My Advice Is to Stop Contemplating Bankruptcy So I Can Give You My Advice

This week the U.S. Supreme Court heard a challenge to restrictions on the advice that bankruptcy lawyers may give their clients. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, lawyers are forbidden to suggest that clients "incur more debt…in contemplation of" bankruptcy. The aim was to deter attorneys from encouraging people to go on spending binges right before filing for bankruptcy in the expectation that they won't have to pay the bills they rack up. But the statute's language is broad enough to encompass perfectly legitimate advice that an attorney may be ethically required to offer. G. Eric Brunstad, the attorney representing the Minneosta law firm that challenged the statute, offered an example during the oral arguments:

Suppose the debtor's problem is that he lives in a house that is too expensive for him. He comes to the lawyer: I'm in financial distress….The lawyer would logically suggest: Why don't you sell your house and rent an apartment? But the signing of the lease is incurring debt, the lease obligation.

It also might make sense for someone contemplating bankruptcy to refinance a mortgage at a lower rate or to pay off high-interest credit card debt by taking out a low-interest home equity loan. Although both moves technically involve taking on new debt, they are not abuses of the bankruptcy system. Yet lawyers who suggested them apparently would be subject to penalties under the 2005 law. Justice Antonin Scalia agreed that "it's a stupid law" but wondered, "Where is the prohibition of stupid laws in the Constitution?" The line drew laughter and may resonate with self-identified strict constructionists, but since this particular stupid law involves restrictions on the words that flow from people's mouths the answer seems pretty clear.

The oral argument transcript is here (PDF). The briefs are here.

Comments

[P Brooks]

Justice Antonin Scalia agreed that "it's a stupid law" but wondered, "Where is the prohibition of stupid laws in the Constitution?"

Har dee fucking har.

[Pappy Smear]

"It also might make sense for someone contemplating bankruptcy to refinance a mortgage at a lower rate or to pay off high-interest credit card debt by taking out a low-interest home equity loan."

Not a good idea for a client planning to file chapter 13.

[Libertymike]

The better question is: Where in the constitution is there a specific grant of power to enact stupid laws?

[John Thacker]

Where in the constitution is there a specific grant of power to enact stupid laws?

Broadly, no, but the power to pass plenty of stupid laws are specifically granted to Congress. Unless you think that, e.g., every single possible declaration of war is smart.

[Umbriel]

Pennsylvania had a similar law years ago prohibiting attorneys from advising elderly clients to give away assets to their children before applying for Medicaid assistance for their nursing home expenses. I believe it was ultimately shot down for the perfectly sensible reason that you can't abridge the free speech of a professional counselor, particularly when they're advising a client to do something that's not illegal.

[P Brooks]

They should have just stopped at "Congress shall make no Law."

[stevedave]

A-fucking-men.

[DevHyfes]

This is why laws have a bunch of preambles explaining congress's intent. The obvious meaning of this wording is that a person ought not incur new debt if they are expecting to file for bankruptcy.

Re-fi'ing your CCs or house when you expect to go into bankruptcy is either stupid or unethical. It's stupid if you end up paying the refi costs right before wiping out the debt, and it is unethical to do so if you roll those costs into debt that you fully intend to default on.

[Gene Berkman]

Liberty Mike phrased the question the way a strict constructionist would.

[R C Dean]

lawyers are forbidden to suggest that clients "incur more debt...in contemplation of" bankruptcy.

Easily interpreted to mean that lawyers shouldn't advise their clients to increase their total indebtedness. Refinancing your house, or selling it and moving into an apartment, should not involve increasing your total indebtedness.

OTOH, incurring any debt with the intention of repudiating it in bankruptcy should be regarded as fraud, so there's that.

[P Brooks]

incurring any debt with the intention of repudiating it in bankruptcy should be regarded as fraud, so there's that.

Isn't there also an exclusion period, to reduce the temptation to raise debt prior to filing?

[Attorney]

Basically, there's a 90-day look-back period (1 year for insiders). The standard for showing that transactions were impermissible preference payments (i.e., preferring certain creditors to others) is easier to satisfy if a transaction occured during the look-back period. But there's not a blanket exclusion.

[hmm]

I always found lawyers taking credit cards as payment for bankruptcy work hilarious.

[prolefeed]

Lawyers actually do that? Seems like cash would be the only acceptable means of payment for a client contemplating bankruptcy.

[Tulpa]

Huh? If the client doesn't pay the credit card bills, the merchants still get paid. It's the credit card company that gets screwed.

[Tulpa]

But the signing of the lease is incurring debt, the lease obligation.

IANAL, but this sounds like bullshit. A lease agreement is considered to be "debt"? Doesn't that mean that ordering cable, setting up an account with the electric company, etc are also considered "debt"?

[Shelby]

Why, yes, yes it does. See Scalia, supra.

[Mary Stack]

"Where is the prohibition of stupid laws in the Constitution?" The line drew laughter. Now Appearing at the Comedy Club Jus..tice Scalia

[Declaring Personal Bankruptcy]

Thanks??..! for your advice regarding bankruptcy??.its useful for everyone?!!!!!!!!!!!