Things Every Creditor Needs to Know When a Chapter 7 is Filed - Mary Beth Ausbrooks Rothschild & Ausbrooks, PLLC April 25, 2012

Things	
  Every	
  Creditor	
  Needs	
  to	
  Know	
  	
  
     When	
  a	
  Chapter	
  7	
  is	
  Filed	
  	
  

                 Mary	
  Beth	
  Ausbrooks	
  
              Rothschild	
  &	
  Ausbrooks,	
  PLLC	
  

                        April	
  25,	
  2012	
  

Secured	
  or	
  Unsecured	
  ??	
  

If	
  secured,	
  

Can	
  your	
  lien	
  be	
  avoided	
  or	
  stripped?	
  
 Will	
  your	
  lien	
  stand	
  up	
  against	
  the	
  
              Trustee’s	
  scruFny?	
  

Properly	
  Perfected?	
  

§   State	
  law	
  will	
  dictate	
  procedure	
  for	
  perfecFng	
  security	
  
     interests	
  in	
  collateral.	
  

§   11	
  USC	
  SecFon	
  544	
  allows	
  the	
  Trustee	
  to	
  avoid	
  any	
  
     unperfected	
  liens.	
  

If	
  the	
  lien	
  is	
  not	
  properly	
  perfected,	
  

§   The	
  Trustee	
  will	
  file	
  an	
  Adversary	
  Complaint	
  to	
  avoid	
  the	
  
     unperfected	
  lien	
  and	
  move	
  to	
  sell	
  the	
  collateral	
  free	
  and	
  clear	
  
     of	
  any	
  liens.	
  

§   The	
  proceeds	
  from	
  the	
  sale	
  of	
  your	
  collateral	
  will	
  be	
  
     distributed	
  to	
  all	
  unsecured	
  creditors	
  on	
  a	
  pro-­‐rata	
  basis.	
  

Can	
  your	
  properly	
  perfected	
  lien	
  be	
  avoided?	
  

§    Do	
  you	
  have	
  a	
  judicial	
  lien	
  that	
  impairs	
  an	
  exempFon	
  	
  
      of	
  the	
  debtor?	
  

§    Do	
  you	
  have	
  a	
  non-­‐purchase	
  money	
  security	
  interest	
  in	
  the	
  
      household	
  goods	
  and	
  furniture	
  used	
  by	
  the	
  debtor	
  or	
  his	
  
      dependents?	
  

11	
  USC	
  522	
  (f)(1)(A)	
  and	
  (B)	
  

§   SubsecFon	
  (1)(A)	
  allows	
  for	
  judicial	
  liens	
  which	
  impair	
  the	
  
     debtor’s	
  exempFons	
  to	
  be	
  avoided.	
  

§   SubsecFon	
  (1)(B)	
  allows	
  for	
  the	
  avoidance	
  of	
  consensual	
  non-­‐
     PMSI	
  liens	
  on	
  certain	
  household	
  items	
  and	
  related	
  property	
  
     used	
  by	
  the	
  Debtor	
  and/or	
  his	
  dependents.	
  	
  	
  

§   The	
  list	
  of	
  avoidable	
  assets	
  is	
  specific.	
  

If	
  522(f)	
  applies,	
  what	
  does	
  that	
  mean	
  for	
  you?	
  

§   Debtor	
  will	
  move	
  the	
  Court	
  for	
  an	
  Order	
  Avoiding	
  your	
  Lien.	
  

§   Once	
  the	
  Order	
  becomes	
  final,	
  your	
  lien	
  is	
  exFnguished	
  and	
  
     your	
  claim	
  becomes	
  unsecured.	
  	
  Your	
  collateral	
  is	
  an	
  asset	
  
     which,	
  if	
  not	
  exempt,	
  could	
  be	
  liquidated	
  by	
  the	
  Trustee.	
  

So	
  your	
  lien	
  is	
  good…	
  

§   The	
  Debtor	
  must	
  perform	
  one	
  of	
  three	
  specified	
  acts	
  within	
  
     30	
  days	
  of	
  the	
  first	
  se[ng	
  of	
  the	
  341,	
  as	
  set	
  forth	
  in	
  11	
  USC	
  
     521(2)(B).	
  

