Sacramento Bankruptcy Lawyer Blog

When filing bankruptcy, the debtor may need to learn new vocabulary to keep up with the progress of his case:

ADVERSARY PROCEEDING: A lawsuit arising in or related to a bankruptcy case that is commenced by filing a complaint with the court.

ASSUME: An agreement to continue performing duties under a contract or lease.

CHAPTER 9: The chapter of the Bankruptcy Code providing for reorganization of municipalities (which includes cities and towns, villages, counties, taxing districts, municipal utilities, and school districts).

CHAPTER 20: An unofficial term describing the filing of a chapter 7 proceeding followed by a chapter 13. The chapter 7 eliminates unsecured debts while the chapter 13 handles continuing liens.

CLAIM: A creditor's assertion of a right to payment from the debtor.

CONSUMER DEBTS: Debts incurred for personal (as opposed to business) needs.

CONTESTED: Those matters, other than objections to claims, that are disputed but are not within the definition of an adversary proceeding.

CONTINGENT CLAIM: A claim that may be owed by the debtor. For example,where the debtor is a cosigner on another person's loan and that person fails to pay.

CURRENT MONTHLY INCOME: The average monthly income received by the debtor over the six calendar months before commencement of the bankruptcy, including regular contributions to household expenses from non-debtors and income from the debtor's spouse if the petition is a joint petition, but not including social security income and other payments made because the debtor is the victim of certain crimes.

DISCHARGE: A release of a debtor from personal liability for certain dischargeable debts identified in the Bankruptcy Code. A discharge releases a debtor from personal liability for dischargeable debts and prevents the creditors owed those debts from taking any action against the debtor to collect the debts. The discharge prohibits creditors from communicating with the debtor regarding the debt, including telephone calls, letters, and personal contact.

Continue reading "Bankruptcy Vocabulary - Sacramento" »

Chapter 7 bankruptcy is when a trustee is appointed to take over the debtor's property. Any property of value will be turned to money to pay creditors. If the debtor wants to keep property, he has to execute a reaffirmation. A debtor can receive a Chapter 7 discharge once every eight years. No one can make a debtor pay a debt that has been discharged, but a debtor can voluntarily pay any debt he wishes. A debtor does not have to sign a reaffirmation agreement to repay a debt.

Some creditors hold a secured claim. For instance, a lender holds a mortgage on a house or a lien on a car. A debtor does not have to pay a secured claim if the debt is discharged, but the creditor can take the property.

Even if a debt can be discharged, a debtor may have reasons why he wants to pay it. For example, a debtor may need to keep a car for transportation to work. To promise to pay that debt, a debtor must sign and file a reaffirmation agreement with the court. Reaffirmation agreements are voluntary.

Reaffirmation agreements can be canceled anytime before the court issues a discharge or within 60 days after the agreement is filed with the court, whichever gives the debtor the most time. The agreement will not be legally binding until the court approves it.

If a debtor reaffirms a debt and then fails to pay it, the debtor owes the debt the same as though there was no bankruptcy. The debt will not be discharged and the creditor can take action to recover any property where there is a lien or mortgage. The creditor can take legal action to recover a judgment against the debtor.

If the creditor becomes a judgment holder, and real estate is involved, with the judgment holder behind a bank loan or mortgage (deed of trust), ie, the judgment is after or junior to the bank, when the bank begins foreclosure on the debtor/borrower, the bank does not have to provide the creditor a notice of the trustee's sale. The creditor can be on the special request for notice list if there are surplus proceeds from an overbid. The form to receive notice is not on the Judicial Council website, but many title companies have a form.

Continue reading "Reaffirmation Agreement - Sacramento" »

At a 341 hearing, the Trustee will ask the debtor if he has read the Bankruptcy Information Sheet. Each debtor must read the Bankruptcy Information Sheet usually found in the waiting room at the Trustee's office.

The Bankruptcy Information Sheet tells the debtor that the debtor chooses the kind of bankruptcy that best meets his needs. The debtor may choose between:

• Chapter 7, where a trustee is appointed to take over the debtor's property. Any property of value will be sold to pay creditors. If the debtor wants to keep property, he has to execute a reaffirmation.

• Chapter 13, where the debtor keeps property, but must earn regular income and pay part of income to creditors. The court must approve a repayment plan and a budget. A trustee is appointed and will collect the payments, pay creditors, and make sure the debtor follows terms of the repayment plan.

• Chapter 12, which is like Chapter 13, but only for family farmers and family fishermen.

