May 17, 2006 – A lawyers association filed a suit challenging some changes to the federal Bankruptcy Code just days before the IRS announced a crackdown on the predatory credit-counseling groups those rules were apparently meant to rein in.
The National Association of Consumer Bankruptcy Attorneys and the Connecticut Bar Association are suing the US government in federal district court, saying rules in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 "prohibit lawful legal advice and require statements [to clients] that are untrue or misleading." The groups argue that three sections of the new law are unconstitutional and are asking the court to strike them down.
At issue is that the Actâ€™s broad language appears to consider among "debt-relief agencies" any lawyer or law firm offering advice to severely indebted clients. Sections of the act that restrict what debt-relief agencies can offer or say to clients seeking financial advice, the lawyers argue, violate First and Fifth Amendment rights to speech and due process if they apply to attorneys and not just credit counselors.
Ironically, the challenged sections of the 2005 Bankruptcy Act were ostensibly written to regulate potentially predatory credit-counseling agencies that people applying for bankruptcy protections are now forced by the Act to consult. As The NewStandard reported early last year, the Act, which makes filing for consumer bankruptcy much harder, actually codifies the advisory services some exploitative credit "counselors" purport to provide.
According to an Internal Revenue Service statement issued yesterday, all 41 audits so-far completed on nonprofit credit-counseling organizations have resulted in determinations that the groups are exploiting their needy clients instead of providing an educational or other charity-related service. The IRS says it is in the process of revoking tax-exempt status of all 41 groups and is auditing many more.
If a court strikes down the challenged sections of the Bankruptcy Code, protections governing credit counselors would go with them. In lieu of such a drastic ruling, the plaintiffs have requested an injunction relieving attorneys from having to adhere to the new rules, leaving them applicable to unlicensed financial advisors.
The Justice Department, named as a defendant in the case, has not yet announced how it will handle the suit.