Occasionally we see loan agreement or other contracts that have a provision in them that says the borrower will not file for Bankruptcy or that the Borrower has waived their right to file for Bankruptcy. If you sign a contract with these terms, the other party may believe you are barred from filing a Bankruptcy and seeking a discharge of some or all of your debts. It is unusual for large corporate banks or lenders to have these provisions. Instead, they may be included in a personal loan agreement, or a contract signed with a title lender or payday lender. Sometimes a lawyer even tries to include these in a contract or settlement agreement they draft for their clients. Do these terms in a contract really prohibit you from filing for Bankruptcy? Absolutely not! Courts have universally held that these provisions are void (meaning no effect whatsoever) as a matter of public policy. In other words, it is not good for our society to allow these terms in contracts. If they have no legal effect at all, why do businesses or individuals include them in contracts? There are two main reasons.
One reason is that the person who drafted the contract just does not know any better and does not have good legal advice (or gets poor legal advice). They simply believe they can slip that in and if you sign the contract it is valid. They are, of course, wrong and even if the rest of the contract is valid that provision is simply ignored. The second reason is that the drafter of the contract, or their lawyer, knows that it is unenforceable but they put it in the contract to make you think that you cannot file. If someone believes they cannot file because they agreed to this in a contract, they may not get advice from a good Bankruptcy lawyer to find out otherwise. The result, unfortunately, is that the other party gets what they wanted by having the term in the contract even though it would be void in court. The trick worked. Although I do not believe it is necessarily unethical for a lawyer to slip that in a contract – after all, both parties have the opportunity to get legal advice – I do believe it is unethical for a lawyer to use this as an argument against an unrepresented party to force a settlement or other action on the contract. In that case, the lawyer is intentionally lying to the person by implying that it is a legal bar to filing a Bankruptcy case. Although I would not recommend signing any contract or loan agreement with provisions that are void, if you have signed one with this term you can be assured it is not enforceable.