Last week, a federal appeals court in St. Louis ruled that a provision in the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) is unconstitutional because it violates the free-speech rights of lawyers, preventing them from fully counseling their clients who may be considering filing bankruptcy.
The new bankruptcy law provision specifically stated that debt relief agencies were prohibited from counseling potential bankruptcy filers on accumulating additional debt to relieve their financial problems.
At issue was whether attorneys are considered "debt relief agencies", and, if so, if they were entitled to give legal advice to their clients that might include incurring more debt.
The 8th U.S. Circuit Court of Appeals in St. Louis said that lawyers were indeed "debt relief agencies;" however, the provision was unconstitutional as applied to them, according to the ruling.
It further stated that sometimes it might be beneficial for clients considering bankruptcy to acquire more debt, citing examples of a debtor who needs to buy a car to get to work or someone who could refinance their mortgage to receive a lower interest rate.
"There are certain situations where it would likely be in the assisted person's, and even the creditors', best interest for the assisted person to incur additional debt in contemplation of bankruptcy," said the ruling.
Although similar challenges to BAPCPA are making their way through lower court systems, the ruling is the first of its kind from a federal appeals court on the BAPCPA provision.
It is expected that this matter will be taken all the way to the U.S. Supreme Court.
A partial dissenter told The Wall Street Journal that the law should only ban legal advice that is "intended to abuse the protections of bankruptcy laws," thereby avoiding constitutional issues. A spokesperson for the U.S. Department of justice told the newspaper that the department is reviewing the decision.
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