead a court to throw out your case (and thus eliminate your chances at receiving a debt discharge) and earn you fines and jail time. This is one reason why working with a bankruptcy lawyer can be helpful.

Bankruptcy fraud includes:

Full post as published by The Bankruptcy Blog on March 12, 2010 (boomark / email).