“Gag Rule” Attorney-Client Section of Bankruptcy “Reform” Declared Unconstitutional
Although the ruling on the totality of the actions brought by the complaining attorney was much narrower than would have liked, the court did one very important thing — It threw out the heavyhanded and patently offensive restrictions on attorney-client communications that were included in the “Bankruptcy Abuse Prevention and Consumer Protection Act” (BAPCPA).
From the American Bankruptcy Institute’s BAPCPA Blog (bolds are mine; paragraphing added by me for readability):
The court recognized that Congress passed BAPCPA to remedy abuse of the bankruptcy system, including debtors who improperly take on additional debt prior to filing with the intent of discharging it. Rather than closing loopholes or imposing sanctions for such conduct, however, Congress passed 526(a)(4) as a “prophylactic rule” banning attorneys from advising clients to take on additional debt in contemplation of bankruptcy. The court found this restriction overbroad, in that it prevents lawyers from advising clients to take actions that are lawful, and even in some instances, financially prudent.
For instance, a client might be well advised to refinance a mortgage at a lower rate to reduce payments or forestall, even prevent bankruptcy. A client also might be well advised to take on a secured debt, such as a car loan, that would survive bankruptcy, if it enabled the debtor to have transportation for work which would provide additional income. 526(a)(4) “prevents lawyers from giving clients their best advice.”
Indeed, the court found that such restrictions could also deprive the courts, as well as clients, of good counsel, by preventing lawyers from presenting options to their clients and ultimately the court. Thus, 526(a)(4) was overinclusive in that (1) it prevents lawyers from advising clients to take lawful actions; and (2) it extends beyond abuse to prevent advice to take prudent actions, and was held facially unconstitutional.
I can think of no similar attempt by Congress to gag one party in a professional relationship. It was a clear violation of free speech, and it’s good to see that a court saw it that way. I don’t know whether the ruling can be cited as a precedent nationwide, but it should certainly be a reference point.
Of course the gag rule was a bad idea, especially given the examples cited. But the point of the gag rule was to prevent BK attorneys from coaching their clients to incur additional debt in order to pass means testing and qualify for Chapter 7. Turns out it was unnecessary, since well over 90% of BK filers sail through means testing anyway.
Comment by Jeff — August 4, 2006 @ 3:35 pm