§   These	
  acts	
  are:	
  
     	
   	
   	
   	
  REAFFIRM	
  
     	
   	
   	
   	
  SURRENDER	
  
     	
   	
   	
   	
  REDEEM	
  

REAFFIRMATION	
  

§   11	
  USC	
  524	
  sets	
  forth	
  the	
  statutory	
  requirements	
  for	
  reaffirmaFon	
  
     agreements.	
  
§   If	
  counsel	
  for	
  the	
  Debtor	
  does	
  not	
  cerFfy	
  that	
  the	
  reaffirmaFon	
  agreement	
  
     is	
  in	
  the	
  best	
  interest	
  of	
  the	
  Debtor,	
  in	
  order	
  for	
  the	
  reaffirmaFon	
  
     agreement	
  to	
  be	
  binding,	
  there	
  must	
  be	
  court	
  approval.	
  
§   A	
  fully	
  executed	
  and	
  filed	
  reaffirmaFon	
  agreement	
  binds	
  the	
  Debtor	
  and	
  
     the	
  creditor	
  to	
  the	
  terms	
  of	
  the	
  underlying	
  note.	
  	
  	
  
§   The	
  debt	
  is	
  not	
  discharged.	
  
§   The	
  debtor	
  may	
  rescind	
  the	
  agreement	
  within	
  60	
  days	
  of	
  its	
  filing	
  or	
  the	
  
     date	
  of	
  discharge,	
  whichever	
  occurs	
  later.	
  

REDEMPTION	
  

§   11	
  USC	
  722	
  states	
  that	
  the	
  Debtor	
  may	
  redeem	
  tangible	
  
     personal	
  property	
  from	
  a	
  lien	
  that	
  secures	
  a	
  dischargeable	
  
     consumer	
  debt.	
  

§   The	
  Debtor	
  will	
  move	
  the	
  Court	
  to	
  enter	
  an	
  Order	
  valuing	
  
     your	
  collateral	
  at	
  a	
  specified	
  amount	
  and	
  allowing	
  the	
  Debtor	
  
     to	
  pay	
  you	
  that	
  value	
  in	
  a	
  cash	
  payment.	
  

§   The	
  tendering	
  of	
  the	
  cash	
  exFnguishes	
  the	
  lien.	
  

§   The	
  balance	
  of	
  the	
  claim	
  is	
  discharged.	
  

What	
  do	
  I	
  do?	
  

§   If	
  the	
  Debtor	
  owes	
  a	
  bank	
  on	
  a	
  revolving	
  account	
  used	
  for	
  the	
  
     financing	
  of	
  electronics,	
  jewelry	
  or	
  furniture,	
  as	
  a	
  macer	
  of	
  
     course,	
  I	
  will	
  file	
  a	
  MoFon	
  to	
  Redeem	
  the	
  collateral	
  for	
  a	
  
     modest	
  (but	
  probably	
  true)	
  amount,	
  knowing	
  that	
  there	
  will	
  
     be	
  no	
  opposiFon	
  to	
  the	
  MoFon.	
  

§   Once	
  I	
  obtain	
  the	
  Order,	
  I	
  advise	
  the	
  Debtor	
  to	
  pay	
  the	
  
     amount	
  once	
  a	
  specific	
  demand	
  is	
  made	
  for	
  it,	
  knowing	
  that	
  
     demand	
  will	
  probably	
  never	
  come.	
  

SURRENDER	
  

§   The	
  Debtor	
  will	
  give	
  your	
  collateral	
  back	
  to	
  you,	
  and	
  the	
  claim	
  
     is	
  discharged.	
  
§   You	
  must	
  have	
  relief	
  from	
  the	
  automaFc	
  stay	
  before	
  you	
  can	
  
     repossess	
  your	
  collateral.	
  
§   You	
  bare	
  the	
  cost	
  and	
  burden	
  of	
  repossessing	
  your	
  collateral.	
  
