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Supreme Court to Hear Case Challenging Bankruptcy Reform Act's 'Gag Rule' Provision

June 25, 2009

During its next term, the U.S. Supreme Court will hear a case very important to Irvine bankruptcy attorneys like us. As New York Times columnist Adam Liptak reported June 22, United States v. Milavetz, Gallop & Milavetz challenges a provision of the sweeping 2005 changes to consumer bankruptcy that restricts the advice bankruptcy lawyers can give to their clients. As Liptak observes, the issues involved are more directly about free speech than bankruptcy -- but with so many Americans facing financial problems right now, bankruptcy issues are highly relevant.

The challenge mainly concerns a provision of the law that seems to say bankruptcy attorneys cannot tell their clients to take on more debt before formally filing for bankruptcy. According to Liptak, it was intended to prevent attorneys from telling their clients to take on lots of debts right before bankruptcy, with the goal of having it forgiven so they won't have to repay it. This is an acknowledged and illegal abuse of the bankruptcy system -- but it was already illegal (and unethical) for lawyers to advise clients to break the law. Because this provision is so broadly written, the column said, it could also criminalize attorneys for advising their clients to take on perfectly legal debt, such as taking out a low-interest-rate loan to pay off credit card bills.

The federal government has argued that the law shouldn't be overturned because it wasn't intended that broadly. The Fifth Circuit Court of Appeal agreed, but the Eighth Circuit did not. Those cases were consolidated into the case the Supreme Court will hear. The lawyer bringing the challenge, Robert Milavetz of Minnesota, would also like to challenge a provision of the bankruptcy law that requires bankruptcy law firms to advertise themselves as "debt relief agencies," a phrase he finds derogatory and believes is intended to discourage advertising by consumer bankruptcy lawyers.

As you might imagine, our Downey bankruptcy lawyers agree strongly that federal law should not restrict our ability to give our clients advice that's otherwise legal and ethical. It's not difficult to think of reasons why it might be smart for a consumer headed for bankruptcy to take on additional debt. In fact, though debt is not desirable for people facing bankruptcy, it can also be a tool to help them get out of it -- refinancing a home might be one example. Because advising clients to abuse bankruptcy law is already illegal, it's hard to see what compelling interest the federal government has to regulate the attorney-client relationship. We also believe the "debt relief agency" requirement is misleading. Though we are happy to work with ethical non-lawyer debt relief companies, we are not one of them as they are traditionally understood -- we are a Rosemead bankruptcy law firm.

Howard Law LLP counsels people throughout Southern California who are considering bankruptcy as a way to control substantial and growing debts. We don't just file the paperwork for our clients; we start each case by reviewing their financial lives and counseling them on whether bankruptcy is right for them. If it's not, we may still be able to help clients with debt settlement services or mortgage loan modifications. If it is, we can get the Chapter 7 or Chapter 13 bankruptcy process started right away, stopping the unpleasant phone calls and letters from creditors -- and eventually giving clients a fresh start.

If you feel trapped by debt and you're ready to get help, you should contact Howard Law right away for a free, confidential consultation. You can reach our main Anaheim office toll-free at 1-800-872-5925 or contact us via email.