• Chapter 11, where the debtor may continue to operate a business, but creditors and the court must approve a plan to repay debts. There is no trustee unless the judge decides necessary; if a trustee is appointed, the trustee takes control of the business and property.

The Bankruptcy Information Sheet tells the debtor that if he already filed bankruptcy under Chapter 7, he may be able to change a case to another Chapter.

A bankruptcy may be reported on a credit record for as long as ten years. It can affect a debtor's ability to receive credit in the future.

The Bankruptcy Information Sheet explains that a discharge is a court order which states that a debtor does not have to pay debts. Some debts cannot be discharged. For example, a debtor cannot discharge debts for taxes; child support; alimony; student loans; court fines and criminal restitution; and
personal injury caused by driving drunk or under the influence of drugs. The discharge applies to debts that arose before the date of the bankruptcy filed. If the judge finds a debtor received money or property by fraud, that debt may not be discharged.

The Bankruptcy Information Sheet tells a debtor to list all property and debts in bankruptcy schedules. If a debtor does not list a debt, it is possible the debt will not be discharged.

Continue reading "Bankruptcy Information Sheet - Sacramento" »

Many borrowers are defaulting on private money loans. Borrowers who want to keep their homes will file bankruptcy to seek the protection of the automatic stay to stop creditors from foreclosing.

The automatic stay stops a creditor from collection actions until or unless the bankruptcy court grants the creditor relief from the automatic stay.

In a loan secured by real estate, the creditor can seek relief from the automatic stay by claiming the creditor is not adequately protected by equity or the debtor does not need the property as part of the reorganization according to Bankruptcy Code Section 362. When making a motion for relief from automatic stay, the creditor might need to do an appraisal of the real property to evaluate what the equity is.

The borrower who files bankruptcy might still need to pay the lender when the borrower is trying to reorganize debt and the loan is part of the bankruptcy plan. In a Chapter 13 bankruptcy filing, the borrower who files bankruptcy is obligated to make post-petition payments.

Another way for creditors to terminate the automatic stay is for them to seek adequate protection payments. Bankruptcy Code Section 361 provides the following examples adequate protection of a party's interest in property: 1) a cash payment or periodic cash payments to the extent that the party's interest declines in value as a result of the debtor's actions; 2) additional or replacement lien to the extent the party's interest declines in value as a result of the debtor's actions; or 3) other relief, as will result in the realization of the "indubitable equivalent" of an entity's interest in property. The purpose of adequate protection is to maintain the status quo.

If a private money loan is underwater, the lender might be subject o cramdown or lienstripping. Cramdown is the involuntary court imposition of a reorganization plan over the objection of creditors. Lienstripping means liens being stripped off of the debtor's assets in a Chapter 11 or Chapter 13 bankruptcy filing, when there is not enough equity in the asset, after deducting senior liens from the property's current market value, to secure the unsecured, when the lien exceeds the value of the debtor's property. According to Bankruptcy Code Section 506, a lien is a secured claim to the extent there is value in the asset it attaches. To the extent the claim exceeds the collateral value, that portion of the claim is unsecured.

Continue reading "Private Money Loan Defaults - Sacramento" »

When someone files for bankruptcy under Chapter 13 of the Bankruptcy Code, the goal is to repay some or all the debts within 3-5 years of filing. Chapter 13 is for the debtor who wants to keep an asset like a house, rather than liquidate everything in a Chapter 7. Filing Chapter 13 Bankruptcy is for a debtor who has regular income looking to adjustment or reduce debt, rather than discharge all debt.

Debts fall into three categories: secured creditors, unsecured creditors, and post-petition. Failure to pay on secured property gives creditors the right to ask for relief from the automatic stay and proceed to seize the property. Unlike a Chapter 7, discharge of debts is not immediate. The debtor needs to come up with a plan to repay certain creditors, and then after payments to those creditors are made, the case goes to discharge.

The court appoints a Trustee who collects payments to distribute to creditors. David Burchard is the Chapter 13 Trustee for the Northern District of California, San Francisco and Santa Rosa Divisions. Lawrence J. Loheit is the Chaptr 13 Trustee in Sacramento. According to his web site, Loheit is a Sacramento native, and started in bankrutpcy in 1963 as the Assistant to the Chapter 13 Trustee. In 1976, Loheit was appointed as the sole Chapter 13 Trustee, by the now deceased Chief Bankruptcy Judge, Robert E. Woodward. A Trustee has a staff of accountants and attorneys. The percentage fee collected by the Chapter 13 Trustee varies but cannot exceed 10% of the sum received in each case for payment to creditors. Each Trustee has his/her own forms on their web sites for debtors when making filings so debtors and their attorneys should make sure they obtain the correct forms.

