Pamela Yip

Yip writes about
personal finance

The Dallas Morning News.
Monday, August 7, 2006

A federal judge in Dallas ruled recently that a provision of the bankruptcy 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 of 2005, say the law caters to the credit card industry while putting unnecessary and harsh burdens on consumers that legitimately need relief from crushing debt loads.

Susan B. Hersh, a Dallas bankruptcy attorney, filed the lawsuit 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 "as 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.

Overall, the bankruptcy law "made everybody out to being a crook, liar and thief," Hersh said.

"It treats everybody almost like a criminal when the majority are just unfortunate," 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, Hersh's attorney in the suit challenging the law.

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."

The provision was unnecessary to boot, he said.

"The law says you can't discharge debts procured through fraud," he added.

Judge Godbey hasn't issued a final judgment in the case, so, for now the law is technically still in effect, the lawyers said. Also, 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 Hersh did.

Ultimately, 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