I Guess Bankrutpcy Attorneys Are Debt Relief Agencies Again -- But How Much Does It Matter?

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 started requiring certain people and entities to disclose to consumers in looking to file bankruptcy that they are a "Debt Relief Agency", and to instruct potential bankruptcy filers not do to do things such as not to incur more debt before filing.  See, 11 U.S.C. §§ 526(a)(4) and 528(a)(4) and (b)(2).  Since this time bankruptcy attorneys across the nation have been contesting the fact that they classified as a "debt relief agency" under the these code provisions, because these provisions do not necessarily include the direct application of "lawyer" or "attorney".  They have also, been disputing that the law can constitutionally restrict them from advising their clients to incure new debt, because in some situaitons involving the mortgage crises, this might be benefical.

The matter is important to consumer bankruptcy attorneys on an emotional, practical, and legal level.  On an emotional level, most attorneys do not believe they competed to get into law school, lived through that grind, and pass an impossible bar exam just to have bare the mark that compares it to other fly by night organizations.

On a practical matter, debt relief agencies have a duty to provide certain disclosures to debtors within a short period after meeting with them.  This does not sound onerous on its face, but most consumer bankruptcy attorneys are kind enough to offer most people free evaluations when the new law places terrible restrictions on them already concerning these services.  It literally takes hours of their time, already discouraging attorneys to practice in the area.  Also, many attorneys are nice enough to talk to consumers over the telephone.  This puts the attorney at risk of not being able to provide these disclosures.

On a legal level, bankruptcy attorneys do not believe that Congress should be allowed to prohibit them from advising their clients in ways that might be financially beneficial to the client, as the new Code provisions do.

Then, of course, there is the whole issue of the question itself.  If an attorney does not know if the provision applies to him or her, how does he or she know to try and comply with it.  So, attorneys have been racing around the country trying to get this issue before bankruptcy courts and district courts to get some degree of clarification.  Needless, to say these decisions have been mixed, at best, leaving some attorneys practicing in a particular court, not having to comply, and those in another court having to comply.

This whole discussion is predicate to a decision of first impression being handed down by one of the United States Courts of Appeal, which states that attorneys are debt relief agencies and must comply with those disclosure provisions, but striking down that part of the law as unconstitutional to prohibits attorneys from advising their client as to incurring debt.  In effect, the 8th Circuit splits the baby.

In Milavetz v. United States of America, the 8th Circuit Court of Appeals found that the new term, "debt relief agency" as defined in 11 U.S.C. § 101(12A), is not ambiguous.  Holding with a majority of the courts that have ruled on this matter, including the Texas case, Hersh v. United States, 347 B.R. 19 (N.D. Tex. 2006), "constitutional avoidance" does not apply in this as to the "debt relief agency".  The Court of Appeals defined constitutional avoidance as "where an otherwise acceptable construction of a statute would raises serious constitutional problems, the Cour will construe the statute to avoid such problems unless such construction is plainly contrary to the intent of Congress".  Thus, if interpreting "debt relief agency" to include attorneys would raise constitutional problems, the Court would look for another interpretation.

Ultimately, the Court found that "debt relief agency" includes attorneys because they were not expressly excluded from this group under 11 U.S.C. § 526(d)(2), and because the limited congressional history specifically discussed this provision in terms of "professional standards for attorneys".  The Court also found that providing this disclaimer is does not violate the constitution guarnatees of free speech.

This being the case, the 8th Circuit had to determine if the prohibition restricting attorneys from discussing with clients the possibility of incurring new debt was overly broad and thus unconstitutional.  The 8th Circuit found it was.

The Court ruled that § 526(a)(4)'s plain language an attorney is prohibited from providing this beneficial advice—even if the advice could help the assisted person avoid filing for bankruptcy altogether. For instance, it may be in the assisted person's best interest to refinance a home mortgage in contemplation of bankruptcy to lower the mortgage payments. This could free up additional funds to pay off other debts and avoid the need for filing bankruptcy all together.  The Court found that Incurring these types of additional secured debt, which would often survive or could be reaffirmed by the debtor, may be in the debtor's best interest without harming the creditors.

The end result is that, at least in the 8th Circuit, and probably around the country, bankruptcy attorneys are going to have to use the "debt relief agency" moniker and provide certain minimal disclosures, but § 526(a)(4) is no more, and the government cannot tell you not to provide beneficial information to your clients.

(Pictured is the Hon. Lavenski R. Smith who wrote the opinion).