Attorneys' fees for Chapter 13 bankruptcy filings are discussed in the Bankruptcy Code and court procedures/rules, and may be disgorged if collected upfront when an attorney does not respond to objections by the Trustee, does not show up for 341 hearings, or a case gets dismissed.

After a bankruptcy filing, the case proceeds to a 341 hearing. A 341 hearing is usually the only court appearance a debtor needs to make. The Trustee heads the 341 hearings, which require the debtor to submit tax returns and bank statements as of the date of a bankruptcy filing. A case cannot go to confirmation until the 341 hearing is complete.

At a confirmation hearing, there are three calendars: confirmed, dismissed, contested. When a plan is confirmed, there are objections by creditors. A case may be dismissed for failure by the debtor to make payments to the Trustee for distribution to creditors. In community property states, when only one spouse files bankruptcy, the other spouse needs to be aware that spouses equally own all property earned or received during the marriage, splitting 50-50. In bankruptcy, all the community property each spouse owns jointly is part of the bankruptcy estate, regardless whether three is a filing by only one spouse. Examples of when a case may be contested include when a debtor tries to modify a plan in order to make payments, when a plan needs to be amended for missing information, or a 341 hearing is not completed.

Continue reading "Chapter 13 Bankruptcy - Sacramento" »

A Chapter 11 bankruptcy filing is usually a "reorganization" bankruptcy. Chapter 11 bankruptcy is available to businesses, whether a corporation or sole proprietorship, and individuals. For instance, an individual who owns a lot of rental property might file Chapter 11.

When a debtor files Chapter 11, a trustee might be appointed to evaluate the debtor's properties, reviewing whether they generate income, what the taxes are, loans that need to be paid. If the debtor is not able to come up with a reorganization plan, the debtor might dismiss the case or convert to Chapter 7. If the debtor decides to dismiss, the court might require the debtor to file a motion to dismiss to show the dismissal is in the debtor's best interests. If the bankruptcy filing was voluntary, the court will likely require the debtor to pay for the administrative fees such as the trustee's fees, trustee's attorney's fees, trustee's accountant's fees if the debtor decides to dismiss since resources were spent to evaluate possible reorganization for the debtor. The resources spent on the evaluation might be more than the value of the assets in the case. The court could decide to make the debtor only pay for the value the estate would generate if it were to convert to Chapter 7 rather than the actual fees to date by the trustee and trustee's advisers. If so, it would be up to the creditors to proportion their fees.

In a Chapter 11 dismissal, the trustee might also request that the debtor cure some of the debts to the secured creditors prior to dismissal, such as paying off the amounts in default. However, the court might allow for a dismissal without cure if there have been no notices of defaults by the creditors, and let the debtor handle the negotiations on the debts after the dismissal as if the debtor never filed for bankruptcy.

Chapter 11 differs from Chapter 7 which relates to liquidation bankruptcy. In Chapter 7 the business ceases operations, a trustee sells its assets, and then distributes the proceeds to its creditors. A Chapter 11 case begins with the filing of a petition with the bankruptcy court. A petition may be a voluntary, which is filed by the debtor, or involuntary, which is filed by creditors. The courts charge a $1,000 case filing fee and a $39 miscellaneous administrative fee.

Upon filing a Chapter 11 bankruptcy petition, the debtor automatically becomes a "debtor in possession" until a trustee is appointed. The debtor-in-possession keeps possession and control of its assets while undergoing a reorganization. A debtor in possession can acquire financing and loans on favorable terms by giving new lenders first priority on the business' earnings, reject and cancel contracts. While the automatic stay is in place, litigation against the debtor is stayed.

Continue reading "Chapter 11 Bankruptcy - Sacramento" »

Financial Engines, Inc. provides investment advisory services to the common person. It sells its services to retirement plan sponsors. The company was incorporated in California in May 1996, then reincorporated in Delaware in February 2010.

The company filed a S-1 for IPO earlier this year to offer over 10 million common stock by the company and its selling stockholders. As of November 2008, the company incurred approximately $3.0 million attributable to the IPO, which was once deferred because of the disruption in the equity capital markets in 2008.