§   Once	
  you	
  have	
  recovered	
  your	
  collateral,	
  you	
  sFll	
  must	
  
     comply	
  with	
  state	
  laws	
  regarding	
  disposing	
  of	
  the	
  collateral	
  at	
  
     a	
  public	
  aucFon	
  and	
  any	
  noFcing	
  provisions.	
  

What	
  are	
  your	
  rights	
  if	
  the	
  	
  
                        Debtor	
  fails	
  to	
  perform?	
  
§   11	
  USC	
  521(6)	
  hanging	
  sentence	
  states	
  that	
  is	
  the	
  Debtor	
  	
  
     fails	
  to	
  perform	
  his	
  intenFon	
  within	
  45	
  days	
  of	
  the	
  341,	
  	
  
     the	
  automaFc	
  stay	
  is	
  lided	
  and	
  is	
  no	
  longer	
  property	
  of	
  	
  
     the	
  estate.	
  
§   Riding	
  through	
  is	
  no	
  longer	
  allowed.	
  
§   If	
  the	
  Debtor	
  has	
  destroyed	
  or	
  sold	
  the	
  collateral,	
  you	
  can	
  file	
  
     an	
  Adversary	
  Complaint	
  to	
  ask	
  the	
  Court	
  to	
  determine	
  the	
  
     dischargeability	
  of	
  your	
  claim.	
  

What	
  is	
  an	
  Adversary	
  Proceeding?	
  

§   Basically,	
  a	
  lawsuit	
  is	
  filed	
  within	
  a	
  bankruptcy	
  case	
  and	
  is	
  
     assigned	
  a	
  separate	
  case	
  number.	
  	
  
§   The	
  lawsuit	
  is	
  iniFated	
  with	
  the	
  filing	
  of	
  an	
  Adversary	
  
     Complaint.	
  
§   Federal	
  Rules	
  of	
  Civil	
  Procedure	
  apply.	
  
§   There	
  must	
  be	
  valid	
  service	
  on	
  the	
  defendant.	
  
§   There	
  must	
  be	
  an	
  Answer	
  filed	
  within	
  30	
  days	
  of	
  Service.	
  
§   There	
  will	
  be	
  discovery.	
  
§   There	
  will	
  be	
  a	
  trial.	
  

Who	
  files	
  Adversary	
  Complaints?	
  

§     Trustees	
  against	
  Creditors	
  or	
  Debtors.	
  
	
  
§     Creditors	
  against	
  Debtors.	
  

§     Debtors	
  against	
  Creditors.	
  

All	
  parRes	
  must	
  weigh	
  the	
  costs	
  of	
  	
  
prosecuRng	
  or	
  defending	
  the	
  lawsuit	
  	
  
 against	
  the	
  possible	
  best	
  outcome.	
  

What	
  are	
  common	
  kinds	
  of	
  adversaries	
  
              involving	
  creditors?	
  

 	
  
§   Complaint	
  to	
  Avoid	
  Unperfected	
  Lien	
  and	
  Sell	
  Collateral	
  Free	
  
     and	
  Clear	
  of	
  Liens	
  (already	
  discussed),	
  filed	
  by	
  Trustee	
  

§   Complaint	
  to	
  Recover	
  a	
  Preference,	
  filed	
  by	
  Trustee	
  or	
  Debtor	
  
     against	
  Creditor	
  

§   Complaint	
  to	
  Avoid	
  a	
  Fraudulent	
  Conveyance,	
  filed	
  by	
  Trustee	
  
     against	
  Creditor	
  

§   Complaint	
  to	
  Determine	
  Dischargeability,	
  filed	
  by	
  Creditor	
  
     against	
  the	
  Debtor	
  	
  

What	
  is	
  a	
  PREFERENCE?	
  
§   11	
  USC	
  547	
  is	
  the	
  applicable	
  statute.	
  

§   For	
  consumer	
  debtors,	
  if	
  the	
  creditor	
  received	
  more	
  than	
  
     $600	
  in	
  the	
  90	
  days	
  prior	
  to	
  filing	
  either	
  through	
  consensual	
  
     or	
  contractual	
  payments	
  or	
  through	
  garnishment	
  or	
  
     execuFon,	
  the	
  Trustee	
  can	
  sue	
  the	
  creditor	
  to	
  return	
  the	
  
     money	
  which	
  will	
  then	
  be	
  distributed	
  to	
  all	
  creditors	
  on	
  a	
  pro	
  
     rata	
  basis.	
  

