Supreme Court To Hear Important Consumer Bankruptcy Cases

Published on Jun 15, 2009 at 1:44 pm in General Blogs.

During the last ten days, the Supreme Court has granted certiorari in two important consumer bankruptcy cases, the outcomes of which will have far reaching implications for debtors’ attorneys and those with student loans filing for Chapter 13.

In the first case, U.S. v. Milavetz, Gallop & Milavetz, No. 08-1119, the Court will determine whether the 2005 amendments to the Bankruptcy Code, known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), requires attorneys, among other things, to tell all clients and potential clients in any advertising or discussions that they are “debt relief agencies.” BAPCPA also requires attorneys within five days of first providing any bankruptcy assistance services to a potential client to execute a written contract explaining services and fees. According to debtors’ counsel, this law is overly restrictive and prevents clients from having sufficient time to contemplate their options and consult with family and friends after receiving legal advice, and is impractical in light of the number of client calls and the need to provide advice over the phone.

The case also deals with whether certain prohibitions on attorneys from rendering or giving certain prefiling advice to clients to do such things as incur additional debt when a person is contemplating bankruptcy violates an attorney’s First Amendment rights and the ethical state laws that require attorneys to zealously represent their clients. The 8th U.S. Circuit Court of Appeals struck down that portion of the 2005 amendment and said the provision was overbroad and “would include advice constituting prudent pre-bankruptcy planning that is not an attempt to circumvent, abuse, or undermine the bankruptcy laws.” The Obama administration is challenging the ruling, arguing that the 8th Circuit’s ruling was too broad in scope and that the provision is not unconstitutional since a more narrow reading of the law forbids only advice that a client take on new debt on the eve of bankruptcy with the intent of abusing the bankruptcy system.

The federal circuit courts have split on the issue. Several similar cases are making their way through the courts but will likely be resolved upon decision in the instant case.

In the second case, United Student Aid Fund v. Espinosa (08-1134), the Court shall decide whether an individual who files a Chapter 13 may discharge student loan debt without showing that the debtor will experience undue hardship if required to pay the loan. The federal circuits have ruled differently on this issue and the Court’s decision will resolve the split in the circuits. In Maryland and the Fourth Circuit, a showing of undue hardship is required before a student loan my be discharged. Practically speaking, a showing of undue hardship is rarely successful in all but the most extreme cases of financial distress, at least in our Circuit.



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