Collateral Bankruptcy Services, LLC is a company created to specifically address this problem and make it so that you or your client do not have to face and make illogical, tough, costly decisions like the debtor and his attorney were forced to make below.
Unfortunately, there is a growing problem of lenders that are refusing to take possession of vehicles surrendered in bankruptcy. We see this not only with motor vehicles but we are also seeing this occasionally in real estate. Because of low values some lenders are unwilling to foreclose to the detriment of the neighborhood. The lender simply finds the cost of paying maintenance, insurance, and back taxes exceed the value of the home.
The same problem exists with lenders that will not repossess certain motor vehicles. This is true because sometimes the costs of repossessing, refurbishing, warehousing and reselling exceed the vehicle’s value. As an example, in 2002 I filed a Chapter 7 bankruptcy for an individual with a 1999 Honda CB750X Nighthawk motorcycle. In 2002 the client owed HSBC over $6,000 on the bike, and the wholesale value of the vehicle was about $3,500. He indicated that he wished to surrender the vehicle but HSBC refused to come out and take possession. So my client kept the motorcycle having it insured with only a liability policy and riding it occasionally when the mood suited him. Since the debt was discharged HSBC was not allowed to try and collect the money from him and they were unwilling to enforce their lien and take back the vehicle.
To my surprise, this same individual came back to see me again in 2010. Once again he was in need of bankruptcy protection. So we filed another Chapter 7 case for him last year. Having forgotten the whole state of affairs from the 2002 bankruptcy, my client reminded me once again about the bike that he has kept in his possession since the last bankruptcy. So we listed the motorcycle once again on the client’s 2010 bankruptcy schedules along with a disclosure note on schedule D that the bike was offered for surrender in debtor’s previous bankruptcy and the lender refused to take possession of the property. In short order, the bankruptcy trustee formally abandoned the estate’s interest in the motorcycle. Once again the lender refused to take possession of the motorcycle.
My client was then asking me how he could get the lien released if he wanted to sell the motorcycle. So, I offered to file a motion to redeem the vehicle for $1.00. My client decided that he did not want to pay me for one extra hour of my time to draft and file the motion to redeem the vehicle. So the bike sits in my client’s garage, to be taken out for a ride on a nice Sunday afternoon on occasion. The title to the bike remains in motorcycle purgatory.
Assuming that another client wished a different outcome in this type of situation, we might have considered several options. First, the bankruptcy law allows the debtor to retain a vehicle where they pay off the lienholder the actual value of the vehicle in one lump sum. This is called redemption as briefly mentioned above. In a case where the lender is refusing to take back the vehicle they are essentially admitting that the vehicle is worthless. So a motion to redeem with the appropriate attorney and client declarations might be granted by the court with an order to pay $1.00 in exchange for the lender’s release of the lien.
Another option is to keep hounding the lender to take back the vehicle by calling them every few days. There is no guarantee that this will work, however the threat of sanctions for a discharge violation as will be discussed later on might prove persuasive.
Yet another option that was suggested by one of my colleagues was to have the vehicle taken to a friendly repair shop to get the oil changed. When the bill for the oil change is not paid to the mechanic. The repair shop can invoke a mechanics lien and sell the vehicle after first notifying the lienholder who has the option of paying the charges. If the lienholder does not pay the charges, perhaps the vehicle can be sold back to the owner/ customer for the price of the oil change.
Finally, you might be able to bring a motion for contempt against the lender for violating the debtor’s discharge order. There is a First Circuit case, Pratt v. GMAC, where GMAC was held to have violated the discharge injunction for having refused to take possession of a vehicle surrendered in the debtor’s Chapter 7 case. See Pratt v. General Motors Acceptance Corporation, 462 F.3d 14; 2006 U.S. App. Lexis 22446; Bankr. L. Rep. (CCH) P80,698; 56 Collier Bankr. Cas. 2d (MB) 1016. So in the First Circuit, if the lender refuses to pick up the car, you can reopen the case and ask that the lender be held in contempt if they do not pick up their collateral. This may or may not work in other circuits depending whether a court in another circuit is willing to follow the rationale of Pratt. At a minimum it makes the threat of seeking a discharge violation a means of convincing an unwilling lender to pick up the property.
The above is an excerpt from Bankruptcy Law Network attorney and contributor, Raymond Schimmel, who lives, works and blogs about problems debtors in bankruptcy face from San Diego, California. To read the full article or others like it, please visit the Bankruptcy Law Network website.