I knew about Section 228 which requires attorneys to notify people that they can represent themselves if they are stupid enough and desperate enough to consider that option. I also knew about mandatory credit counseling, which is a bit like "mandatory abortion counseling", but for debtors, because it provides deceptive information from a source with an incentive to act in the creditor's interests rather than yours:
[C]redit-counseling services, many of which get a portion of their financing from banks and credit-card companies, are in the business of assisting you in repaying your debt, not advising you to pile on more, so it's unlikely a consumer would get this kind of advice, says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies in Fairfax, Va. "There are circumstances, obviously, when a consumer in order to continue their livelihood may need to [borrow], and we may explain that that option exists, but we would never suggest that they do so," he says.
But the big issue is this one:
Under the new rules, anyone designated a debt-relief agent won't be allowed to advise their clients to take on more debt.
"A debt relief agency shall not advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title," the law says.
At first blush, it sounds perfectly reasonable: If consumers are so deeply in debt that they need to resort to bankruptcy protection, more borrowing can make a bad situation worse.
Mr. Tassey of the Coalition for Responsible Bankruptcy Laws, says the provision is consistent with other Bankruptcy Code "anti-loadup" rules, "to discourage debtors from taking on vast amounts of debt in anticipation of filing for bankruptcy."
But there may be a time when borrowing more money is necessary to help clients get back on their feet financially, says Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys in Washington, D.C.
For example, he says, having access to a reliable car may be essential for an unemployed worker to find a job. If your current clunker is on the verge of an expensive breakdown, it might be prudent to borrow to buy a new or late-model car now, before the bankruptcy filing destroys your credit score, he says.
Under the new law, however, "an attorney would be prohibited from advising clients about incurring debt, even though it may be perfectly legal or lawful for them to do it," Mr. Sommer says.
It remains to be seen how regulators will enforce this provision without violating attorney-client privilege.
This analysis holds true because:
a debt-relief agent could be a financial planner, certified public accountant, or even a divorce lawyer, anyone who provides bankruptcy advice. But the category also may include so-called bankruptcy mills – businesses such as paralegal services that aren't authorized by the government to practice law, yet offer advice on the bankruptcy process and prepare bankruptcy petitions for people to file on their own.
Thus, even if taking about another loan could free you of five years of paying you entire discretionary income to creditors, and instead allow you to immediately discharge your debts with no payments at all, a result not infrequently possible under the new law (indeed, my prior posts at this site point out some situations when this is the case), attorneys will be violating the bankruptcy code if they tell their clients to do so.
Now, a similar provision related to attorenys who assist in Medicaid planning a few years ago was held unconstitutional by a New York Court, but any bad rule poses risks, and even if the law eventually ends up protecting attorneys and accountants who have a privilege to keep their conversations with the clients secret in the face of subpeonas, the same protections might not end up applying to people like financial planners who are required not to blab secrets of their clients, but are subject of disclose everything they have said if faced with a subpeona. Thus, even if attorneys eventually escape being forced to give advice that harms a client after long litigation, others may still be forced to do so, and that is fundamentally unjust. The law is not a secret, and I sincerely hope that the courts find that even ordinary people have a right to discuss one's rights under it in public.
In the mean time, if you must go bankrupt, ask your lawyer if he or she is willing to defy that provision of the law, 11 United States Code Section 526(a)(4), for which the attorney could face an injunction barring that attorney from rendering such advice (under threat of imprisonment for contempt of court if the order is not followed) or "an appropriate civil penalty" with no dollar limitation, and damages to presumably creditors harmed by the additional debt, and attorneys' fees. (It would not itself, be a crime, however).
I suspect that the bankruptcy bar will be bringing litigation over this provision in short order, seeking an injunction on the grounds that it chills their first amendment rights and their clients' right to legal representation.
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