What is that Chapter 7 Debtor doing with my collateral? By Mary Beth Ausbrooks, Esq. & William Paul Slough, Esq.

Transcription

1 What is that Chapter 7 Debtor doing with my collateral? By Mary Beth Ausbrooks, Esq. & William Paul Slough, Esq.

2 What options does the Chapter 7 Debtor have? Surrender the collateral Redeem the collateral Reaffirm on the debt secured by the collateral Avoid the lien of the collateral 2

3 Statement of Intentions 11 U.S.C. 521 requires a debtor to state his intentions on whether he intends to surrender the collateral, reaffirm on the debt or redeem the collateral. Official Form 8 must be completed and filed within 30 days of the first setting of the 341 and the debtor must perform his intention, as per 11 U.S.C. 521(a)(2)(B). If the Debtor fails to perform his intention within 45 days of the first setting of the 341, the stay is lifted and the property is no longer property of the estate and creditor is permitted to gain possession, as permitted under the applicable state law as per 11 U.S.C. 521(a)* Note that the Chapter 7 Trustee can intervene to contest by filing a Motion and having a hearing within that same 45 day period. 3

4 Statement of Intentions A copy of the statement of intention shall be served on the trustee and the creditors named in the statement on or before the filing of the statement. F.R.B.P. 1007(b)(2). 4

5 What is Surrender? Simply stated it means that the Debtor intends to give back the collateral and receive a discharge of personal liability on the underlying obligation. 5

6 Why surrender? The collateral is in poor condition. The value is far less than the debt owed. The debtor cannot afford it to keep the collateral. The collateral is a luxury item or is otherwise not needed. The Debtor cannot reaffirm or redeem the collateral. Keeping the collateral would not be in the Debtor s best interest. 6

7 How does a creditor facilitate gaining possession of the surrendered collateral? 521(a)* states that a creditor can use all remedies under state law once 45 days from the first meeting of creditors date. Motion for Relief from the Automatic Stay as permitted under 362(d). Obtain an Agreed Order Granting Relief from Stay with Debtor s counsel and the Chapter 7 Trustee. 7

8 What is Redemption? 11 U.S.C. 722 states: An individual debtor may, whether or not the debtor has waived the right to redeem under this section, redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt, if such property is exempted under section 522 of this title or her been abandoned under section 554 of this title, by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien in full at the time of redemption. 8

9 Elements to 722 Collateral must be tangible personal property. The collateral must be used for the personal, family or household use. The underlying lien is a dischargeable consumer debt. Collateral must be either exempted by the debtor or the Trustee has to abandon the property. The Debtor has to pay the value of the collateral as set forth in 11 U.S.C. 506(2) which states that an allowed secured claim is based on what a retail merchant would sell the collateral for considering its age and condition as of the date of filing. The Debtor has to pay the redemption amount in full at the time of redemption. 9

10 How does the Debtor effectuate a redemption offer? Negotiates a voluntary redemption agreement with the lienholder. Files a Motion to Redeem Collateral. Depending on the jurisdiction, there may or may not be a hearing. In my district, the creditor would have 21 days to object to the motion. If no objection is raised, an Order is submitted and entered granting the Motion. 10

11 Typical Targets of a Motion to Redeem Computer equipment Vacuum cleaners Water purifier systems All other types of electronics Furniture Jewelry Musical instruments Cars, but typically outside financing is required 11

12 Reaffirmation Agreements 11 U.S.C. 524(c) sets forth the elements of an agreement that if the steps are followed, the agreement will survive the discharge of the debtor s bankruptcy. The agreement is called a Reaffirmation Agreement and the contents of this agreement are set forth verbatim in 524(c). 12

13 What are the elements of a valid Reaffirmation Agreement? The agreement was made before the entry of the discharge order. 524(c)(1). The debtor was advised of numerous disclosures set forth in 524(k) which include listing of all of the financial terms and requiring certain disclosures by the debtor and details regarding his rights and responsibilities. The agreement has to be filed with the Court and include certain certifications signed by Debtor s counsel. The agreement cannot be rescinded to be effective. 13

14 What is the role Debtor s attorney in the Reaffirmation Agreement? 11 U.S.C. 524(c)(3) states that the attorney who represents the Debtor must certify that (A) the agreement was entered into voluntarily by the debtor who was fully informed; (B) the agreement does not impose an undue hardship on the Debtor; and (C) the attorney fully advised the Debtor of the consequences of default and the legal effect and consequences of the agreement. Rule 9011 states that by signing a document which is presented to the Court the signer certifies that the statements that are made to the best of the signer s knowledge, information and belief, after a reasonable inquiry, that there is evidentiary support. If the Court finds to the contrary, the signer can be sanctioned by the Court. 14

15 Reasons why Counsel will not sign the Reaffirmation Agreement? Paying the reaffirmed debt will cause an undue hardship. This term is not defined but courts have interpreted it to mean that the Debtor cannot afford the payment. The official reaffirmation agreement form includes a mathematical test where the Debtor s net income is listed, and subtracted from it is the total of all of the Debtor s monthly obligations. The net amount must cover the reaffirmed payment. If the Debtor s budget is negative with this reaffirmed payment, and there is no satisfactory explanation on how the Debtor will be able to pay this debt, then Debtor s counsel cannot sign the Reaffirmation Agreement. 15

16 What happens if Debtor s Counsel does not sign the Reaffirmation Agreement? The Reaffirmation Agreement will not be effective unless the Court approves it. A Motion (Part E of the official form) must be filed with the Reaffirmation Agreement asking the Court to set a hearing. At said hearing, the Court will listen to testimony and other evidence as to whether the reaffirmation agreement should be approved. 16

17 Is Ride Through an option? A ride through or a retain and pay situation occurs when the Debtor retains the collateral and continues to make contractual payments on the discharged debt. The Bankruptcy Code does not support this type of situation and the Circuits are split on whether this can be done. 4 Circuits have held that Debtors who are contractually current on the loan and continue to make payments have a 4 th option. 4 other Circuits have held that this 4 th option is not available debtors can only reaffirm, redeem or surrender. 17

18 Personal vs. Real Property 362(h)(1) & 521(a)(6) Both require a debtor to reaffirm, redeem, or surrendered personal property. Courts are split on whether Congress intended this to include real property, or if the ride through option still exists for land: There is no ride through option for Chapter 7 debtors who seek to retain real property securing creditor's claim. In re Harris, 421 B.R. 597, 598 (S.D.Ga., 2010). Ride through option exists as to real property securing creditor's claim. In re Covel, 474 B.R. 702, 708 (W.D.Ark, 2012). 18

19 Lien Avoidance Actions 11 U.S.C. 522(f) allows for a Debtor to move the Court to avoid the lien of an otherwise valid security interest if: 1) the lien is a non-purchase money security interest in certain household goods; and 2) a judicial lien that impairs the Debtor s exemption in the underlying property. These actions require the filing of a Motion and the opportunity for a hearing. 19

20 What I would like to see in the process of effectuating a Debtor s Intentions? A central location, a website portal, for example, where my staff or my Chapter 7 associate attorney can go and request or download a reaffirmation agreement. Negotiations on modified terms could be handled through this site. An automated system, if you will, for the handling of not only reaffirmations, but redemptions, stay relief orders, etc. I want to cut down on the man hours chasing documents. 20