Bankruptcies: Recurring Issues Over the years we have fielded literally thousands of client questions. Many of these inquiries deal with a borrower who files bankruptcy. As you know, this is a confusing area of the law. Sometimes, what appears to be an innocent action on the part of the lender, results in serious and unexpected repercussions. Recently, a client suggested that we prepare a compilation of client questions and our responses. We thought this was an excellent idea. As a result, some of the more commonly asked questions will be reviewed here. They are presented in no particular order, but they do represent a cross-section of the relationship between creditor, debtor and bankruptcy law. Hopefully, this brief examination will be a handy reference guide for you. Please understand that the law is evolving and congress is on the verge of passing a major new Bankruptcy Bill. Where we thought it appropriate, developing trends were noted. Question: The debtor has filed a Chapter 7 after we repossessed his car. Do we have to return it to him? Answer: Yes, usually. A Ninth Circuit Bankruptcy Appellate Panel decision held that the continued retention of repossessed property after notice of the bankruptcy filing is a willful violation of the automatic stay. Trend: The automatic stay protection is considered a basic protection afforded the debtors under bankruptcy law, and its scope is intended to be broad. But, some changes are anticipated when the current bill becomes law. Bottom line: If you have not sold the repossessed unit when you learn of the bankruptcy- stop everything and contact your legal advisors. They will determine if the debtor is seeking the return of the car or is willing to let you keep it. The "Statement of Intention," filed with the court, may provide some good information. Note: Some judges will allow you to keep the vehicle if there is no insurance and you proceed immediately for a court ruling. A pre-petition repossession in Chapter 13 could require proof of adequate protection before returning to debtor (proof of insurance). Question: If the customer files a bankruptcy, can we collect from the co-signer? Answer: Yes- If the debtor filed a Chapter 7. The courts have consistently held that the pursuit of a co-debtor does not violate the automatic stay. However, if the debtor filed a Chapter 13, you can only pursue the co-debtor to the extent that the maker's plan does not pay the loan. Trend: No cases indicating a contrary opinion have appeared in other districts. Bottom line: If the debtor is in a Chapter 13, the court requires that we first obtain relief from the "co-debtor stay" (11 USC §1301) before going after any guarantors. Otherwise, in a Chapter 7, there is no problem pursuing co-debtors. However, be sure that the property recovered from the guarantor is not also property that the bankrupt has an interest in. Question: Only the debtor filed bankruptcy- can we go after his spouse for the outstanding debt? Answer: No. If the debtor is married and living with his spouse (i.e. they are not separated) then the non-filing spouse gets the benefit of the filing spouse's discharge. This is true only to the extent that it is a community debt. If the debt was the separate debt of the non-filing spouse, then it could still be collected from that non-filing spouse's separate property. Trend: This is and has been the state of the law since the Code's inception in 1978-79. Bottom line: If you have only one spouse in the bankruptcy, it's important to find out if the other spouse has going through a divorce or is separated. If they are separated, then there is a possibility that the debt may not be discharged as to the non-filing spouse because there may be separate property issues. This situation requires careful legal analysis as the issues are complex. Question: The customer has filed a Chapter 7 and is demanding that we lower the contract balance and monthly payments for an automobile loan. He is also demanding that we agree to a reaffirmation. Must we reaffirm? Answer: No. Reaffirmations are a voluntary agreement between the lender and the customer. Trend: The court will not and cannot force the lender into a reaffirmation. Bottom line: If the debtor has fallen down on the payments, you should consider bringing a relief from stay to repossess the car. Question: Can we contact the debtor directly to discuss his reaffirming loans with us? Answer: Only if the debtor is not represented by an attorney. Trend: A respected Rhode Island Bankruptcy Judge has ruled that a credit union's solicitation of a Chapter 7 reaffirmation was a willful violation of the automatic stay. The debtor was represented by an attorney when the contact was made. Bottom line: It now seems prudent to get the customer attorney's consent to negotiate beforehand. If the customer contacts you, your staff should insist on the customer first obtaining their counsel's O.K. before continuing with the discussion. Question: The debtor has just defaulted on his loan. When we contact him for collection, he says that he filed a bankruptcy last year and that he no longer has the ability to continue paying. This is the first time you hear of the filing. The member says the debt is discharged because he owed it when he filed. Is he right? Can you still collect? Answer: Even though the customer filed a Chapter 7 and did not list you, and had no actual knowledge of the bankruptcy - the debt is still part of the bankruptcy. This unfortunate rule was established in a 1993 appellate case. [In Re Beezley, 994 F. 2d 1433 (9th Cir.1993)]. The court did state, however, that the creditor retains the right to argue before the court the question of non-dischargeability due to dishonesty, fraud, conversion etc. But: If the customer filed a Chapter 13, and did not list you, the debt is going