Bankruptcy law violates lawyers' free speech, says court

WASHINGTON (9/8/08)—A provision in the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act that prohibits lawyers from advising clients to take on more debt prior to filing for bankruptcy protection has been struck down by a federal appeals court in St. Louis, Mo.

The 8th U.S. Circuit Court of Appeals, ruling 2-1, concluded that attorneys who provide bankruptcy assistance to debtors are debt-relief agencies as defined under the Bankruptcy Code. In addition, the court also concluded that the particular section of the Code that restricts debt-relief agencies from advising potential debtors about incurring additional debt prior to filing bankruptcy is unconstitutional as to attorneys.

Calling credit unions' attention to last week's ruling, Mike McLain, Credit Union National Association (CUNA) assistant general counsel and senior compliance counsel, said the ruling underscores the need for credit unions to continue working with their members who may be facing financial hardships by continuing to offer debt consolidation loans and working with members to lower payments and interest rates on existing loans rather than file bankruptcy. "There are times when it will be in a member's interest, for example, when he or she is facing the threat of bankruptcy, to consolidate debt at a lower interest rate and with lower payments, and credit unions can help with that," McLain said.

He said the court ruling will make it likely that more consumers get similar advice from their attorneys. However, in some instances debtor's attorneys may advise their clients to skip certain loan payments or to restructure their debts in a manner that may be harmful to credit unions.

To protect themselves, McLain said, credit unions must be aware of the laws and actions they can pursue before a member files bankruptcy as well as their rights and the actions they can pursue under bankruptcy law after a member files bankruptcy.

The court ruling applies to the following states: North Dakota, South Dakota, Nebraska, Minnesota, Iowa, Missouri, and Arkansas.

courtesy of cuna.org