Bankruptcy Reminders

TIADA's Compliance Consultation Service has recently received several calls regarding consumer bankruptcy filings and creditors' rights in such situations. In particular, lienholders want to know what they can do when a customer files for bankruptcy protection. The two most frequently asked questions are:

1) I repossessed a vehicle, then the customer filed for bankruptcy the next day/week. Do I have to return the vehicle?

The short answer is yes. There are certainly ways for a lien holder to preserve their interest in, and the value of, the collateral. The association recommends that all lien holders make use of all legally available remedies to do so.
2)  My customer says that they are going to file for bankruptcy soon. Can I repossess the vehicle?
Again, the short answer is yes. The automatic stay on collection efforts is not effective until a consumer records (“files” at court) a bankruptcy filing.

TIADA would also like to review some myths about bankruptcy and creditors' rights and give you the facts you need to know.

Myth: Until a creditor receives official notice from the Bankruptcy Court that a debtor has filed bankruptcy, that creditor is under no obligation to pay attention to the bankruptcy filing, and can handle the debtor as any other debtor.

Fact: Any notice is actual notice.  From the moment a bankruptcy case is filed, the Automatic Stay is in existence and applies to every claimant and creditor of the debtor.  The stay prohibits any creditor from commencing or continuing any collection activity against the debtor, including repossessing collateral or disposing of collateral that has already been repossessed.  If a creditor takes action with actual notice (actual notice can come from the bankruptcy court, the debtor or the debtor's attorney) of the bankruptcy filing, the creditor is in violation of the automatic stay and is subject to sanctions.  Don't make the mistake one car creditor did in ignoring a hand-written notice delivered by the debtor on yellow-pad paper.  The judge made it clear after the creditor was arrested that the informal notice was actual notice.

Myth: Repossessing collateral prior to the debtor filing bankruptcy protects the creditor from being affected by the bankruptcy.

Fact:  If the creditor (1) repossesses collateral, (2) sends appropriate post-repossession notice, (3) waits the appropriate time period, and (4) legally disposes of the collateral, all before the debtor files bankruptcy, the creditor is under no obligation.  If, however, all of the above have not been completed prior to the bankruptcy filing, then the automatic stay will impact the creditor.

We find that debtors and their attorneys often run out and file just before the 20-day holding period on a strict foreclosure, or the usual 10-day holding period on a private sale expire. Absent some unusual circumstances (check with your attorney) the vehicle will probably have to be returned, and relief will have to be sought through the bankruptcy court.
Myth: If a debtor in bankruptcy lets insurance on the vehicle lapse, I can repossess despite the bankruptcy.

Fact: The contractual insurance requirement can be enforced in bankruptcy, but only with the permission of the bankruptcy court (the judge approves your request).  It would be a violation of the bankruptcy automatic stay to repossess without court authorization.

Myth: Since most motor vehicle retail installment contracts provide that the filing of a bankruptcy by the debtor is a condition of default, the creditor can repossess without having to obtain the permission of the court.

Fact: The debtor would be in default under the contract for filing bankruptcy, but the automatic stay still trumps the contractual rights regarding any collection action.

Myth: A closing document signed by a buyer declaring that he or she will not file bankruptcy; and that if bankruptcy is filed, the car creditor will not be subject to the bankruptcy, would keep the creditor out of bankruptcy danger.

Fact:  Such a contract term is forbidden by the Bankruptcy Code and is totally unenforceable.  Obviously, if this device could be used, every creditor would include it in credit papers making the Bankruptcy Code useless.

Some consumers file for bankruptcy protection shortly after they purchase a vehicle. The hope is that the bankruptcy filing occurs before the car creditor has perfected a security interest in the vehicle. In such a scenario, the car creditor would be treated as an unsecured creditor, similar to a credit card company, and would have little hope of receiving any payment for the vehicle. Federal bankruptcy law states that auto dealers are considered secured creditors if a lien is perfected within 30 days of the customer taking possession of the vehicle. In Texas, a security interest is perfected as of the date the county tax assessor-collector accepts a title application that discloses the lien and the filing fee.  Applying for title transfer within 30 days of the date of sale accomplishes all three goals discussed here. However, the best practice is always to transfer as soon as possible to avoid fines and insure liens are perfected.


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