26
June
2024

Bankruptcy Basics

Let's explore four very basic pieces of advice to better prepare you when it comes to bankruptcy issues.

Bankruptcy Basics

It seems that at least once a week, a bankruptcy question comes up in one of the dealer/creditor social media groups that we follow. The questions usually involve either selling a vehicle to someone that has filed bankruptcy or repossessing a vehicle from a bankruptcy debtor. Unfortunately, what usually follows the question are a bunch of anecdotal comments, some good, some not so good, and the person posting the question has to play "Russian Roulette" when deciding which advice to follow.

This is simply an article, not an advanced class on Bankruptcy, so I’m not going to try to delve into the numerous fact patterns that may present themselves or try to anticipate every bankruptcy related question on the minds of this audience. Instead, I want to provide you with four very basic pieces of advice to better prepare you when it comes to these issues:

WHAT IS THE AUTOMATIC STAY?
First, it's imperative to understand that the "automatic stay" protects the debtor and its property as soon as the bankruptcy case is filed. Think of it as a magic shroud that offers impenetrable protection. You don't want to violate the automatic stay, that can get expensive in a hurry.

Back when I was doing bankruptcy work, I once had a client that refused to give back a recently repossessed vehicle when the customer filed bankruptcy a few days after the vehicle was taken, but prior to its disposition. The client was upset with the condition of the vehicle, lapse of insurance, and simply refused to listen when I cautioned that the proper procedure would be to return possession of the vehicle and file for an emergency Motion to Lift Stay. Instead, he wanted to save the time and money and rolled the dice, hoping the debtor would drop the issue. Not surprisingly, the debtor’s lawyer, smelling money, filed a Motion against my client for violating the automatic stay, and asked for sanctions. Let’s just say that the dealer learned a hard lesson and was a lot more lenient when it came to dealing with bankruptcy debtors in the future.

Remember, only the court can lift the automatic stay, you can't just take matters into your own hands, no matter how egregious the actions of the debtor. The best course of action is to file for a Motion to Lift Stay and work within the bankruptcy process, not around it.

SUBSCRIBE TO PACER
Secondly, every creditor should have a subscription to Pacer, which is a government website that tracks all open federal cases. This enables you to check on the status of a case by simply putting in a name or file number. Having access to this information is invaluable. Best of all, it's free, with the only costs coming if you print more than a certain number of pages in each month.

I don’t think it is an overstatement to say that every creditor should subscribe to Pacer so it can research filings and also verify case numbers or other information provided by the debtor. This especially comes in handy when an applicant tells you that their bankruptcy case was “discharged”. There’s a big difference between discharge and dismissal and over the years I’ve run into many situations where either the dealer or the applicant confused the two, which is problematic because they have very different meanings. An applicant that has recently had a bankruptcy discharge may be a safe underwriting bet, because there are prohibitions against filing a bankruptcy for several years after discharge, whereas a recently dismissed debtor can quickly refile and include newly purchased property in the bankruptcy, which the dealer would then have to take affirmative action to protect its interests.

USE A CREDITOR'S RIGHTS ATTORNEY
Thirdly, every debtor should establish a relationship with a creditor's rights attorney. The Federal Bankruptcy Code is subject to interpretation by individual judges. For instance, when I used to handle bankruptcy cases in Dallas, there were three judges, and they handled issues like "cram down", "valuation", and other matters somewhat differently, so it was always important to understand the personal preferences of the judge. There's also something called "local rules", and even "local, local rules" (no, I'm not making this up) and these have to be considered when deciding on a course of action.

Perhaps the question I’m asked most often involves whether or not a creditor is required to give back property if the debtor files bankruptcy after it was repossessed. For most of my career, my answer was “yes”, because of the protection of the Automatic Stay; however, there was a Supreme Court decision a few years ago in the case of Chicago v. Fulton that seemed to indicate that this is no longer the case. I say “seemed to indicate” because this case didn’t involve repossession, and bankruptcy judges have interpreted this case differently. This type of matter illustrates why it is important to work with a creditor’s rights attorney that is familiar with how cases like this are interpreted at the local level.

TRUSTEES AND DEBTOR'S COUNSEL
Lastly, understand that the debtor's attorney isn't the only adversary you may have in a bankruptcy case. Upon filing, a Trustee is appointed, and its job is to marshal the assets of the debtor and protect the estate. Sometimes this can put the Trustee at odds with a creditor. The Trustee can play a big role in how the case proceeds, so it's important to factor them into your analysis.

The issue where I’ve probably seen the most tension between trustees and car finance creditors is when a title hasn’t been transferred and lien hasn’t been perfected within the time allowed by law. This fact pattern can lead to a Trustee trying to avoid the lien and treat this creditor as unsecured. I bring this up to demonstrate that there can be situations where the Trustee’s interests and the creditor’s interests don’t align.

When it comes to bankruptcy issues, practicing "Internet Law" can be costly. Plenty of social media commentators mean well, but they may not be intimately familiar with the code, know the right questions to ask, or understand the impact that a local bankruptcy judge or trustee can play. While I no longer represent clients in bankruptcy matters, I’m a good source of knowledge on the "do's and don'ts" and can help guide clients to the right analysis and resources. Please reach out to This email address is being protected from spambots. You need JavaScript enabled to view it. to learn more.

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Steve Levine

Steve Levine

Steve Levine is an auto finance lawyer with over 30 years of experience protecting car dealers and finance companies. He is an owner and Chief Legal and Compliance Officer of Ignite Consulting Partners, which offers guidance on compliance, operations and best practices. He has also published two books, Winning the Fight: A Guide to Protect Car Dealers and Counterpunch: Compliance Strategies for Car Dealers which are both available on Amazon. Or contact info@IgniteCP.com to learn more. Please follow Steve on X @LawyerLevine for compliance and industry related content.

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