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Supreme Court hears arguments in student loan bankruptcy case

[JURIST] The US Supreme Court [official website; JURIST news archive] heard oral arguments [day call, PDF; merit briefs] Tuesday in two cases. In Milavetz, Gallop & Milavetz v. United States [oral arguments transcript, PDF; JURIST report] and United States v. Milavetz, Gallop, & Milavetz, the Court heard arguments on the scope of a federal law prohibiting certain bankruptcy professionals from advising consumer debtors to incur more debt in contemplation of filing for bankruptcy and whether it violates the First Amendment [text]. The law firm of Milavetz, Gallop & Milavetz [firm website] brought the suit against the US seeking a judgment declaring that certain provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) [text] are unconstitutional as applied to attorneys. The US Court of Appeals for the Eighth Circuit ruled [opinion, PDF] that, while bankruptcy attorneys meet the definition of a "debt relief agency" in the legislation, the BAPCPA provisions codified in 11 USC § 526(a)(4) [text] are unconstitutional as applied to attorneys. Counsel for Milavetz, Gallop, & Milavetz argued that "[s]ection 526(a)(4) is unconstitutional because it proscribes truthful information about entirely lawful activity, it whipsaws the attorneys who are trying to apply it, it creates an impossible situation for them, and it harms the client." Counsel for the US argued:

A debt relief agency is any person who provides specified services to specified clients for pay. An attorney is a person, a defined term under the Bankruptcy Code, and the Petitioners have affirmatively alleged in their complaint that they provide bankruptcy assistance to assisted persons. We think that is all that is required to determine that they are debt relief agencies under the statute.
In United Student Aid Funds, Inc. v. Espinosa [oral arguments transcript, PDF; JURIST report], the Court heard arguments on the requirements for discharging student loan debt via bankruptcy proceedings. Specifically at issue is whether such a bankruptcy discharge can be obtained without proving "undue hardship" as required by 11 USC § 523 [text] and without commencing an adversarial proceeding as required by bankruptcy court rules. Petitioners appeal a decision [opinion, PDF] from the US Court of Appeals for the Ninth Circuit, which held that student loans can be discharged within a Chapter 13 plan if the creditor receives notice of the plan and fails to object. The appellate-level decision found that creditors in the business of administering student loans are unlikely to be misled by customary bankruptcy procedures and "crafty student debtors," ruling that bankruptcy courts have "no business" interfering in such procedures. Counsel for the petitioner argued that "[a]llowing debtors to discharge their student loan debts by mere declaration opens the door to recategorizing every category of non-dischargeable debt." Counsel for the US argued as amicus curiae on behalf of the petitioner. Counsel for the respondent argued that "it would be very, very upsetting to the bankruptcy jurisdiction, exceedingly upsetting to make a very broad exception to finality."

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