What is the best path...

September 3, 2009 7:18 PM

Did we receive sound advice? A friend is filing Chapter 7 bankruptcy in the next few days. A creditor is threatening to repossess some items if said person doesn't respond to the written request for a voluntary surrender of the items. A document pledging the items as collateral was signed. A legal advisor gave the following advice...

The creditor has given the borrower until September 8, 2009 to respond. If no response is forthcoming, the creditor is threatening IMMEDIATE (September 9, 2009) assignment to a repo company. My question is this. During a legal consultation today, my friend was advised to tell the creditor to expect a bankruptcy filing in the next ten days. This seems counter-intuitive. Wouldn't the creditor speed up their efforts at repossesion in an effort to beat the bankruptcy filing? Was this bad advice and if so why? Was this good advice and if so why? Does it make more sense to remain quiet about the filing until the papers are delivered or does the creditor have to stop making efforts at repossesion the moment they are notified of intent to file bankruptcy documents.

posted by Muirwylde to law & government (7 comments total)

If you doubt the veracity of the advice you have been given regarding a legal matter seek a second opinion from another lawyer, not metafilter.
posted by dfriedman at 8:42 PM on September 3 [2 favorites has favorites]

What's the difference between voluntary surrender and repossession anyway?

Evidently there is some difference that is of value to the creditor. That smells fishy to me.

Now IANAL, but if he agrees to voluntary surrender, it would appear to me that the items could be taken by the creditor even if bankruptcy were to be filed. Bankruptcy would likely buy some time, if not outright protect the items from repossession (probably for a limited time).

I would surmise that the legal advice you got would serve as a good faith notice of intent to file bankruptcy - and that repossession efforts may be impossible legally, even if the filing were not yet made, but was to be made in a timely fashion.

The laws are full of legal loopholes like that; that's why you need to see a lawyer. Or, just ask the legal advisor why he advised that.
posted by Xoebe at 8:49 PM on September 3

Thank you and I realize you are not my friends lawyer. I did receive an excellent answer via me-mail and will consider this question anwered given the limitations and reservations of the venue.
posted by Muirwylde at 9:07 PM on September 3

I am not a lawyer, but the other creditors may have a beef if he transfers an asset to another creditor right before a filing. I THINK there is a 30 day clawback on those sorts of transfers. I do not know how it works if the asset is pledged as collateral. I think the advice is sound. The creditor is now on notice and should not try to grab assets from other creditors.
posted by JohnnyGunn at 10:34 PM on September 3

I can't comment on the legal advise (I'm a banker not a Solicitor), however from the lenders point of view, and agree on the baseline situation :

"A document pledging the items as collateral was signed"

The document you're referring to is called a letter of pledge. A loan was taken out, pledging this asset as collateral.

Collateralised loans are generally very safe, as they have a claim over the asset. Safe implies lower interest rates payable on the debt.

Ok, then something called "Chapter 7" happens, the court immediately freezes all assets and the interim trustees determine exactly how much each creditor gets because (as you're bankrupt and thus don't have enough money for all debts) in what percentage.

But the original lender has a letter of pledge, so they're ok, right?

No so fast. Maybe, maybe not. The matter is in court now. Their Solicitors have to approach the court and the trustees and make an argument; its not a done deal. So there is uncertainty, risk. They may walk away with the asset, and they may not. I've seen it go both ways.

Throwing this all into bankruptcy court messes up your lenders plans for the loan, the principal advanced and the interest to be repaid (profit).

So your intuition is spot on. But this?

During a legal consultation today, my friend was advised to tell the creditor to expect a bankruptcy filing in the next ten days.

There very well may be a clause in your paperwork that requires you to advise the creditor of any material change in circumstance i.e., knowledge of a possible bankruptcy or plans to proceed with bankruptcy.

Very common actually.

Not sure about the downside if one didn't reveal any foreknowledge but, on the other hand, presumably your friend freely signed this paperwork , wasn't under duress at the time, therefore they should aide by their contract.

So find out if there is a clause in their letter of pledge.
posted by Mutant at 11:30 PM on September 3

There are also mechanisms where attempts at collection/repossession have to stop or change if a bankruptcy is imminent.
posted by gjc at 6:52 AM on September 4

Bankruptcy is a crazy weird beast and the practice actually includes things like notice to creditors before filing and creditors can be prohibited from doing certain things, even before filing, if they are notified that a bankruptcy proceeding will soon be initiated. Because debt-collection efforts are automatically stayed by the filing of a petition (which can include mucking up repossessions of collateral and foreclosures that are already in process), attorneys preparing petitions--and persons contemplating them--routinely inform creditors that the petition is imminent.

If you don't trust the advice your bankruptcy attorney is giving you, ask another one. Alternately, you can go to your nearest federal bankruptcy court, and ask for the bankruptcy assistance desk. You can read the Court's primer on the process, if you like.
posted by crush-onastick at 10:38 AM on September 4