We were recently contacted by an individual whose automobile – which he owned free and clear – was repossessed by a creditor who obtained a judgment on an unrelated debt, and apparently perfected a lien on the vehicle. At first blush, it may appear that filing for bankruptcy at this stage would not help this individual since the repossession looks like a “done deal.”
However, relief may be available to this individual under the Bankruptcy Code. Section 522(h) of the Code allows a debtor in bankruptcy to essentially stand in the shoes of the trustee and sue a creditor that has repossessed property if the creditor’s lien impaired the debtor’s ability to protect or exempt the property pursuant to bankruptcy law. In other words, if the property could have been exempted by the debtor and the creditor repossessed or garnished the property in the 90 day period prior to filing, the property may be recoverable by your bankruptcy attorney. Only certain judicial liens such as a judgment after a suit by a credit card company and non-possessory, non-purchase money security interests in household goods or tools of the trade are avoidable. This a complex area of the law that requires a knowledgable attorney to fully utilize.
“The lien that ate the equity.” Example of a judicial lien that impairs an exemption that is avoidable in bankruptcy:
Chris is suffering from overwhelming credit card debt after losing his job. The payments become too much and he falls further and further behind. Eventually, he is sued by a credit card company for non-payment of a $4,000 balance. Unable to afford an attorney and conceding that he owes the debt, Chris doesn’t answer the complaint and the credit card company obtains what is known as a “default judgment.”
The judgment is the court’s final determination that the debt is due. On the strength of the judgment, the creditor obtains a lien on Chris’ 2005 Honda. The Honda is worth $10,000, Chris owes $6,000 on the car and Chris’ state exemption laws allow debtors to protect up to $3,500 of equity in a car. The Honda is then repossessed by the credit card lender. Chris files for bankruptcy three weeks later. What result? Well, the original car loan has a balance of $6,000 add to that the $4,000 judgment lien of the credit card company and the entire value of Chris’ car is consumed in debt. Chris’ state laws allow him to protect $3,500 of value in his car from the claims of creditors. As such, the credit card judgment impairs Chris’ car exemption by eating into the equity he enjoyed in the car after the first loan. The bottom line is that the judicial lien (remember this analysis does not apply to the regular car loan) makes it impossible for chris to protect his car as he should be able to under state and bankruptcy law. The repossesion is therefore avoidable in bankruptcy.
In the above hypothetical, the debtor is authorized to use the Trustee’s avoidance powers to reclaim the exempt property. Bankruptcy Code sections 522(g) & (h) specifically state that the debtor may utilize the trustee’s avoidance powers if i) the creation of the lien or transfer of the property was involuntary (as in a repossession); ii) the trustee does not attempt to avoid the transfer; and iii) the property transferred or the lien created affects the debtor’s exempt property (as it does here by impairing Chris’ car exemption).
If you have recently had property repossessed, contact a knowledgable bankruptcy attorney to discuss your options.