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Bankruptcy Advice

High court offers guidance for lawyers

Barbara Nevin, a lawyer near Minneapolis, has been handling bankruptcy cases for almost a quarter of a century. But in the last few years, she’s noticed a change. Her clients are older than they used to be—about one-third are older Americans, she says.

Some have lost their jobs; some face huge medical bills. But as Nevin counsels her clients, she often runs into the same problem: a section of the 2005 bankruptcy reform law that prohibits lawyers from advising their clients to incur more debt if they are considering filing for bankruptcy.

There’s broad agreement that someone about to declare bankruptcy shouldn’t put a big-screen television set and a pricey island vacation on their credit card before asking a court to wipe out all of their debt–and attorneys shouldn’t encourage such behavior. But bankruptcy lawyers and consumer advocates say there are times when incurring some additional debt makes good financial sense for both debtors and creditors, like getting a car fixed so you can get to work or signing a lease for a less expensive apartment.

“You’ve got a situation where you want to give your clients the best advice, and there’s a new law that seems to somehow restrict it,” says Alan Milavetz, whose father started the Twin Cities firm where he and Nevin now work.

They aren’t alone in their concern. A court document prepared by the Connecticut Bar Association and the National Association of Consumer Bankruptcy Attorneys contains heart-wrenching examples of how some lawyers have felt constrained by the law. One reported discovering that a client was eating cat food to save money. “Because of the restrictions [in the law], I simply don’t know what to tell people who are struggling to meet even their basic necessities,” the lawyer wrote.

Another lawyer described a meeting with a married couple who were contemplating filing for bankruptcy. The wife had recently found a lump in her breast that tests showed was probably malignant and would require surgery, the attorney reported. Still, the woman was considering going without treatment because of the cost.

“I had a client who could die if she did not get prompt medical treatment, and I couldn’t say anything to her about it or discuss her financial options,” the lawyer reported.

‘A valid purpose’

Milavetz’s firm went to court to fight the law, arguing, among other things, that the provision violates the First Amendment rights of attorneys to free speech. The Supreme Court issued an opinion on March 8 in Milavetz, Gallop & Milavetz v. United States, leaving Nevin and her firm with what most observers agreed was a mixed result.

A unanimous ruling written by the high court’s newest member, Justice Sonia Sotomayor, confirmed that the 2005 law, which was intended to make it more difficult to declare bankruptcy, applies to lawyers who do bankruptcy work. That was the position taken by the U.S. government in its defense of the legislation, though the law’s text only mentions “debt relief agencies.” The justices also rejected the claim that the restrictions in the law violate the First Amendment.

But the court clarified the question of just what kind of advice lawyers may give their clients, ruling that the law should be read only as a ban on discussions of new debt that would constitute an abuse of the bankruptcy system, not debt “for a valid purpose.”

The ruling makes it clear to attorneys that, “short of advising their clients to commit fraud,” they can do some financial planning and suggest some spending before proceeding to bankruptcy, says Robert Lawless, a law professor at the University of Illinois and a bankruptcy specialist.

A footnote in Sotomayor’s ruling goes into fine detail about exactly what the justices had in mind: “[A]dvice to refinance a mortgage or purchase a reliable car prior to filing because doing so will reduce the debtor’s interest rates or improve his ability to repay is not prohibited,” because the purpose of taking such actions is to improve the debtor’s financial prospects, not to game the system. Advising clients to go into debt to buy groceries, pay medical bills, or “other purchases reasonably necessary” is also permitted.

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