Can I Take Out Debt Before Filing Bankruptcy?

Blog

Aug 30

I attend a lot of seminars and educational programs dealing with bankruptcy and related issues.  Usually the information is valuable to my practice and to my clients, but I recently attended a seminar where an attorney stated to the audience that we should never advise our clients to incur debts while we are planning on filing their bankruptcy case.

I disagree.  While of course we would never advise a client to incur debts with any intent to defraud creditors, there are times when incurring debt can be both prudent and beneficial to the client.

The attorney who made that broad statement about not incurring debts was likely referring to a change in bankruptcy law which took place in 2005.  Congress inserted a provision in Section 526 of the Bankruptcy Code, which prohibits a “debt relief agency” from advising a debtor to incur more debt because the debtor is filing for bankruptcy.  This provision is designed to prevent debtors from “loading up” prior to filing bankruptcy.

The U.S. Supreme Court addressed this issue in 2010, in a case named Milavetz, Gallop & Milavetz, P.A., et al. v. United States.  The Court noted that under the bankruptcy code, attorneys are “debt relief agencies”.  As such, they cannot advise debtors to “load up”, but they may advise debtors to prudently incur debt.

A good example might be taking out a loan to buy a car.  Without transportation, the debtor might be unable to get to work and could become unemployed.  In such an instance, incurring debt would likely be favorable not only to the debtor, but to all the creditors.

There are numerous other instances when incurring debt would not likely be a problem under Section 526.  For this reason, at Krekeler Strother we do not make a blanket declaration that debt should not be incurred.  Instead, we prefer our clients contact us to discuss the issue and determine the best approach.