The management uses adjusted EBITDA and adjusted net income or loss as measures of operating performance, for planning annual budgets, to allocate resources, to evaluate business strategies, and to communicate to the board of directors on financial performance. Adjusted EBITDA means net income or loss before interest income or expense, net, income tax expense, depreciation, withdrawn offering expense, amortization of internal use software, direct response advertising and deferred sales commissions and stock-based compensation.

The company derives most of its revenue from asset management fees based on the assets in retirement accounts it manages. The company appears to have a stellar cast of characters on its leadership, with most executives on the team for more than several years. For instance, the President and CEO, Jeffrey Maggioncalda's bio reads he has been with the company since 1996. Kenneth Fine, Executive Vice President of Marketing, has been with the company since 1997.

Financial Engines' revenue depends on retirement plan participants signing up for its Professional Management service. Financial Engines does not sell investment products or earn commissions on its advice to participants. Many people think that they already get investment advice from their employers, but employers are only responsible for choosing the mix of funds, not making the choices on what to invest in.

The company advises to diversify to manage risk, and considers expenses and taxes. The company gives people a personalized plan to fit their retirement age, asset turnovers, transaction costs. People are recommended to review their plans regularly.

If you have any questions with regard to bankruptcy or need financial difficulties counseling, contact our office at 1-800-303-2964. Rinne Legal is located at 1990 North California Blvd., Walnut Creek, California 94596, with additional offices in Fairfield, Oakland, and Sacramento. Rinne Legal offers free initial consultations.

Another major Sacramento-area business will be winding up their operations through bankruptcy court. Placer Fire Equipment, a Rancho Cordova company that builds fire apparatus for local and state agencies, filed for Chapter 7 bankruptcy in Sacramento on March 3.

The effect of Placer Fire Equipment's bankruptcy will be felt elsewhere in the Sacramento area. Its clients included the Sacramento Metropolitan Fire District, the governor's Office of Emergency Services, and the North Lake Tahoe Fire Protection District. The company owes nearly $1 million to Folsom-based Sierra Vista Bank, $63,000 to Sacramento County Airports, and at least eight employees will be out of their jobs and may be out of back wages as well. In bankruptcy, the court will liquidate Placer Fire Equipment's assets and distribute the proceeds among its creditors. But, with total debt of $3.8 million, it is unlikely that any creditor will receive more than pennies on the dollar.

It is hard not to at least partly blame the economy for any company's failure. Placer Fire Equipment went from $1.6 million in income in 2008 to a more than $1 million loss in 2009. While the news has been dominated by bank failures, foreclosures, and unemployment. It is stories about small companies that capture how starkly fortunes of many Americans changed because of forces beyond their control.

As expected, the final 2009 numbers showed a spike in bankruptcy filings. There were 1.43 million bankruptcy filings in 2009, a 32 percent increase from 2008. Consistently, every month in 2009 reported bankruptcies in excess of the same month in 2008. Last month, there were 22 percent more bankruptcies than in December 2008.

The recession has caused bankruptcies to reach a level that has not been approached since 2005, when Congress rewrote the Bankruptcy Code to discourage consumers from filing bankruptcy. This year's 1.43 million filings was the seventh-highest year on record, behind 1998 and 2001-2005.

Some experts contend that the 2005 Bankruptcy Code reform has been ineffective. They attribute the decline in bankruptcies after 2005 to the healthy economy, the surge of people filing bankruptcy in 2005 to avoid the new rules, and the new rules making bankruptcy more expensive and time-consuming. The reform had intended to prevent filers from abusing the system. But, those safeguards are now costing filers more money and delaying relief to families that need protection from creditors or need to save their homes.

This year does not project much, if any, reduction in bankruptcies. Foreclosures and subprime mortgages going bust will likely continue. And many more families may be under financial stress due to unemployment and underemployment in 2009.

The Los Angeles Times reports that over the twelve months that ended September 30 small business bankruptcies in California were up 81 percent over the previous twelve months. In all, 19,000 small businesses in California filed bankruptcy, compared to 10,500 the previous year. Nationally, small business bankruptcies were up 41 percent. The Sacramento area had one of the nation's highest rates of small-business bankruptcy filings.

The figures fail to account for small business owners who file for personal bankruptcy, a strategy that many bankruptcy attorneys recommend because it is simpler than filing for a business. Many small business owners personally guarantee debt and therefore cannot just close their business because they are personally liable for lingering debt. And, business owners often use personal finances to prop up their businesses. So, even if their business survives, their personal financial situation may become untenable.