§   If	
  the	
  Trustee	
  abandons	
  this	
  asset,	
  the	
  Debtor	
  can	
  step	
  in	
  the	
  
     Trustee’s	
  shoes	
  and	
  can	
  bring	
  the	
  suit.	
  	
  

Do	
  you	
  have	
  a	
  defense?	
  

§     11	
  USC	
  547(b)	
  sets	
  forth	
  the	
  elements	
  of	
  a	
  preference.	
  	
  
       The	
  elements	
  are	
  all-­‐inclusive	
  and	
  require:	
  
        – Payment	
  was	
  made	
  to	
  a	
  creditor	
  
        – On	
  an	
  old	
  account	
  
        – Made	
  while	
  the	
  Debtor	
  was	
  insolvent	
  
        – Within	
  90	
  days	
  of	
  filing	
  
        – Which	
  enabled	
  the	
  Creditor	
  to	
  receive	
  more	
  than	
  his	
  share	
  if	
  the	
  Trustee	
  
          made	
  disbursements	
  to	
  creditors.	
  
        – It	
  is	
  not	
  a	
  preference	
  if	
  the	
  payment	
  was	
  for	
  a	
  contemporaneous	
  exchange	
  for	
  
          new	
  value,	
  as	
  per	
  subsecFon	
  (c).	
  

	
  

What	
  is	
  a	
  fraudulent	
  conveyance?	
  

§   11	
  USC	
  548	
  allows	
  the	
  Trustee	
  to	
  avoid	
  a	
  transfer	
  of	
  property	
  
     if	
  less	
  than	
  reasonable	
  equivalent	
  value	
  was	
  not	
  given,	
  made	
  
     while	
  the	
  Debtor	
  was	
  insolvent.	
  

§   Actual	
  fraudulent	
  intent	
  is	
  not	
  required.	
  

What	
  acRons	
  can	
  a	
  Creditor	
  bring	
  	
  
                         against	
  the	
  Debtor?	
  
§   The	
  most	
  common	
  is	
  a	
  Complaint	
  to	
  Determine	
  
     Dischargeability.	
  
§   This	
  would	
  be	
  appropriate	
  in	
  circumstances	
  when	
  the	
  Debtor	
  
     cannot	
  surrender	
  collateral	
  because	
  he	
  destroyed	
  it	
  or	
  sold	
  it	
  
     without	
  approval.	
  
§   Also,	
  appropriate	
  when	
  the	
  Debtor	
  incurs	
  debt	
  within	
  60	
  to	
  
     70	
  days	
  before	
  filing	
  for	
  cash	
  advances	
  or	
  the	
  purchase	
  of	
  
     luxury	
  goods,	
  as	
  per	
  11	
  USC	
  523(a)(2)(C)(I)	
  and	
  (II).	
  There	
  is	
  a	
  
     presumpFon	
  of	
  non-­‐dischargeability	
  in	
  these	
  circumstances.	
  

What	
  should	
  creditors	
  do?	
  

§   Enforce	
  valid	
  liens.	
  	
  Creditors	
  should	
  know	
  that	
  Debtors	
  know	
  
     that	
  there	
  is	
  a	
  very	
  small	
  chance	
  that	
  there	
  will	
  ever	
  be	
  a	
  true	
  
     demand	
  for	
  the	
  return	
  of	
  un-­‐reaffirmed,	
  un-­‐redeemed	
  
     collateral.	
  

§   Weigh	
  the	
  cost	
  of	
  enforcement	
  of	
  liens	
  or	
  rights	
  against	
  the	
  
     ulFmate	
  reward.	
  

QuesRons?	
  
    Mary	
  Beth	
  Ausbrooks	
  
 Rothschild	
  &	
  Ausbrooks,	
  PLLC	
  
  1222	
  16th	
  Ave.	
  So.,	
  Ste.	
  12	
  
     Nashville,	
  TN	
  37212	
  
marybeth@rothschildbklaw.com