Bankruptcy Act Limiting Lawyer Advice Under Fire

In these days of financial turmoil, bankruptcy lawyers seeking to advise clients on dealing with burdensome debt can take comfort: The first federal appeals court to rule on a controversial 2005 bankruptcy reform statute has shot down a provision that limits what lawyers may say.

In Milavetz v. U.S., a di­vided panel of the 8th U.S. Circuit Court of Appeals at St. Louis last September invalidated a section of the Bank­ruptcy Abuse Preven­tion and Con­sumer Protection Act that prohibited “debt relief agencies”—which include attorneys—from advising clients to “incur more debt in contemplation” of filing bankruptcy.

Judge Lavenski R. Smith called that part of section 526(a)(4) “unconstitutionally overbroad” and a violation of the First Amendment. The pro­vision “prevents attorneys from fulfilling their duty to cli­ents to give them appropriate and beneficial advice,” Smith wrote in his majority opinion.

“If you have financial troubles and are contemplating bankruptcy, your attorney can now provide financial planning advice to assist in avoiding bankruptcy or prevent recidivism in the bankruptcy system,” says Robert J. Milavetz, president of the Edina, Minn., law firm Milavetz, Gallop & Milavetz, which filed the suit.

Continue reading the full story online in the January issue of the ABA Journal.