Bankruptcy lawyers in California, and across the country, appear to have mixed feelings about being grouped with debt relief agencies under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

That was the Supreme Court's ruling this week in the case of Milavetz, Gallop & Milavetz, P.A. v. United States.

Under the 2005 act, debt relief agencies may not advise consumers to take on more debt in preparation for filing bankruptcy. The worry here is that consumers would be able to, essentially, game the system by incurring debt that would then be wiped out in the event of a bankruptcy.

The question, posed by the bankruptcy attorneys who brought the case, was whether or not the stipulation applied to bankruptcy lawyers and, if so, whether it violated the First Amendment right to free speech. Further, the plaintiffs questioned whether or not such a restriction would affect the client/attorney relationship by disallowing attorneys to give the best advice possible to their clients.

The Supreme Court unanimously agreed that the stipulation does apply to bankruptcy attorneys offering services to consumers considering, or going through, bankruptcy filings. Still, the Court clarified the point and confirmed that attorneys could advise clients to take actions that incurred debt, but only for a "valid purpose."

Essentially, the ruling bars bankruptcy lawyers from advising clients to incur debt for the sole purpose of taking advantage of bankruptcy law. For some lawyers, this clarification simply reinforced ethical standards already in place.

Others were less pleased and, regardless of where an attorney fell on the issue, most agreed that the ruling leaves the door open for future questions and litigation around the issue.

Related Resources:

  • High Court Ruling that Lawyers are 'Debt Relief Agents' Gets Mixed Reaction (Wisconsin Law Journal)