The U.S. Supreme Court recently ruled that attorneys are debt relief agencies pursuant to Section 101, but a bankruptcy attorney or a "debt relief agency" can tell an individual to incur more debt as long as there is a valid reasoning for doing so. Basically, an attorney can not tell a client to incur debt just because he or she is about to file for bankruptcy.
The plaintiffs in the case were a law firm and and a few of their clients. They asked that the Court rule that the "Debt Relief Agency" language in the Bankruptcy Code did not apply to them. They argued that attorneys are not debt relief agencies and if they are, that Section 526(a)(4) and 528(a)(4) are unconstitutional as to attorneys.
The district court agreed with the Plaintiffs and ruled that the Debt Relief Agency language did not apply to attorneys and further that Section 526(a)(4) and 528(a)(4) were unconstitutional. The 8th U.S. Circuit Court of Appeals disagreed with the District Court and ruled that attorneys are debt relief agencies but agreed that Section 526(a)(4) was unconstitutional. The Supreme Court ruled that attorneys are debt relief agencies and that the limitation on advice found in 526(a)(4) was constitutional.
Focusing on 526(a)(4), which prohibits debt relief agencies from advising their clients to incur debt before filing for bankruptcy, the court suggested that it may be ok for an attorney to advise their client to incur debt before filing for bankruptcy as long as the the incurring of debt is not considered an abuse or misconduct of the debtor. Example - an attorney could not tell their client to run up their credit cards or obtain a loan to pay off the attorney fees right before the case is filed. Further, an attorney probably could not tell their client to go out and finance an expensive car right before filing so that the client would qualify under the means test for Chapter 7. These types of activities could result in a violation of Section 526(a)(4).
It now appears that there are times that an attorney could tell a client to incur debt on the eve of bankruptcy without violating 526(a)(4). I can think of a few instances that could meet this test. One would be an attorney advising a client to purchase a car right before filing for bankruptcy because he or she did not have a car or because their old car would not last for 3 -5 years in a chapter 13. Another example would be advising a client to refinance on their home right before filing a Chapter 7 or Chapter 13 bankruptcy.
The Supreme Court's ruling did not provide the outcome that most debtors attorneys were looking for, but it at least cleared up some of the confusion about what to advise clients before filing for bankruptcy. Basically, I would use the smell test. If advising a client to incur debt smells bad and looks bad, then it probably will be violating the code. If it is benefiting all parties and passes the smell test, then it is probably ok.
Brian Limbocker
Limbocker Law Firm, LLC
2470 Windy Hill Road SE Suite 300
Marietta, GA 30067
Phone: 770-933-5355
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