ABA Banking Journal - April 2010 - (Page 54)
legal issues | by greg taylor
Can they say that?
Supreme Court weakens limits on pre-bankruptcy debt advice
Overshadowed by the current regulatory reform debate, the U.S. Supreme Court last month issued a decision in Milavetz, Gallow & Milavetz v. United States that put to rest a constitutional challenge to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (11 U.S.C. § 526(a)(4)). The High Court took up one of the more divisive provisions of BAPCPA, the rule that prevents “debt relief agencies” from counseling individuals to take on additional debt prior to filing for bankruptcy. The Court found it necessary to gut this well-intended provision to save it from the litigation purgatory reserved for constitutionally questionable legislation. The provision—section 526(a)(4)—is a blanket prohibition on advising a client to incur additional debt in advance of filing for bankruptcy. It was enacted to curb one of the most common abuses of the bankruptcy system: individuals who make purchases on credit immediately prior to filing with the expectation that the debt would be subsequently discharged. The ban was also intended to check an anticipated increase in individuals “loading up” on debt prior to filing in order to offset income under the law’s “means test.” Writing for a unanimous Court, Justice Sonia Sotomayor avoided a First Amendment battle by narrowly construing BAPCPA’s restrictions. The Court concluded that the law does not create a blanket ban on all advice to take on more debt, as is suggested by a literal reading of the statute. First, the Court noted that the provision’s application was limited to situations where an attorney or other professional actually advises a client to incur more debt. While certain advice is prohibited, professionals “remain free” to talk fully and candidly about incurring additional debt in contemplation of a bankruptcy filing, without actually advising a client to do so. Second, and more significantly, the Court declined to interpret BAPCPA as banning all advice to take on more debt. Rather, it prohibits such advice when “the impelling reason for the advice is the anticipation of bankruptcy.” Under this formulation, BAPCPA permits attorneys and others to advise clients to take on additional debt where doing so has a “valid purpose.” The unresolved question, of course, is what constitutes a “valid purpose.” The Court reaffirmed the obvious point that advice to “load up” on debt with the expectation of obtaining its discharge is “conduct that is abusive per se.”
54 | ABA BANKING JOURNAL | april 2010
Narrow view turns clock back to ’05
In a footnote, the Court gave examples of the types of advice to a client that would not run afoul of BAPCPA. Advice to refinance a mortgage or purchase a reliable car is not barred, for example, because doing so “will reduce the debtor’s interest rates or improve his ability to repay.” More subjectively, advice to incur debt for purchases “reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor” is also permissible. The Court’s narrow construction turns the clock back to 2005, and will undoubtedly embolden debtors and their counsel. n
Greg Taylor is associate general counsel, ABA. email@example.com
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