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Lawsuit Challenges New Bankruptcy Law

By Martin H. Bosworth
ConsumerAffairs.com

November 16, 2005

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A Minnesota law firm has filed a legal challenge to the new bankruptcy law, claiming that it unnecessarily restricts the ability of bankruptcy attorneys to interact with their clients, and violates both the First and Fifth Amendments of the Constitution.

Robert Milavetz and Barbara Nevin, of the Milavetz, Gallop, and Milavetz firm, issued a complaint for a declaratory judgment against the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in U.S. District Court in Minneapolis on Nov. 14th.

The complaint alleges that the BAPCPA's rules regarding "debt relief agencies" are so vaguely worded that attorneys are also included under the rules, which may limit their ability to advise their clients on how to proceed with bankruptcy petitions.

In their argument, Milavetz and Nevin contend that the BAPCPA specifically prohibits any sort of "debt relief agency" advising their client to incur more debt while "contemplating" bankruptcy, or to "pay an attorney or bankruptcy petitioner fee or charge for services" in the course of their duty.

Following this logic, they argue, they cannot ask their own clients to pay them, nor can they advise them to make any kind of payment for services that might cause a debt.

Milavetz and Nevin say this "chills attorneys' federally protected rights and ethical obligations to properly advise and counsel their clients." This would deprive the lawyers of their First Amendment right to free speech, and their clients of their Fifth Amendment right to prevent their loss of property without due process.

Nathalie Martin, resident scholar at the American Bankruptcy Institute (ABI), says the complaint is the result of "overly broad language" used by the bankruptcy law's authors.

"There were many debtors' lawyers and consumer bankruptcy attorneys who didn't know what they were doing," she said. "In attempting to eliminate bad practices, [the Senate] drafted this so broadly that it hurts the good guys as well."

One bankruptcy court judge has already held that attorneys should not be considered "debt relief agencies." Judge Lamar Davis of the Georgia U.S. District Court believed "[I]f Congress meant to ensnare attorneys in the thicket of [the new bankruptcy regulations], it would have used the term 'attorney' and not 'debt relief agency.'" Milavetz and Nevin referred to Davis' decision in their complaint.

The new bankruptcy law has come under heavy fire for being too punitive and restrictive towards consumers, particularly in terms of the heavy paperwork and filing requirements it involves. Martin says that clients filing for bankruptcy themselves, or relying on petition preparers to do it for them, are taking a huge risk.

Some parts of the new law have already been waived due to potential problems. The Justice Department temporarily waived bankruptcy filing requirements for victims of Hurricane Katrina, as they would have been unable to file properly due to the loss of personal documents and records from the storm.

Members of Congress in both houses had introduced bills designed to ease many of the filing rules for victims of Katrina, but House Judiciary Committee chairman F. James Sensenbrenner refused to hold a hearing on the matter.

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