Sacramento bankruptcy attorneys, like all bankruptcy attorneys, face a unique challenge in counseling clients. According to Section 526(a)(4) a “debt relief agency” (which includes bankruptcy attorneys) cannot counsel clients to incur more debt in contemplation of bankruptcy. Consequently, Section 526(a)(4) has been dubbed the “gag” provision since it effectively limits the advice bankruptcy attorneys are allowed to give their clients.
The Gag Provision
Section 526(a)(4) was created to prevent bankruptcy attorneys from advising clients to load up on dischargeable debt before bankruptcy. In essence, the statute prohibits bankruptcy attorneys from advising clients to incur more debt because the client is filing for bankruptcy. Therefore, when bankruptcy attorneys advise their clients to incur debt because these debts will soon be discharged in bankruptcy, these attorneys run afoul of Section 526(a)(4). However, the gag provision does not prevent bankruptcy attorneys from advising clients to incur more debt before bankruptcy when the principal motivation for the incurrence of debt are for reasons other than bankruptcy. For instance, a Sacramento bankruptcy attorney can advise a client to incur more debt to purchase items reasonably necessary for the support or maintenance of the client or their dependents. Perhaps the client has not purchased a much needed retainer for their child due to poor finances. In this instance the bankruptcy attorney can have a “full and frank” discussion with the client about the incurrence of debt before bankruptcy, including what will happen to the unsecured debt for the dental retainer in chapter 7 bankruptcy. Likewise, a Sacramento bankruptcy attorney does not violate the gag provision by advising a client to refinance a debt before bankruptcy to reduce the interest rate. The advice to refinance debt is not principally motivated by bankruptcy, but rather by the prospect of improved financial welfare through a lower interest rate.
When you hire a bankruptcy attorney do not expect the attorney to advise you to load up on debt. However, be receptive to the bankruptcy attorneys “full and frank” discussion about the incurrence of debt before bankruptcy. Also, follow the bankruptcy attorneys advise about what not to do before bankruptcy. For instance, when the bankruptcy attorney tells you to stop using credit cards, don’t continue to make purchases on the card because you think the debt will be discharged. The bankruptcy attorney may be protecting you from the consequences of fraudulently incurred debt, so listen to their advice.
Sacramento Law Group
331 J St #200
Sacramento, CA 95814