Despite the drop in the number of Chapter 7 and Chapter 13 bankruptcy filings in 2011, the projections for 2012 are bleak. For creditors, that means continuing to navigate the rules in bankruptcy. Some debtors holding collateral will try and reaffirm their debts with creditors. Congress made changes to several provisions relating to reaffirmation of debts and those changes must be read together to fully understand each parties’ rights with respect to the debtor’s ability to retain the collateral. The debtor now has a number of deadlines and potentially severe consequences for failing to meet those deadlines. However, Congress also left a small loop hole for debtors facing stubborn creditors. As a result, it is important for both sides to understand the law.
Before 2009 in the 9th Circuit, a debtor had the right to retain collateral provided the debtor remained current on the underlying loan. In 2009, the 9th Circuit Court did away with that right. As a result of Congressional changes, the debtor now must choose between reaffirming the debt on the collateral, redeeming the collateral by paying its fair market value to the creditor or surrendering the collateral to the debtor. Given the low property values, this creates an issue for creditors who were once over-secured and now are under-secured. If the debtor is able to purchase at fair market value, then the debtor alone has the opportunity to take advantage on an upswing in the market.
A Chapter 7 debtor has a duty under the new rules to file a statement of intent within 30 days after filing the petition or before the date of the meeting of creditors, whichever is earlier. The debtor can request a different time period from the Court and the Court has authority to set those different time periods. Once the statement of intent is filed, the debtor must perform on that statement within 30 days after the meeting of creditors or within the time fixed by the Court. What that means for creditors is that creditors should have some certainty as to the debtor’s intent.
If a debtor does not perform according to the statement of intent, Congress saw fit to create consequences. The consequences vary depending upon the type of collateral and the lending relationship. With regard to personal property, the automatic stay is terminated with respect to personal property (and the personal property is no longer part of the estate) if the debtor does not file a statement of intent timely, does not indicate on the statement of intent whether the debtor is surrendering the personal property in whole or in part or retaining the personal property, OR if the debtor fails to timely take the action specified in the statement of intent. There are additional creditor friendly rules for personal property sold to the debtor by the creditor (and the creditor financed the sale). These rules can mean that a debtor needs the creditor’s cooperation. There is a small loop hole benefiting the debtor if a creditor refuses to cooperate with a debtor trying to reaffirm the debt.
Previously if the parties agreed to reaffirm debt, creditors had difficulty with the required disclosures in the reaffirmation form. The new rules now include a standard form reaffirmation agreement, along with a cover page. Previously, the Creditor was required to disclose a number of facts that were difficult, at best. Those disclosures have largely disappeared in the new standard form.
If a debtor files bankruptcy, secured creditors should carefully review the time periods and the statement of intent to determine what their rights and obligations are with regard to the collateral securing the debt. Most fact patterns can be difficult and complicated and, as a result, it makes sense for creditors to consult their counsel or have their key people take special classes to become knowledgeable in these areas.
Gina focuses her practice in banking and lending law, creditor’s rights, construction, and real estate law.