Academic journal article ABA Banking Journal

Can They Say That? Supreme Court Weakens Limits on Pre-Bankruptcy Debt Advice

Academic journal article ABA Banking Journal

Can They Say That? Supreme Court Weakens Limits on Pre-Bankruptcy Debt Advice

Article excerpt

Overshadowed by the current regulatory reform debate, the U.S. Supreme Court last month issued a decision in Milavetz, Gallow & Milavetz v. United States that put to rest a constitutional challenge to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (11 U.S.C. [section] 526(a)(4)).

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The High Court took up one of the more divisive provisions of BAPCPA, the rule that prevents "debt relief agencies" from counseling individuals to take on additional debt prior to filing for bankruptcy. The Court found it necessary to gut this well-intended provision to save it from the litigation purgatory reserved for constitutionally questionable legislation.

The provision--section 526(a)(4)--is a blanket prohibition on advising a client to incur additional debt in advance of filing for bankruptcy. It was enacted to curb one of the most common abuses of the bankruptcy system: individuals who make purchases on credit immediately prior to filing with the expectation that the debt would be subsequently discharged. The ban was also intended to check an anticipated increase in individuals "loading up" on debt prior to filing in order to offset income under the law's "means test."

Writing for a unanimous Court, Justice Sonia Sotomayor avoided a First Amendment battle by narrowly construing BAPCPA's restrictions. The Court concluded that the law does not create a blanket ban on all advice to take on more debt, as is suggested by a literal reading of the statute.

First, the Court noted that the provision's application was limited to situations where an attorney or other professional actually advises a client to incur more debt. …

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