Supreme Court Agrees to Hear Challenge to Bankruptcy Reform Law Provision

The U.S. Supreme Court Monday agreed to hear arguments in a case that challenges a controversial provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

At issue is a section of the law that prohibits “debt relief agencies” from encouraging clients to take on more debt in advance of a bankruptcy filing. The provision was intended to prevent knowledgeable advisors from getting consumers deeper into debt so that a judge might rule favorably in a bankruptcy hearing.

The bill includes bankruptcy attorneys in its definition of “debt relief agencies.”

A law firm based in Minnesota -- Milavetz, Gallop & Milavetz – along with two consumer plaintiffs, challenged the provision last year on First Amendment grounds and won its suit against the government when a U.S. appeals court based in St. Louis agreed, striking down the language as unconstitutional.

The appeals court said that the language was overly broad, and "would include advice constituting prudent pre-bankruptcy planning that is not an attempt to circumvent, abuse, or undermine the bankruptcy laws." The decision noted that some consumers may legitimately take on additional favorable debt, such as refinancing a home to a lower monthly payment, in advance of a bankruptcy filing. Debt relief agencies, or attorneys, should be free to offer that advice to clients, the court said.

The Obama administration will argue before the Supreme Court on appeal that the provision can be viewed as narrow enough to allow attorneys and debt relief agencies to freely advise their clients. The U.S. will say that the language should be interpreted to only forbid advice that a client take on new, additional debt in advance of a bankruptcy filing.

The Supreme Court accepted the case Monday and will hear arguments during its upcoming term which begins in October.

The cases Milavetz, Gallop & Milavetz v. U.S. and U.S. v. Milavetz, Gallop & Milavetz were consolidated into one case to be heard before the high court.