Lawyers Can't Tell Companies About-To-Be-Bankrupt To Take On More Debt

Companies getting ready to file for bankruptcy want all the advice they can get. And lawyers do not like to be told what they can and cannot advise.

Lawyers get their feathers ruffled because they believe they know what is best for their clients and their clients can take the advice and do with it what they will.

Second, it makes lawyers cringe because there’s that thing called the First Amendment which allows lawyers (and everyone else) to say what they will unless there some compelling state reason that they shouldn’t do so.

But the Supreme Court did indeed limit the advice lawyers can give to their clients today, and the compelling reason is that those anticipating bankruptcy should not take on extra debt just because they can.

Writing for the Court, Justice Sonia Sotomayor said:

As used in [the at issue bankruptcy protection act]…we think the phrase [“in contemplation of”] refers to a specific type of misconduct designed to manipulate the protections of the bankruptcy system…[W]e conclude that [the act] prohibits a debt relief agency only from advising a debtor to incur more debt because the debtor is filing for bankruptcy, rather than for a valid purpose.

Lawyers are part of the “debt relief” in this scenario.

We doubt this will have a huge impact on advice given to clients — after all, any decent bankruptcy lawyer should not be suggesting clients take on additional debt if they do not have some sort of “valid purpose.” And, we imagine, valid purpose will be something that will come to be defined over time.

The WSJ Law Blog discussed the rule and has a link to the opinion here.

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