With the advent of the bankruptcy law changes in 2005, individuals have fewer alternatives when considering bankruptcy. An individual facing bankruptcy has three options to consider filing under, those being Chapter 7, Chapter 11 or Chapter 13 of the code. For a lender, the consumer’s choice of chapter has unique implications to be considered, and the devices and methods available to the lender under Chapter 7 will be considered in this article. The lender’s options for protective actions in Chapters 11 and 13 will be discussed in later articles.
Since Chapter 11 is typically used by small businesses we’ll start off by comparing Chapter 7 and 13 proceedings. The key difference between Chapter 7 and Chapter 13 is the repayment of debt. Chapter 7 is bankruptcy liquidation, meaning your assets are liquidated to pay lenders, with certain exceptions. Chapter 13 allows consumers with a regular income to establish a payment plan to pay back all or some of their debts to creditors, over a period of time.
To qualify for a Chapter 7 bankruptcy a consumer must obtain mandatory credit counseling within 180 days before filing bankruptcy, meet the means test and then file a petition and related schedules with the bankruptcy court. Upon filing, the automatic stay is put in place, which limits the actions of creditors and other pending legal actions. The court will appoint a Trustee to oversee the case. In a Chapter 7 a consumer’s assets (valued as of the date of the filing), with certain exceptions, will be liquidated and the proceeds will be used to pay creditors. At the termination of the matter the consumer will receive a discharge.
In this Chapter, a consumer’s home may be saved only if payments are kept current. Therefore, a lender should closely monitor the payments. If they are not made, the lender should refer the account to Bankruptcy Counsel who can then apply for relief from the automatic stay.
As a less costly alternative the lender can wait until the trustee has abandoned his interest and the debtor has been discharged in Bankruptcy and then start the foreclosure process (this is not recommended since the foreclosure process may take several months and the sooner one starts the process the more likely that a greater recovery will be achieved). Time almost never favors the lender in the current market and in the foreclosure process.
In this Chapter a loan secured by a vehicle must be kept current. A lender should closely monitor the payments and insurance for the collateral. If they are not timely made nor kept in place the lender should refer this to Bankruptcy Counsel who can then apply for relief from the automatic stay. The lender can also wait until the trustee has abandoned his interest and the debtor has been discharged in Bankruptcy and then start the repossession/replevin process but this is not recommended. This collateral is subject to vast depreciation and loss.
The consumer has one of four options:
- He can keep the payments current
- Redeem the vehicle for its value (usually NADA wholesale or its equivalent)
- surrender the vehicle, or
- reaffirm the debt
While reaffirmation achieves the ultimate protection for a creditor, the amendments to the bankruptcy code have made this path so arduous that it is seldom achieved and the time and energy spent make this an impractical choice in most instances. If reaffirmed and approved by the Court, the consumer is bound by the original contract and may be sued for a deficiency if he were to default.