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Justices Revive Rule on Firms’ Bankruptcy Advice

(CN) - Bankruptcy attorneys must identify themselves as "debt relief agencies" and can't advise consumers to rack up more debt before filing for bankruptcy, the Supreme Court ruled Monday, reinstating a ban on counsel aimed at exploiting bankruptcy protections.

The high court upheld the 8th Circuit's ruling that bankruptcy attorneys are "debt relief agencies" under federal law. This means that law firms must disclose this identity in advertisements with a statement such as, "We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code."

Attorneys must also abide by a regulation barring them from telling consumers to incur more debt before filing for bankruptcy, the high court ruled.

This part of the decision overturned the lower court's ruling that such a ban is too broad, as it bars a debt relief agency from telling a client "to incur any additional debt," even debt that doesn't abuse bankruptcy laws.

Congress had blocked this type of advice out of concern that consumers would "load up" on debt with the expectation that it would be discharged in bankruptcy.

"[I]t is hard to see how a rule that narrowly prohibits an attorney from affirmatively advising a client to commit this type of abusive prefiling conduct could chill attorney speech or inhibit the attorney-client relationship," Justice Sonia Sotomayor wrote for the court.

The ruling is a defeat for the law firm Milavetz, Gallop & Milavetz, one of its attorneys and two clients, who argued that the regulations violated the firm's First Amendment right to freely advise clients.

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