subject: Milavetz to Test Constitutionality of Bankruptcy Law [print this page] Milavetz to Test Constitutionality of Bankruptcy Law
The US Supreme Court heard oral arguments this December in an important First Amendment case: Milavetz, Gallop & Milavetz, PA v. US. The question before the Court is whether a provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) violates an attorney's rights to free speech. The particular provision prohibits debt relief agencies from advising a client or potential client "to incur more debt in contemplation of such person filing" for bankruptcy protection (11 USCA Section 526(a)(4)).
The circuit courts are split over the constitutionality of Section 526 and whether attorneys should be considered debt relief agencies. The Eighth Circuit Court of Appeals ruled in the Milavetz case that the restrictions on attorney speech in Section 526 are unconstitutional, but held that attorneys providing bankruptcy services are debt relief agencies. The Supreme Court's decision expected next year should finally resolve these issues.
The plaintiff attorneys argue that the Section 526 restrictions limiting what an attorney can tell a client are an unconstitutional violation of the attorney's rights to free speech. Like other citizens, attorneys do not surrender their First Amendment rights when they go to work.
The plaintiffs also argue that following the bankruptcy law requires attorneys to violate their ethical obligations under Minnesota Rules of Professional Conduct to give clients "appropriate and beneficial advice." Thus, the bankruptcy law puts attorneys in the precarious position of violating either federal law or state-mandated ethical duties when deciding what information they can provide to clients.
Finally, the plaintiffs question Congress' authority to pass legislation regulating attorney conduct. Traditionally, responsibility for regulating the activities of attorneys has fallen to individual states, not Congress. By attempting to regulate attorney conduct, the plaintiffs argue, Congress has overstepped the limits of its authority.
The government argues for a more narrow reading of Section 526. According to the government, the implied meaning of Section 526, and more specifically the phrase "in contemplation of," is that debt relief agencies cannot advise an individual to take any action that would abuse the bankruptcy system. This would include instances when an attorney would advise a client to take on additional debt for abusive purposes rather than because it is in the client's best interests to do so prior to filing for bankruptcy.
The government also points out that the purpose of the 2005 reforms was not only to prevent individual debtors from abusing the bankruptcy system, but also to prevent attorneys and others who prepare bankruptcy relief petitions from abusing the system and advising their clients on how to abuse the system.
The outcome of the Milavetz case is very important to those who may be considering filing for bankruptcy protection. The 2005 changes to the bankruptcy laws made it more difficult for some people to qualify for Chapter 7 bankruptcy. Those who do not qualify for a Chapter 7 bankruptcy may be able to file a Chapter 13 bankruptcy. Under a Chapter 7 bankruptcy, qualified debtors are not required to repay the majority of their debts, giving them a "clean slate" to start over financially. A Chapter 13 bankruptcy, on the other hand, requires debtors to set up a repayment plan over a three to five year period to repay some or all of their debtssomething an individual without sufficient income may not be able to do.
Since the 2005 changes, debtors must meet the requirements of a means test to qualify for Chapter 7. The means test considers an individual's debt obligations versus the individual's ability to pay. Debtors must meet a certain debt threshold before becoming eligible for Chapter 7. For some debtors who are on the verge of qualifying for Chapter 7 bankruptcy, one big purchase may be all that is needed to push them over the debt threshold. Otherwise, the debtors find themselves in the position where they do not have enough debt to qualify for a Chapter 7, but they do not have enough income to commit to a Chapter 13 repayment plan.
If you have found yourself struggling with debt and want to learn more about your legal options, contact a knowledgeable bankruptcy attorney today. The lawyer can explain your bankruptcy options and help you explore other options that may help you get a better handle on your finances.
