Justices fault part of 2005 debt law
Posted on Saturday, September 6, 2008
The 8 th U. S. Circuit Court of Appeals has struck down part of the 2005 bankruptcy law that bars lawyers from advising clients to incur more debt before filing, saying it violates the Constitution’s right to free speech.
The provision prevents “attorneys from fulfilling their duty to clients to give them appropriate and beneficial advice,” the court ruled in a 2-1 decision Thursday. It was the first ruling on the provision by a federal appeals court.
Changes in bankruptcy laws made three years ago were the most extensive since the current process was adopted in 1978. A record 2. 1 million Americans filed bankruptcy in 2005, most of them before the law took effect in October of that year. This year, filings are set to surpass 1 million.
The revised law’s broadly worded prohibition prevents lawyers from suggesting that clients take on more debt even when it wouldn’t be erased in bankruptcy, the 8 th Circuit said. The panel said it might be beneficial to some debtors to refinance a mortgage at a lower interest rate or buy a reliable car to get to work before filing for bankruptcy.
The court, in the majority decision written by Judge Lavenski R. Smith of Arkansas, also reversed the lower court and found that the 2005 law didn’t violate the First Amendment by requiring bankruptcy lawyers to identify themselves as “debt-relief agencies” in advertising.
“The threat of being labeled as a debt-relief agency has curbed or chilled big firms from doing pro bono work for people” who need bankruptcy, Henry Kaim, a partner with the law firm King & Spalding in Houston, said in an interview.
“As galling as it is, Congress has pretty broad rights to regulate commercial advertising,” Jay Westbrook, a professor and bankruptcy-law expert at the University of Texas in Austin, said in an interview. He said he wasn’t surprised by either aspect of the ruling.
A Justice Department lawyer declined to comment. Because of the court’s finding that the provision is unconstitutional, the government could appeal to the U. S. Supreme Court.
The dissenting 8 th Circuit judge, Steven M. Colloton, said he would have upheld the law. Rather than throw out the ban on advising clients to take on more debt, Colloton said he would have interpreted the law as barring advice only “for the purpose of manipulating the bankruptcy system.” U. S. appeals courts have upheld other parts of the 2005 law. In June, the 6 th U. S. Circuit Court of Appeals rejected a couple’s argument that the new statute wasn’t a “uniform” bankruptcy law because individuals with the same income could escape their debt in one state and not another.
The case is Milavetz Gallop & Milavetz v. U. S., 07-2405, 8 th U. S. Circuit Court of Appeals (St. Louis ).
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