Everything You Need to Know About Motor Vehicle Loans & Bankruptcy
With COVID-19 government relief running its course, consumers and companies alike are seeking debt relief via bankruptcy again. In fact, bankruptcy rates are creeping back up – and all signs point toward a steady spike in filings. The automotive industry often takes a heavy hit, with people failing to make payments and defaulting on their loans. Creditors in this space need to understand key bankruptcy protocols and processes so they can remain in control – and achieve optimal recovery results.
Fortunately, our talented group of attorneys can accelerate your knowledge in this area. In part I of our Ask a Pro auto loan webinar series, shareholder Milos Gvozdenovic and attorneys Garry Masterson and Erin McCabe answered YOUR top questions related to auto loans and bankruptcy. In part II, they picked up where they left off, covering key information related to internal system tracking, reaffirmation agreements, chapter 13 plans, and so much more.
Here’s a quick overview of some of the most frequently asked questions – and their respective answers – from part II of this interactive open mic session.
Internal System Tracking
1. Is it beneficial for a financial institution to mirror the chapter 13 plan within its core system? And, what happens if the case is dismissed three years later?
It’s always ideal to update your internal system to reflect the bankruptcy plan’s terms. This will allow you to account for pre-petition arrearages and post-petition payments.
Sometimes, problems arise when payments are coming in (from the debtor or the bankruptcy trustee) and you simply apply them to the oldest payment due without adjusting the timing within the tracking system. If you’re unable to make proper adjustments within your system, you can always keep track of payments within a manual spreadsheet.
If the court case is dismissed three years later, you may proceed as if the bankruptcy was never filed. You have to look at the payments and determine if they’ve been applied as post-petition payments or as arrearages. If you haven’t recovered the full amount owed to you, you may need to pursue state court remedies or, in some cases, repossess the vehicle.
2. If the debtor files a chapter 13 and the plan calls for the cure of pre-petition arrearage, should we bring the account current to the first post-petition payment? If this is the case, should the maturity date be extended?
Yes, you can make the account current, but you may not want to extend the terms. This is because your system may end up showing that there’s an outstanding balance, even when the plan has ended. You want to avoid a wrongful repossession or discharge violation.
3. What federal/state laws govern the need to mirror the bankruptcy plan within our core system?
There are no federal or state laws that require you to mirror the bankruptcy plan in your core system. However, it’s critical to make sure you’re following the proper terms of the plan.
Reaffirmation Agreements
4. Can a lender refinance a discharged loan that was not reaffirmed?
This is a hot button issue as of late but, ultimately, the answer is no unless a new value is given for the original loan. The problem with refinancing a non-reaffirmed loan is that there’s a risk that the court may penalize the lender for using the refinancing to circumvent the reaffirmation process.
If you attempt to refinance a discharged loan, you need to be prepared to answer these questions in court:
- Was this an attempt to collect a discharged debt?
- How did you convince the debtor to pay for the discharged loan?
- Why did you refinance the loan instead of reaffirming it?
- Did you try to re-obligate the debtor on a debt that they otherwise would not be able to reaffirm?
- What benefit did the debtor receive from the refinance?
- Why wouldn’t you readjust the terms within the reaffirmation agreement?
5. Would a reaffirmation agreement be considered valid if the creditor, debtor, and debtor’s attorney all signed the agreement before the discharge date but the document was not filed until after the discharge order had been entered?
The most important thing to remember throughout the bankruptcy process is to monitor your deadlines. Usually, the court outlines deadlines for many key steps throughout this process.
Once everyone signs the agreement and it is submitted to the court, the reaffirmation agreement is in effect. However, if you file a reaffirmation agreement later than 60 days AFTER the original meeting of creditors, it may be considered invalid depending on the court or jurisdiction.
If you’re facing this issue, you may want to look into one of these three options:
- Ask the debtor’s attorney to seek a delay of the discharge deadline
- Have the debtor’s counsel – or your counsel – file a document with the court asking for leave to file the reaffirmation agreement past the deadline
- Have the debtor’s counsel vacate the discharge order for the sole purpose of getting the reaffirmation agreement filed
6. Should we conduct credit reporting for reaffirmed accounts?
In all cases, you are required to report on reaffirmed accounts. If the debtor signs a reaffirmation agreement, their debt is no longer subject to a discharge. You would treat that loan as you would any other loan – it’s business as usual. Therefore, you need to report it to the credit agency.
If the reaffirmation agreement changes the terms of the loan, you treat it similar to a refinancing of the loan. Credit reporting will continue and your internal system should match the reaffirmation agreement if there is any change to the terms.
7. Once a debtor reaffirms a loan, at what point in the process do you credit the account as active instead of “BK-acct closed”?
As soon as the document is filed with the court, the loan should be treated as “normal” or as an active account. You can begin reporting on it to the credit agency and send monthly bills to the debtor. If the debtor falls behind or fails to make payments, you can contact them. The reaffirmation agreement takes effect as soon as it’s filed.
Pre-petition Vehicle Recovery Actions
8. Does refusal to return a vehicle that was seized pre-petition (before the bankruptcy was filed) violate Bankruptcy Code Section 362? Are sanctions warranted?
Many of these situations are case specific, which is why it’s important to contact legal counsel who can help you determine which path will achieve the best results.
Generally, as long as the vehicle was legally repossessed prior to the bankruptcy being filed, there is no violation of Section 362. With that being said, there may be some steps you want to take. Even though your repossession during the pre-petition stage is not a violation of the automatic stay, you will need relief from the automatic stay in order to liquidate that vehicle.
Once you receive notice of the bankruptcy filing, do not take active measures on the vehicle such as setting a sale date or proceeding with a sale. Place the sale date on hold or cancel it. If you obtain relief from the automatic stay, you can move forward.
If opposing counsel has filed a motion for turnover or a separate adversary proceeding, you should contact your bankruptcy attorney as soon as possible. If a plan has not been filed, you should quickly file a motion for relief from the automatic stay so you can proceed with liquidation of the vehicle after the relief is granted.
9. If the vehicle was sold due to repossession (prior to the bankruptcy filing), would the funds need to revert to the bankruptcy estate?
It depends. If the vehicle was repossessed and sold prior to the bankruptcy case being filed, but you still have the excess funds in your possession, you can contact the chapter 13 or chapter 7 trustee to confirm what they would like you to do with the excess funds. Taking this step can ensure you remain protected. Communication with the bankruptcy trustee in such instances can alleviate problems that could arise in the future should excess funds be disbursed without their knowledge.
The moral of the story: It never hurts to communicate with the bankruptcy case trustee regarding proper next steps. You always want to remain in their good graces.
For more comprehensive FAQs and insights about auto loans and bankruptcy, watch Part I and Part II of our Ask a Pro Open Mic: Keeping Your Hands on the Wheel in Bankruptcy - Motor Vehicle Loans webinar series. If you have additional questions that need to be answered, please contact Milos, Garry, and/or Erin directly and learn more about our bankruptcy team.
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.
