Federal Court Strikes Down Section Of New Bankruptcy Law

DALLAS -- A federal district court last week ruled unconstitutional a section of the bankruptcy reform law that went into effect last October. The ruling could set precedence for similar suits pending in other states. U.S. District Court Judge David Godbey declared that Section 526 of the Bankruptcy Abuse Prevention and Consumer Protection Act unconstitutionally restricts lawyers' free speech rights, in part by defining the lawyers as 'debt relief agents.' Attorneys for plaintiff Susan Hersh, a bankruptcy lawyer, had argued that the section bars lawyers from advising clients to incur more debt in order to get out from under existing debt. The approach is legal and many consumers overwhelmed by bills from several creditors are advised to consolidate debt into a single monthly payment. The ruling marks a victory for bankruptcy lawyers who criticized the law as a pro-credit card industry initiative that makes it harder for debtors to get a second chance. The Texas court's declaration could impact a suit brought May 11 in Connecticut by the National Association of Consumer Bankruptcy Attorneys and the Connecticut Bar Association, which also challenges Section 526 on the grounds that it is unconstitutional.