Bankruptcy lawyers can advise clients on debt-court

By Chelsea Emery

NEW YORK, Sept 5 (Reuters) - The federal appeals court in St. Louis declared unconstitutional a section of the U.S. bankruptcy code that prohibits attorneys from advising their clients on taking on more debt while contemplating a bankruptcy filing, according to court filings.

Bankruptcy law firm Milavetz, Gallop & Milavetz PA sued the United States in 2007, saying that a portion of the landmark Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 unconstitutionally applied to bankruptcy attorneys.

The amendment in dispute prohibits debt-relief agencies from giving clients advice about taking on more debt before filing for creditor protection. Such debt could include mortgages or student loans.

"Under the Bankruptcy Act as written by Congress, clients weren't free to receive good, solid, honest advice related to obtaining new debt, so the Court of Appeals ruled that section unconstitutional," said Robert Milavetz, the law firm's managing partner. "A lawyer has an obligation to tell a client what the consequences of new debt might be."

The Minneapolis-based firm argued that attorneys should not be included in the definition of debt-relief agencies and that any law prohibiting attorneys from advising clients on all aspects of their financial rights violated the First Amendment.

The court said that while attorneys are considered debt-relief agencies, they are able to advise clients on debt since some debt is vital for families to support themselves, according to the ruling, filed Sept. 4 at the U.S. Court of Appeals for the Eighth Circuit.

The appellate decision said "it may be in the assisted person's best interest to refinance a home mortgage in contemplation of bankruptcy to lower the mortgage payments. This could free up additional funds to pay off other debts and avoid the need for filing bankruptcy all together." (Reporting by Chelsea Emery; Editing by Steve Orlofsky)