to be included in the filing if the plan is still being paid. If the plan is completed, your obligation is not affected by the discharge (In Re Crites, 1996 Bkrtcy D.OR.) Trend: The courts allow the customer to obtain the benefit of a discharge if it was a "no-asset bankruptcy." The "no harm-no foul" rule is the one followed by this circuit. This applies to your deficiency balances. If the customer is still in possession of the vehicle after discharge, you have the right to repossess or to file a claim and delivery. Question: The debtor filed a Chapter 13. Our debt was incurred fraudulently, the plan calls for us to receive nothing. Can we bring a complaint for Non-dischargeability? Answer: No! Chapter 13's discharge all debts - even dishonest ones. The only exceptions are child and spousal support, student loans, taxes and drunk driving judgments. Trend: The Chapter 13 is still a safe haven for many dishonest debtors. Bottom line: The only step that you can take is to try to have the Chapter 13 denied because of a "bad faith" filing. Your legal counsel would have to convince the court that the purpose of the plan was to avoid paying a dishonestly obtained debt. Question: The debtor's Chapter 13 values our automobile below wholesale. What can we do? Answer: File a proof of claim with the correct valuation. Trend: Our local courts have ruled that the proof of claim controls over the amount listed in the debtor's plan. [In Re Hobdy, 130 B.R.. 318 (9th Cir. Bap 1991)] . Bottom line: The Chapter 13 trustee will notify the debtor of the higher claim that the lender filed and give them an opportunity to object. In some jurisdictions, courts use an appraiser to value the collateral. The proof of claim loses out to the appraiser's valuation. If your higher valuation renders the plan unfeasible, you should also file an objection to confirmation. Note: The Supreme Court has ruled that the replacement value, meaning the price a willing buyer in the debtor's trade, business or situation would pay a willing seller to obtain property of like age and condition (i.e. retail/high blue book) is the required valuation in a Chapter 13 "cram-down". Question: The customer calls you and says that he has filed a bankruptcy. Do you have to stop collection efforts? Answer: Not necessarily. You must ask the debtor for a case number. If he cannot give you it, then you should ask if he has an attorney. If no attorney and no case number, then you are not obliged to believe him. Trend: The courts will expect you to make a reasonable inquiry before you can ignore the debtor's representation of bankruptcy. Bottom line: You should try to get a case number, date of filing, type of bankruptcy and an attorney's name from the debtor. Many debtor's have learned that they only have to suggest that they filed and the creditors back off. You don't have to back off if he they can't give specific information. On the other hand, if an attorney says that there has been a filing and won't tell you more, the courts will require you to believe him. Be sure that the attorney says that he filed as opposed to having been retained to do a bankruptcy. Question: Debtor's Chapter 13 was confirmed a year ago the trustee still isn't sending our car payments. Where is the money going? Can we get relief from stay? Answer: Even though the debtor is making his payments to the trustee, that doesn't mean that you will be getting your monthly payments. Many debtor attorneys put a provision in the plan that the trustee must first pay the administrative claims in full before any other debts are paid. This means that you have to wait until the attorney gets his fees; then your car payments can begin. Trend: San Bernardino Judges refuse to allow the debtor's attorney to be paid more than 50% of the monthly plan payment. This allows for some of the money that the trustee disburses to get to secured creditors. Bottom line: It is worth objecting to confirmation if your first car payments will be delayed for more than six months. The judges should be willing to give you something to offset the vehicle's depreciation and avoid the so-called "free ride" by the debtor. Question: The debtor was reported to credit reporting agencies as delinquent on his obligations. He then gets a Chapter 13 plan confirmed and is paying you according to the plan, but less than the contract. Can you continue to report that obligation as delinquent? Answer: Yes. Although the Chapter 13 plan provisions are being lived up to, they are not the amounts promised under the original agreement. Therefore, the delinquent status is still accurate. This is not a violation of the automatic stay because you are not doing anything to collect on the debt. Question: The debtor continues to use your collateral after the bankruptcy (he's driving the car). Do you have the right to collect post-petition compensation for the use of the property? Answer: Yes. A ninth circuit court of appeals case (Hedges v Resolution Trust Corp. 32 F.3d. 1360 (9th Cir.1994) held that the seeking of compensation for debtor's post-petition use of property is not a violation of the bankruptcy injunction. The injunction does not prevent a state court from determining the extent of liability due from the use of the collateral Note: This decision may not apply to leases. Many bankruptcy courts have held that the unmatured lease obligation is discharged in the bankruptcy. This is an unsettled area of the law. Question: Debtor files a Chapter 13. His 5 year plan modifies your car loan. It provides payments only to the amount of the wholesale value of the car for 36 months and offers a small percentage toward the remaining balance for the remaining 24 months. Do you have to give him the pink slip after the secured claim is paid in full? Answer: The courts are split. For example, In Re Hernandez (162B.R.160, 1994- Illinois) holds that the creditor must give the pink up once the secured claim is paid. But, In Re Scheierl "(176 BR 498, Bkrtcy. D. MINN. 1995), holds that the creditor can retain the pink slip until the plan is successfully completed. Bottom line: Thus far, only a Northern California Bankruptcy Court has published a decision on this issue (In Re Murry-Hudson 147 BR 960, Bkrtcy N.D.CAL., 1992). That court ruled that a Chapter 13 debtor was entitled to release of the automobile lien once the secured portion of the claim was paid. The debtor was not required to wait until the plan was completed and she received her discharge. Should the debtor dismiss the Chapter 13 after getting the pink slip, your lien rights would be fully restored [11 USC §349(b)(1)(c)]. You would hold an unperfected security interest in the vehicle as to the debtor. Accordingly, you can repossess the car (Cal. Comm. Code §§9201, 9503. Also, you might be able to re-perfect your security interest under California Vehicle Code §5909. Question: Debtor files a Chapter 7 but does not comply with thestatement of intentions regarding your collateral. What can you do? Answer: The Courts of Appeals in 5 circuits are split on the question of whether the debtor may retain property without reaffirming or redeeming the collateral- 3 Circuits state that the debtor must choose to reaffirm, redeem or surrender (5th, 7th and 11th), while 2 state that the debtor has the alternative of retaining the property and remaining current (4th and 10th). Lower courts are also divided. In our circuit the only published decision is In Re Weir (175 B.R. 682, E. D. Cal, 1994). That case holds that the creditor's only remedy is relief from stay for the debtor's noncompliance. But, the court notes that if the debtor is current on payments, the creditor must look to state law for the right to repossess, and state law usually will not permit it without a payment default. As noted in In Re Weir, there is no bite in the Bankruptcy Code's toothless tiger (the statement of intentions section). Question: Can a Chapter 13 be dismissed for bad faith if the debtor has a previous, recent bankruptcy filing? Answer: The court must look at the "totality of circumstances" (In ReEisen 14 F3d 469, 9th CIR 1994) some factors to be considered are: - Did the debtor misrepresent facts in his Bankruptcy documents? - Is the filing an unfair manipulation of the Bankruptcy Code? - What is the history of prior filings and dismissals? Question: Is it a violation of the automatic stay to repossess an auto from a bankrupt who is not on title? Answer: Possibly! - a Michigan Bankruptcy Judge held a bank in contempt based upon the following facts: The Chapter 7 debtor's father signed the credit application, the vehicle installment contract and was the only party listed as the owner on title. But, the son had possession of the car. After the son filed a Chapter 7, the bank repossessed the auto. The court found the bank in contempt. They were ordered to return the car to the son and pay for his rental of another car while they had the vehicle! Question: If a car is repossessed after getting relief from stay in a Chapter 13, is it OK to file an Amended Proof of Claim for the deficiency? Answer: Yes! (In Re White, 169 BR 526, 1994). But, remember that the deficiency is an unsecured debt - you'll probably be getting less than the full balance paid out through the plan. Question: Can you accept an employer's pay over pursuant to a wage garnishment after the debtor files a Chapter 13? Answer: No. (In Re Roberts, 9th CIR BAP-CAP, 175 BR 339). The California Appellate Court found that the acceptance of the funds from the employer was a violation of the automatic stay. Bankruptcy Reform Act of 1994 Sample reaffirmation provisions The obligation owing to ______________________ described above is discharge able under applicable Bankruptcy laws. This agreement is not required under this title, under non-bankruptcy law, or under any agreement not in accordance with the provisions of 11 USC §524 (c). You are not legally obligated to reaffirm this obligation; and, if you reaffirm, your liability on this obligation will be fully restored and enforceable in accordance with its terms. This reaffirmation agreement may be rescinded at any time prior to discharge or within sixty (60) days after the agreement is filed with the court, whichever occurs later, by giving notice of rescission to the creditor (or other holder of the claim). Declaration by Attorney for Debtor I declare, under penalty of perjury, that: - I am the attorney for the debtor and have represented said debtor during the course of negotiating this agreement. - This agreement, in my opinion, represents a fully informed and voluntary agreement and does not impose an undue hardship on the debtor. - I have fully advised the debtor of the legal effect and consequences of this agreement and any default under this agreement. If the debtor does not have an attorney, then the court will be required to approve the reaffirmation at a scheduled hearing. Bankruptcy Reform Act of 1994 Chapter 13: The debt limits for Chapter 13 eligibility have been significantly increased. Under the new law, if the debtor has less than $250,000 in unsecured debts and less than $750,000 in secured debts, he is qualified to file a Chapter 13. This change will open the door to many more Chapter 13 filings. The old law limited the debt to $100,000 unsecured and $350,000 secured. If the debtor exceeded the debt ceiling, they were forced to decide among the expensive and cumbersome Chapter 11, the liquidating Chapter 7, or stay out of bankruptcy and try to work it out with the creditors. Now they can throw a million dollar debt load into the Chapter 13 court!

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