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Voluntary Payments on Secured Loans After Bankruptcy

August 26, 2016

by Drew M. Edwards, Esq.

It’s very common for credit union members to declare bankruptcy without reaffirming their secured loans. In this situation, the credit union’s right to collect money from the member ceases, but its right to take possession of the collateral (e.g. repossessing a car) survives. In this article, I will be discussing auto loans, but the same principles apply to mortgages and foreclosures. In the case of an auto loan that has been discharged in bankruptcy, your only official legal remedy against the debtor is to repossess the car. However, in practical terms, the debtor usually wants to keep the car, and you want to continue to receive payments. Thus, there is usually a tacit agreement that you will not repossess as long as the member continues to make payments voluntarily. This sounds simple enough, but there are a few things to keep in mind if you want to avoid running afoul of the law.

The first thing to consider is the statements that you send to your member. According to a strict reading of the Federal bankruptcy law, any communication with the debtor about the discharged loan would be prohibited by the automatic stay and the discharge injunction. However, the New Jersey bankruptcy court has issued a special local order allowing secured creditors to communicate with bankrupt debtors in certain limited ways. The order allows you to send “informational” statements to the debtor on a regular basis, and also as a reminder if they stop paying. With this order, the court is acknowledging that it’s better for a debtor get a reminder statement than a surprise repossession. Here is the exact text of the order: “It shall not be a violation of the automatic stay or the discharge injunction for secured creditors to send regular monthly statements and payment coupons to individual debtors … In the event that debtors fail to make timely payments, it shall not be a violation of the automatic stay or the discharge injunction for secured creditors to send reminder statements, provided that the statements are informational only, and do not demand payment.” You can read the full text of the order here.

You will have to design a special type of statement to be sent to secured debtors who have been discharged in bankruptcy. The order permits “regular monthly statements,” but this refers to the frequency of the statements, and not to their content. The text of the order is slightly ambiguous, allowing “payment coupons,” but also stating that reminder statements must be “informational only.” I suggest playing it safe and sending purely informational statements that do not show a due date or amount due. The statement should only identify the collateral and show the balance, the date of last payment, and the amount of last payment. Avoid anything that uses the word “due” or implies that payments are due.

As with all bankruptcies, make sure that you flag the member’s account so that anyone who interacts with it will know that the member is bankrupt. If you are receiving regular monthly payments and sending statements, it’s easy for a new employee to miss the fact that the member has been discharged in bankruptcy, and inadvertently send a collection letter or call the member on the phone when the account becomes delinquent. Make sure that all automatic collection efforts are suspended for this account, and that everyone in the credit union knows that the member is not to be contacted.

If the member stops paying, you have two options: you can continue to send the same informational/reminder statements, or you can repossess. You can’t threaten to repossess, or make any reference to repossession in your statements. If you do repossess and sell the car, remember not to list any deficiency balance on the deficiency notice that you send after the sale. If there is a co-signer, you will have to send two separate deficiency notices: one to the co-signer listing the full balance due, and one to the bankrupt debtor listing a zero deficiency balance. You cannot send any statements, even informational statements, to the bankrupt member after the car has been repossessed.

Once you have the car in your possession, be wary of using it as leverage to negotiate payment before the sale. If your member comes to you and wants to negotiate, or if they want to talk to you about a discharged loan for any other reason, call your attorney. Your intentions may be good, but it’s easy to stumble into a violation of the bankruptcy law if you stray outside of the strict boundaries set by the court.

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