It might seem more than obvious, but debtors shouldn’t load up their credit cards or take on massive new debts right before they file a bankruptcy case. Doing so risks losing their chance for a discharge, allegations of fraud, and worse.
But an interesting side issue made it to the Supreme Court last week: Can a lawyer advise his client about taking on debts before bankruptcy?
Think about it: While no good bankruptcy lawyer would advise his client to engage in fraud, there might be some situations calling for “new debt” before a case is filed. A loan might be refinanced, for example, to get a debtor a lower mortgage payment. This is technically a new debt.
The Bankruptcy Reform Act in 2005 tried to outlaw lawyers from discussing any new debts with their bankruptcy clients. Many attorneys thought this could be an infringement on their free speech rights.
But the Supreme Court ruled that it is not a violation of the law to discuss with clients the merits of loans that could help them, like an advantageous refinancing. The reform act only tells attorneys that they must not advise clients on taking on new debts that they are actually going to try to discharge.
The name of the case they decided is Milavitz v. United States.