1 July 2024 / Casey B. Hicks / Scott D. Fink

Coffee with Casey Recap: A Q&A on How Bankruptcy Impacts Collateral Recovery

Topics: Bankruptcy

It’s hard to believe we recently celebrated episode 10 of our popular #CoffeeWithCasey webinar series!
With a record number of registrants, it was another engaging episode topped off with an iced cup of coffee - the best way to beat the summer heat. Bankruptcy Group chair and shareholder Scott Fink joined the webinar host and shareholder Casey Hicks for a Q&A session that discussed a critical topic: How bankruptcy impacts collateral recovery. 

Some of the questions answered during this episode included:

  • How does a bankruptcy filing affect creditors’ rights and their ability to recover collateral?
  • Do creditors need to return repossessed collateral upon learning of a bankruptcy filing?
  • What steps enable creditors to take back collateral and liquidate it?
If you share these questions or have similar concerns, you’ve come to the right place. Here are a few of the top takeaways discussed by Scott and Casey. And don’t forget to watch the full 30-minute episode to gain all of the tips and best practices. 

Q: Does a bankruptcy filing affect my ability to recover?

A: Unfortunately, it does because of the automatic stay that occurs upon a bankruptcy filing. 
The automatic stay, which takes effect immediately after the bankruptcy filing, prevents creditors from taking action to collect their debts, including repossessing or foreclosing on the collateral that secures the loans. It also halts any legal proceedings or lawsuits pending against the debtor. 
As a creditor, you must comply with the automatic stay whether you know about the bankruptcy filing or not. It may take hours, days and, sometimes, even weeks until you receive a notice of a debtor’s bankruptcy filing. 
However, this does not mean that creditors lose their rights to the collateral. Depending on the type and chapter of bankruptcy, creditors may be able to recover some or all of the collateral or receive compensation for its value. 

Q: Are there any exceptions to the automatic stay?

A: Yes, there are a few instances in which the automatic stay does not take effect. The most relevant relates to when a debtor files bankruptcy for a third time within the same calendar year as two other bankruptcy filings. If this is the case, the automatic stay does not take effect. In other words, if you have a debtor who is on bankruptcy number three within a 365-day period, you can continue on with your repossession efforts. 
The debtor may attempt to impose the automatic stay, but you do not need to cease your actions, whether it is a lawsuit, repossession, etc. If this situation arises, it’s smart to hire counsel to support your case and action steps. 

Q: Can I recover collateral in a chapter 7 bankruptcy filing?

A: In chapter 7, creditors have a couple of options at their disposal. They may file a motion for relief from the automatic stay and repossess or foreclose on the collateral, if they can show the collateral is not adequately protected or that the debtor has no equity in it. Or, creditors must wait until 45 days from the meeting of creditors for the automatic stay to terminate (if the debtor fails to follow through on their intentions with respect to the collateral) or you must wait for the discharge order to be entered, whichever occurs first. 
It’s important to keep in mind that the meeting of creditors typically does not occur until 30-45 days until after the case is filed. So, creditors could be looking at 60-70 or even 80 days until the automatic stay is lifted and they can continue repossession efforts. 

Q: How soon can you file a motion for relief of automatic stay?

A: If your customer/debtor is delinquent on the loan by more than 14-20 days, you definitely want to file a motion for relief from the automatic stay. If they are only lagging on the loan slightly, you may want to reach out to their counsel and uncover the debtor’s intent before filing the motion. 

Q: Can you recover collateral in a chapter 13 bankruptcy filing?

A: Chapter 13 bankruptcy is also known as the reorganization bankruptcy because it involves the creation of a repayment plan - the plan of reorganization - by the debtor, which is approved by the court. 
The plan lasts for three to five years, during which the debtor makes monthly payments to the trustee, who then distributes them to all of the creditors named in the plan. The plan must provide at least as much payment to the creditors as they would receive in a chapter 7 liquidation. The debtor can keep their assets as long as they make the plan payments. 
Creditors must review the proposed repayment plan to determine the treatment of the loan, which will dictate options and action steps. Creditors typically have two choices: (1) you can accept the debtor’s treatment of the debt in the plan, which may involve paying the debt in full, paying the value of the collateral, or modifying the terms of the loan; or (2) you can file an objection to the plan if you can show the plan does not meet legal requirements or the debtor is not acting in good faith.
If the plan is confirmed by the court, creditors are bound to the repayment plan and its terms. You cannot take any action against the collateral. 
If the plan is not confirmed, creditors can seek relief from the automatic stay and proceed with repossession or lawsuits. 

Watch the full episode today

Bankruptcy can have a significant impact on creditors and their collateral recovery. Many factors are at play including the type of bankruptcy filing, the value of the collateral and the actions of the debtor. It’s always a good idea to consult with a law firm or attorney who specializes in bankruptcy to understand your options and maximize your recovery efforts. 

To get more questions answered about your rights amid bankruptcy filings, watch the full Coffee with Casey webinar today. Our team is constantly monitoring the world of bankruptcy and is happy to connect with you. You can contact shareholders Casey or Scott anytime. 
This blog is not a solicitation for business, and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.

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Casey B. Hicks


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