Bankruptcy Still Works - A guide to the new bankruptcy laws

Authors:
LEON D. BAYER
Partner: Bayer, Wishman & Leotta
JEFFREY WISHMAN
Partner: Bayer, Wishman & Leotta

Attorneys beware: There can be possible attorney liability and sanctions against you for the filing of a case that court finds is an abuse of Chapter 7! (Because this section is intended for lawyers to read, we have reproduced below the actual text of the statute, found in the new Bankruptcy Code at Section 707(4)(A):

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Liens normally remain. One of the most fundamental protections for creditors under Chapter 7 is the fact that liens normally pass through Chapter 7 unaffected by the debtor’s discharge.

Types of liens. A lien is a security interest affecting some type of property owned by the debtor. Most typically in a bankruptcy case it is going to be a lien or a mortgage secured by the debtor’s residence or other real property, or the title slip to a motor vehicle that has money owed on it. Purchase money security interests in appliances and furniture are also common examples of assets that may be subject to a lien. Basically, a "lien" is usually found on something that the debtor has not finished paying for. When the debtor files bankruptcy, the debtor can usually keep

such assets, provided that the debtor continues to pay for the item and honor the original contract.

Avoiding liens. Some liens are avoidable (removable) by the debtor, but to avoid such a lien special action must be taken in the court. It does not happen automatically, and it is the debtor’s burden to prove in court that each of the circumstances that legally permit the court to make an order avoiding such lien in fact exists. Generally, liens can be avoided against assets but only to the amount of any exemption that the debtor was entitled to claim on the asset, and provided that the lien arose as a judgment lien, or as a nonpossessory, nonpurchase money lien on certain kinds of household goods and personal effects belonging to the debtor. The terms "nonpossessory, nonpurchase money" means that the debtor already owned the asset before it was ever pledged as collateral for the debt, and the creditor did not keep possession of asset as security for the debt.

Examples: Jewelry held in pawn is not subject to such lien avoidance, because a pawn broker keeps possession of the jewelry until the loan is paid, thus the lien isn’t nonpossessory; A debtor who has borrowed money from a loan company by using home furniture and appliances as collateral for the loan can usually avoid the lien, because such furniture and appliances are usually exempt, the debtor did not use the borrowed money to buy the assets that are being used as collateral, and the debtor did not have to surrender possession of the collateral until the loan is repaid – and thus the necessary elements of a nonpossessory, nonpurchase money lien against exempt property have been met; a judgment lien recorded against the debtor’s house is usually avoidable to the extent of the equity that would have been exempt in the absence of the judgment lien, because the lien is a judgment lien, (as opposed to a voluntary mortgage which normally is not avoidable).

Statutory liens are not avoidable by the debtor. There are certain liens called statutory liens that the debtor can not avoid. Examples are tax liens and mechanic’s liens.

Caveat: Certain liens against exempt property are avoidable by the debtor, but the lien avoidance does not happen automatically. The debtor must take affirmative legal action in court to secure an actual court order avoiding the lien, or else it remains against the debtor’s property and can still be enforced by the creditor, after the case is closed, even though it could have been avoided during the case.

Reopening a closed case. The court will usually permit the debtor to reopen a case so that the debtor can pursue relief that could have been sought, (but perhaps was overlooked), during the bankruptcy. For example, during the bankruptcy

case the debtor might not have been aware of a judgment lien, and only learned about the lien several years later. In that case the debtor might seek to reopen the closed case to then file a motion seeking to avoid the lien.

Reaffirmation agreement. A reaffirmation is an agreement between the debtor and a creditor that a particular debt will not be discharged in the bankruptcy case. This is most typically done with secured debts covering personal property, such as motor vehicle loans and also with executory agreements like a vehicle lease. (In the case of a vehicle lease, the new agreement will most likely be called an assumption agreement.)

Statement of intentions. One of the duties of each individual debtor with secured debts is to file a written statement with the court within 30 days of the bankruptcy filing, stating what the debtors intentions are with respect to each secured debt. This document is called a Statement of Intentions. The bankruptcy law says in effect that with respect to each secured debt, the debtor must state that the debtor will surrender possession of the collateral to the creditor, or reaffirm the debt, or redeem the collateral. Then, within 30 days after the first date set for the meeting of creditors, the debtor must perform his intention. (A conflicting provision of the law says that the debtor must surrender the collateral securing a debt with 45 days after the first meeting of creditors unless the debtor enters into a reaffirmation agreement or redeems the collateral.)

Performance of the Statement of intentions. If the debtor fails to perform the required "intention" with 45 days after the first meeting of creditors, the automatic stay is terminated with respect to any personal property securing the obligation and the Code says, "the creditor may take whatever action as to such property as is permitted under applicable nonbankruptcy law, (unless the trustee timely seeks and obtains an order from the court requiring the debtor to surrender the property to the trustee.

1. • Creditor’s right to a nonbankruptcy law repossession. A creditor secured by personal property, (not secured by real estate) is free to repossess the collateral, (even if the payments are current) IF a situation exists that would have given the creditor the right to repossess in a case where a bankruptcy had never been filed. For example, most motor vehicle financing agreements require the borrower to keep the vehicle insured, and

1. to name the creditor on the insurance policy as a loss payee. Failure to carry the required insurance would be a material breach of the contract, allowing the creditor to repossess even though the monthly loan payments are current. Likewise, most financing agreements state that the insolvency of the borrower or a declaration of bankruptcy by the borrower is a material breach of the agreement. Most financing agreements provide that any material breach of the agreement allows the creditor to repossess. If the debtor reaffirms the agreement, (reaffirmation requires an agreement of both the creditor and the debtor), then presumably the nonmonetary technical default triggered by the act of filing bankruptcy has been cured.

1. • Nonmonetary breach and a creditor’s right to repossession. Where the only breach of the agreement has been a nonmonetary technicality, that is, no failure to comply with any material contract provision has occurred other than the technical breach caused by the bankruptcy filing, can the creditor repossess anyway? Most creditors (at least those institutional creditors in the motor vehicle financing business), have taken the position that they will repossess IF the debtor fails to reaffirm. They want the reaffirmation provisions of the new Bankruptcy Code to be strictly enforced, because in some cases they are rightly concerned that the debtor is going to abuse the vehicle, then "walk" from the obligation as soon as it is convenient for the debtor to do so.

1. o The reaffirmation process is really a "tug of war" between what is in the best interests of the debtor verses what is in the best interests of the creditor. It is usually in the best interests of the creditor to keep the debtor personally liable for the obligation. It is usually in best interests of the debtor to keep possession of personal property security (such as a motor vehicle), if it can be done without the personal liability that is resurrected under a formal reaffirmation agreement. When the debtor keeps the collateral without making a reaffirmation agreement, we call that a "ride thru," (because of debtor’s continued possession of the collateral "rides thru" the bankruptcy and emerges intact at the end of the process minus any direct personal liability of the debtor).

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