Lawyer groups challenge new bankruptcy law

updated 12:37 p.m. ET May 12, 2006

NEW HAVEN, Conn. - Organizations representing thousands of attorneys are challenging the nation's tough new bankruptcy law, saying it illegally restricts the advice lawyers can give and makes it harder for clients to navigate the bankruptcy system.

A lawsuit filed in U.S. District Court in Hartford on Thursday claims that the law treats attorneys the same as unlicensed document preparers or credit counseling firms, which are required under the new law to give specific advice — including not to go deeper into debt.

That illegally hampers the attorney-client relationship, the lawsuit argues, and might even prevent lawyers from recommending that clients hire them in the first place. Attorneys say legal advice isn't one-size-fits-all.

"Someone could be down and out but have access to a student loan to go to school for retraining," said attorney Barry S. Feigenbaum, who filed the suit. "We couldn't advise that client to take that student loan."

Car repairs, medical bills and court-ordered child support are listed in the lawsuit as examples of added debt that might keep clients working and out of jail. In some cases, lawyers say borrowing against a 401(k) retirement plan or accessing a home equity line of credit might make sense.

"I cannot advise them to take these steps," Bloomfield attorney Charles Maglieri wrote in an affidavit in the case. "They need my help, my legal advice, but I am no longer able to advise them what to do."

The law is written so broadly, Feigenbaum argues, that it also restricts the advice given by divorce attorneys and others who don't handle bankruptcy cases. He said the law also violates the rights of bankruptcy petitioners to have lawyers help them with their cases.

"The statute injects the government directly into the heart of the attorney-client relationship in a way that would be both grave and unprecedented," the lawsuit states.

The Justice Department was looking into the lawsuit Friday morning.

The Connecticut Bar Association and the National Association of Consumer Bankruptcy Attorneys asked a judge to temporarily rule that attorneys are not covered by the provisions until the case is settled.

Other provisions challenged in the lawsuit include requirements that agencies provide standardized legal advice forms and contracts for their clients and advertise themselves as "debt relief agencies." Attorneys say those restrictions should not apply to them.

No ruling has been made and no hearings have been scheduled.

The new law, the most sweeping overhaul of the U.S. Bankruptcy Code in a generation, took effect in October. It bars those with above-average incomes from Chapter 7 — where debts can be wiped out entirely — except under special circumstances.

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