Professional-client speech and bankruptcy-related advice

[John]

Incurring debt in anticipation of a bankruptcy filing, e.g. running 
up credit cards balances that you INTEND to default on, is fraud. 
Debts incurred by fraud are not dischargeable in bankruptcy. Advising 
someone to do it -- as opposed to explaining (with a wink and a nod) 
the bankruptcy law's distinction between pre-petition debts 
(dischargeable) and post-petition debts (non-dischargeable) -- 
amounts to advising the client to commit fraud because he can get 
away with it.

Payments "for services performed as part of preparing for or 
representing a debtor in a case under this title" are administrative 
expenses of the bankruptcy estate under the bankruptcy code, and 
subject to judicial approval. If they are pre-paid, they not only 
escape judicial approval of the bankruptcy estate's administrative 
expenses, but are also probably subject to recovery by the bankruptcy 
estate as preferential payments (favoring one creditor over another). 
However, the attorney who collected them (as counsel for the debtor) 
is going to have a conflict of interest (as counsel for the estate in 
bankruptcy -- a separate legal entity) when it comes to recovering 
the preferential payment from himself on behalf of the estate. The 
creditors can force the issue, but it runs up their own legal 
expenses, as well as the estate's administrative/legal expenses. It 
doesn't happen because the wick (the cost of disqualifying counsel 
and recovering the excessive administrative expense) isn't worth the 
candle (the actual retainer minus the allowable administrative 
expense).

In short, I think this provision is not only constitutional, but goes 
without saying. It just draws bright lines.

The problem with the Bankruptcy Reform Act is that bankruptcy results 
from improvident lending decisions, and the BRA encourages creditors 
to make even more improvident lending decisions. "The problem [with 
the Bankruptcy Reform Act] is that credit card companies will have an 
even greater incentive to encourage recent bankruptcy filers to incur 
new debt, knowing that this debt will be safe from any possible 
bankruptcy discharge for a longer, eight-year period," Rao [staff 
attorney of the National Consumer Law Center] said. 
http://www.washingtonpost.com/wp-dyn/content/article/2005/04/14/AR2005041403169.html. 
The story reports that bankruptcy filers are inundated with new 
credit offers.

John Noble
Not a conlawprof
Washington DC


At 3:41 PM -0700 4/25/05, Volokh, Eugene wrote:
>	The newly enacted Bankruptcy Reform Act, S. 256, sec. 227(a)(4),
>bars debt relief agencies -- a category that includes lawyers -- from
>"advis[ing] an assisted person or prospective assisted person to incur
>more debt in contemplation of such person filing a case under this title
>or to pay an attorney or bankruptcy petition preparer fee or charge for
>services performed as part of preparing for or representing a debtor in
>a case under this title."  Unless I'm mistaken, incurring such extra
>debt is not prohibited -- only advising people to do is prohibited.  (If
>I am mistaken, please do correct me!)
>
>	Is this restriction constitutional?  (Many thanks to Prof. Gary
>Neustadter at Santa Clara, who has a forthcoming article that touches on
>this, for pointing this out to me.)
>
>	Eugene
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