Supreme Court to Decide Bankruptcy Advice Case

June 9, 2009

The Supreme Court said Monday that it would decide the constitutionality of a section of the U.S. bankruptcy code that barred attorneys from advising clients to take on more debt while contemplating a bankruptcy filing.

The high court agreed to hear a U.S. Justice Department appeal defending as constitutional a provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The appeal said Congress adopted the reforms to target abuse of the bankruptcy system encouraged by lawyers.

The section at issue prohibited bankruptcy professionals like attorneys from giving their clients advice about incurring more debt before filing for creditor protection. Such debt could include mortgages or student loans.

The Minneapolis-based bankruptcy law firm Milavetz, Gallop & Milavetz PA, two of its attorneys and two prospective clients sued in 2007. The lawsuit argued that the law violated constitutional free-speech rights under the First Amendment.

A U.S. appeals court based in St. Louis agreed and struck down that section of the law as unconstitutional. It ruled the law prevented lawyers from fulfilling their duty to clients to give them appropriate and beneficial financial advice.

The appeals court said a client contemplating bankruptcy might benefit from refinancing a home mortgage to lower monthly mortgage payments, freeing up funds to pay off other debts.

The Supreme Court is expected to hear arguments in the case and then issue a decision during its upcoming term that begins in October. (Reporting by James Vicini, Editing by Tim Dobbyn)

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