Blog sponsored by Bankrupt-Law.com


Pamela Yip
11:26 PM CDT on Sunday, August 6, 2006
Consumer attorneys have scored a significant victory against the new
bankruptcy law.
A federal judge in Dallas ruled recently that a provision of the law is
unconstitutional because it prevents lawyers from giving their best advice
to clients in financial distress.
Critics of the Bankruptcy Abuse Prevention and Consumer Protection Act say
the law, which went into effect last fall, caters to the credit card
industry while putting unnecessary and harsh burdens on consumers who
legitimately need relief from crushing debt loads.
Susan B. Hersh, a Dallas bankruptcy attorney, filed suit to challenge a
provision of the law that forbids an attorney from advising a client to take
on additional debt before a bankruptcy filing.
The provision was intended to discourage unscrupulous bankruptcy filers from
taking on debt with the expectation that it will be erased in the bankruptcy
case.
U.S. District Judge David C. Godbey ruled the provision "was facially
unconstitutional."
"Rather than changing the system to close the loopholes or penalize those
who take on such debt, Congress ... enacted a prophylactic rule, banning the
bankruptcy attorneys from advising their clients to take on additional debts
'in contemplation' of bankruptcy," Judge Godbey said.
"Without addressing all the complexities of the bankruptcy law, it seems
quite possible that sometimes taking on more debt could be the most
financially prudent option for someone considering bankruptcy."
Examples include refinancing a loan to get a lower interest rate and getting
a car loan so a debtor has the means of getting to a job, Judge Godbey said.
Thus, the provision in the law prevents lawyers from "advising clients to
take actions that are lawful" and "unconstitutionally restricts Hersh's
speech," the judge ruled.
Ms. Hersh said in an interview that the provision in the law is such an
"arcane restriction on the attorney-client relationship that it was just
absurd."
'Like a thief'
Overall, the bankruptcy law "made everybody out to being a crook, liar and
thief," Ms. Hersh said.
"It treats everybody almost like a criminal when the majority are just
unfortunate," Ms. Hersh said. "What they need to be able to do is to move on
so they can rejoin the economy and the credit industry."
The provision was overly broad, said Howard Marc Spector, Ms. Hersh's
attorney.
As a lawyer, he said, "They're paying me to draw these fine legal
distinctions. But in this particular situation, there is no distinction. All
advice regarding borrowing is illegal."
And the provision was unnecessary to boot, he said.
"The law says you can't discharge debts procured through fraud," he said.
Formal ruling pending
Judge Godbey hasn't issued a final judgment in the case, so for now the law
is technically still in effect, the lawyers said. And even when there is a
final judgment, the federal government can appeal.
"It is obviously a ruling that's still under review, and we've not made any
determination of what our next step will be," Justice Department spokesman
Charles Miller said.
Meanwhile, the Connecticut Bar Association and the National Association of
Consumer Bankruptcy Attorneys have filed a lawsuit challenging the same
provision that Ms. Hersh did.
Ultimately, Mr. Spector said, he hopes consumers can "go back to their
bankruptcy lawyer, and rather than getting some double talk about what the
bankruptcy lawyer can tell them to do, they can rely on the fact that their
lawyer can give them all of the answers to their problems, not just part of
the answers."
E-mail pyip@dallasnews.com