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Bankruptcy

: Arizona Bankruptcy Attorney Blog

A Bankruptcy Lawyer in Arizona Can't ADVISE You to Incur New Debt in Contemplation of a Bankruptcy

By Joseph McDaniel, Esq.

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There is a funky, unconstitutional statute located inside the BARF Act, at 11 USC 526(4), and in relevant part it reads that a "debt relief agency", which translates as "bankruptcy attorney" for purposes of this discussion, cannot

"advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title"

Let's examine how this unconstitutional, unethical statute plays out. One the one hand, a bankruptcy lawyer is...a lawyer! As a lawyer, he is under an ethical obligation to represent a client and help that client to the best of his ability, knowledge, experience, and wisdom.

At another level, a bankruptcy lawyer is a citizen of the United States, and is himself entitled to the protection of speech accorded all other citizens of the United States.

And I know that eventually, the Supremes will do the right thing and find that portion of the statute unconstitutional, like the unconstitutional statutes in Loving v. Virginia, and Brown v. Board of Education of Topeka.

I have faith in the Supremes. They always get it right. Eventually.

But for now, a prudent bankruptcy lawyer had better darn well not advise a client to incur more debt in contemplation of a bankruptcy unless he wants to be a martyr to free speech. Not if he want to keep helping clients file bankruptcy cases.

Now, are there any circumstances where it would be in a potential debtor's best interests to incur such debt? Well, sure. For instance, if a debtor could refinance a high-interest rate mortgage prior to a bankruptcy, so he can make the house payments and buy his kids beanie-weanie, that would be in the best interest of the debtor.

Ditto with the issue of buying a new car if the debtors currently have a good credit rating, and their current car is about to die The True Death, and they plan on keeping and paying for the new car, and the car payment doesn't represent an undue hardship. Note: people in some parts of the country don't understand this, but you gotta have a car to get around in Phoenix, or Scottsdale, or Mesa, or Chandler, or Tempe, or anyplace else in Arizona. We got these here wiiiide-open spaces, right?

If a client asks a bankruptcy lawyer about a prospective transaction that involves incurring new debt, does a bankruptcy attorney have to shove a ball gag into his mouth and pretend that he's forgotten the safe word?

I don't think so.

If a client asks a bankruptcy lawyer whether he should incur a particular debt, that the client plans to repay in full, the bankruptcy lawyer can certainly explain the legal issues, pro and con, associated with the proposed transaction, but he still can't advise the client to incur the debt.

So if a client calls me hysterically and says, "My little girl's leg was torn off by a pit bull. The doctors will sew her leg back on if I sign a note for the balance of the medical fees! I'm currently contemplating a bankruptcy! What should I do?", I am quite certain that I will discuss the legal effect of the possible new debt, without ever advising the client to incur it.

Also note: if you need to ask your bankruptcy lawyer whether you should have your kid's leg sewn back on, your parents didn't raise you right.

There is a nice discussion of this very issue written by Craig Andreson, a Bankruptcy Attorney in Minnesota. His conclusion is similar to mine, and as he correctly points out, "Advising you to incur new debts is different from discussing the legal effect of incurring new debts."

Full post as published by Arizona Bankruptcy Attorney Blog on December 30, 2010 (boomark / email).