Small business owners have been plagued not just by the downturn in the economy, but especially by the credit crunch. Banks have been reluctant to take on any risk, including providing loans to small businesses, even though they owe their continued existence in large part to bank bailouts funded by the taxpayer. More than just refusing to loan to vulnerable businesses, banks have rejected loan applications from businesses that have been operating healthily for years. Without funds to pay bills and employees, debt piles up and becomes unbearable.

The Obama administration is exploring providing stimulus funds aimed at small businesses. Potential plans include providing loans, temporarily suspending capital gains taxes on new investments in small-business stock, and tax incentives to encourage small businesses to hire more employees. The government must act quickly because every month more and more small businesses and businessmen flounder.

The following is a fictitious scenario:

Year 2005: Jeff, Controller never thought he would settle in California, but the politics start here, the best athletes are from here, the fashions are ahead of everyone else's. Everyone knows the major cities from rap: Frisco for San Francisco, Sacto for Sacramento, Oaktown for Oakland. People judge based on area code, and if asked where they're from, they give their area code. 2 hour commute from the 831 to the 650, but the commute is an excuse when late. To some, Jeff's life is perfect. The office is walking distance from a pool, East West Bookstore, and ethnic foods (Vietnamese, Greek, Mexican...). Silicon Valley is where the money is. Save on groceries - free snacks, sodas, lunches. Save on water - free showers, gyms. Save on tickets - free parking. In other places, the best you may get is a filtered water cooler with little paper cups.

Year 2009: Jeff was shown the door when after returning from lunch. Jay, his manager, discussed ridding him all day behind closed doors, but pretended there was nothing happening when he asked Receptionist to help on one of his quarterly goals, when he expensed a training course. Jay read from a script and left on the guise that he had to take care of personal business so he would not need to say anything further to Jeff. Before the meeting, Jay instructed IT Manager to take Jeff's computer away so it would be gone by the time he returned to his desk. Facilities Manager wouldn't let him take his personal things, afraid that he would steal confidential information. She would not let him sit at his desk to read the exit paperwork. She treated Jeff like he stole something, and rushed him out the door.

Continue reading "Bankruptcy Discharge" »

Under 11 U.S.C. § 547(b)(4)(A), transfers made from the debtor's estate up to 90 days prior to filing of the bankruptcy petition are avoidable by the trustee as preferential transfers. In other words, the bankruptcy trustee can undo any such transfers because they are deemed to improperly favor the recipient over other creditors.

However, under § 547(c)(4), those transfers are not preferential if the creditor made a new loan after the borrower paid off the old loan. This exception is designed to protect revolving credit arrangements. Typically, a credit card provides a borrower with a debt limit that cannot be exceeded. If the borrower pays the full balance one month, then the next month the borrower has the full credit limit at his disposal. If the borrower has not paid the full balance, then the following month he has a correspondingly less amount at his disposal to borrow.

Hence, it is unfair for the lender if payments made prior to a new loan are undone. The lender would not have offered the new loan unless it received those payments.

An illustration: John has a $1000 credit limit. He uses $600 to make purchases in Month 1 and pays off the full balance at the end of the month. In Month 2, he makes total purchases of $800 and pays off the full balance at the end of the month. In Month 3, he makes $1000 in total purchases, but does not pay off the balance and files bankruptcy. Under section 547(c)(4), John's payments at the end of Months 1 and 2 are not preferential transfers, and the lender does not have to return the payments to John's bankruptcy estate.

The American Bankruptcy Institute (ABI) reported encouraging numbers for November. Consumer bankruptcy filings dropped 18 percent from October, as there were 112,152 filings as compared to 135,913 the previous month. Chapter 13 filings held steady at 29 percent of all consumer cases.

The November numbers still represented a 12 percent increase from the previous November. Samuel J. Gerdano, ABI's Executive Director, attributes the rise to the persistently high unemployment figures and still beleaguered housing market. National unemployment remains high and many consumers are still struggling with housing debt in excess of their homes' values. Negative equity prevents homeowners from being able to refinance to lower monthly payments and to use any equity to pay down debt.

Many subprime, adjustable-rate mortgages (ARM) have yet to reset. Banks wrote an avalanche of five-year ARMs into 2007 before the credit crisis began. Bankruptcies may remain high as these mortgages switch from their low initial interest rates, and the monthly payments adjust upwards accordingly. Chapter 13 bankruptcies will also remain high, as homeowners are more likely than non-homeowners to have income and assets that preclude them from filing Chapter 7.

If you are a homeowner struggling with an ARM, then you may benefit from consulting with an experienced bankruptcy attorney.

