Secured creditors are generally protected up to the value of the security, or collateral, in Chapter 7 bankruptcy proceedings, as long as creditors are careful to comply with the rules in place regarding a debtor’s options for keeping the collateral and paying the debt.
When a debtor files a bankruptcy petition, the automatic stay is immediately invoked and prevents a creditor from repossessing collateral without court permission. Those carefully drafted ipso facto clauses in your loan contracts, which outside a bankruptcy context might allow you to repossess the collateral, are rendered pretty much useless, with very few exceptions. As a secured creditor, you have one option in the beginning of a bankruptcy proceeding, and that is to wait for the debtor to exercise his options.
First, a debtor must declare his intention to surrender the collateral, redeem the collateral, or reaffirm the debt. If the debtor chooses to redeem the collateral, he must pay the secured debt up to the value of the collateral to the secured creditor. If the debtor chooses to surrender the collateral, then the debtor and creditor, or their counsel if represented, arrange pick up of the collateral by the secured creditor.
If the debtor chooses the latter option to retain the collateral and affirm the debt, then the reaffirmation agreement must be drafted, signed by the debtor and the creditor, and properly filed with the court. The duty to facilitate the reaffirmation agreement falls to the secured creditor.
In addition, Bankruptcy Code Section 524(k) requires creditors of consumer debtors to provide disclosures to the debtor in a timely manner to notify the debtor of the consequences of entering into a reaffirmation agreement, including the fact that the reaffirmation agreement imposes personal liability of a potentially dischargeable debt.
Once the reaffirmation agreement has been signed and filed with the court, it is subject to court approval. If the debtor has complied with Sections 362 and 521 by filing a statement of intention, cooperating with the creditor in signing the reaffirmation agreement, and appearing at a reaffirmation hearing, he has fulfilled his duties in the reaffirmation process, even if the court refuses to approve the agreement.
Where does a court’s refusal to approve a reaffirmation agreement leave the secured creditor? No better off. As long as a debtor complied with Sections 362 and 521, and he continues to make timely payments, the court’s refusal to approve a reaffirmation agreement has no effect on the automatic stay or subsequent discharge injunction, and the creditor may not take action to repossess the collateral.
In fact, a secured creditor may be found in violation of the discharge injunction, and a court may impose compensatory damages along with the return of the collateral under Section 105 if the creditor repossesses collateral when a debtor complied with Sections 362 and 521 and the bankruptcy court denied the reaffirmation agreement after a hearing.
If you are a secured creditor in a reaffirmation scenario, be sure any repossession actions you contemplate are permissible under the Bankruptcy Code. The attorneys at Glass & Goldberg are committed to protecting creditors’ rights before, during, and after a bankruptcy proceeding, and can help you navigate the nuances of the Bankruptcy Code.
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