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The U.S. Supreme Court has agreed to decide whether a bankruptcy attorney is a “debt relief agency” and whether disclosure provisions in the 2005 bankruptcy reform law are constitutional.

Under the statute, debt relief agency is defined as “any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer.” (11 U.S.C. §526)

The Court will review an 8th Circuit ruling that said a law firm representing debtors fell under this definition.

“The plain reading of the definition of debt relief agency, and the defined terms that make up that definition, leads us to conclude that attorneys who provide ‘bankruptcy assistance’ to ‘assisted persons’ are unambiguously included in the definition of ‘debt relief agencies.’ The statutory language sweeps broadly and clearly covers the legal services provided by attorneys to debtors in bankruptcy,” the court said.

It noted that Congress had listed exclusions to the section’s application and that lawyers were not among them.

One reason the issue is important is because under the statute a debt relief agency is prohibited from advising a debtor to incur more debt in contemplation of filing a bankruptcy case. (11 U.S.C. 526(a)(4))

The Court will also decide whether the disclosure requirements for debt relief agencies violate the First Amendment.

Under §528, debt relief agencies must disclose in all of their advertising materials: “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code,” or a similar statement.

The 8th Circuit rejected the law firm’s argument that this amounted to mandatory deceptive disclosures, and held that attorneys concerned about confusing the public could identify themselves as both attorneys and debt relief agencies.

“Simply put, attorneys that provide bankruptcy assistance to assisted persons are debt relief agencies under the Code, and the disclosure requirements of §528 only require those attorneys to disclose factually correct statements on their advertising. This does not violate the First Amendment,” the court said.

A decision from the Supreme Court is expected next term.

U.S. Supreme Court. Milavetz, Gallop & Milavetz v. U.S., No. 08-1119 and U.S. v. Milavetz, No. 08-12245. Certiorari granted: June 8, 2009. Ruling below: 541 F.3d. 785 (8th Cir. 2008).

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