On November 6, 2009, the New York Times reported Jason Rodriguez opened fired at his former workplace in downtown Orlando, FL. The engineer gave his life away when he randomly shot 6 people, injuring 5 and 1 dying at the scene. The shooting resulted from anger in being terminated in 2007 at an architectural firm. Rodriguez filed for bankruptcy and was working at a Subway shop.

It seemed difficult for his former employer to understand why he would still be angry at the termination, but those who have jobs, are not in debt, or are otherwise productive, may not realize angry thoughts continue to play over and over when someone is stuck at the same place for a long period of time. The unemployed today have taken much longer to find new positions, with some taking possibly over a year to land only a part-time or temporary job. It seems Rodriguez allowed an injury to go beyond its original scope, defining his self-image based on one company, but compassion is what separates a bankruptcy attorney who is an ally from one who advises only on legal proceedings. Bankruptcy is not a sign of imperfection, but an unburdening of the past, and a test in courage to face whatever comes.

Bankruptcy proceedings are governed by federal law - the Bankruptcy Code, found at Title 11 of the United States Code. Title 11 contains numbered chapters that define eligibility to Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13 and Chapter 15.

Chapter 7 can be used by both businesses and consumers to liquidate assets to pay creditors. A Chapter 7 debtor cannot reorganize, emerging from bankruptcy with restructured debt. In Chapter 7, upon the filing of the proceeding a trustee oversees the liquidation of the debtor's assets. The trustee is chosen randomly from eligible panel trustees in the district where the case is filed. For a business, the trustee takes over control and oversight from an entity's board and leadership team. For a voluntary bankruptcy, there is little chance for payment of creditors.

Chapter 9 provides for reorganization of a municipality like Vallejo, CA and perhaps Pacific Grove, CA.

Chapter 11 refers to the business reorganization chapter of the Bankruptcy Code. Unlike Chapter 7, in a Chapter 11, the company's management and board remain in control of the process. A company continues to operate post-filing. No trustee is appointed in most Chapter 11 proceedings, but bankruptcy court approval is necessary for many operational decisions. Chapter 11 by a business does not necessarily mean that it will reorganize. Many Chapter 11 cases begin with an immediate sale of substantially all of the debtor's assets (a liquidation), commonly known as 363 sales. After substantially all of the assets are sold, Chapter 11 proceedings may end with court approval of a reorganization plan.

A reorganization plan is provides for payment of creditors and interest holders in accordance with the Bankruptcy Code. The plan may involve distributing proceeds to creditors after a liquidation sale, restructuring debts, and continued operations. The plan offers creditors an opportunity to review and take a position as to property distribution and future operations of the debtor.

Chapter 12 is limited to family farmers and fisherman, Chapter 13 is limited to consumers, requiring the consumer debtor to repay some amount to creditors. A business is not eligible for Chapter 13. Chapter 15 deals with cross-border insolvencies.

Continue reading "Bankruptcy Reorganization or Liquidation" »

On Tuesday, the Supreme Court heard two cases that could significantly impact bankruptcy law. Besides hearing arguments about the dischargeability of student loan debt in bankruptcy, the U.S. Supreme Court heard a second case challenging the validity of provisions of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). One rule prohibits lawyers from recommending that assisted persons, who are individuals with primarirly non-exempt consumer debts, take on additional debt. Another requires that attorneys who offer bankruptcy advice must advertise as debt relief agencies.

A Minnesota law firm challenged the provisions as violating lawyers' First Amendment rights, ethical duties to provide legal advice, and responsibility to not provide misleading advertising. The firm's stance is that 11 U.S.C. section 526(a)(4) is overbroad and wrongfully prevents attorneys from providing sound legal advice to clients. For instance, the law, which prohibits advising assisted persons to incur more debt, may prevent an attorney from advising a potential bankruptcy filer to sell his overly expensive home and rent an apartment because the lease would be additional debt.

The firm also argued that Congress did not intend for 11 U.S.C. section 528, which requires that debt relief agencies disclose in advertisements that they are debt relief agencies, to apply to bankruptcy attorneys because Congress designed the law to regulate behavior by non-attorney bankruptcy providers. The firm's attorney made the point that If Congress wanted the law to apply to attorneys the law's language would explicitly include attorneys.

The justices appeared to view section 526(a)(4) unfavorably and Justice Scalia even repeatedly referred to it as "a stupid law." On the other hand, a few justices treated the firm's position on section 528 skeptically. The Supreme Court will likely hand down a decision towards the beginning of 2010.