First a little background for those uninitiated in the process of personal property secured by a pre-petition note in the context of Chapter 7 bankruptcies. Experienced bankruptcy lawyers know well this process.
When a creditor has a lien on any of the debtor's property before the debtor files for Chapter 7 bankruptcy protection, the debtor may choose to surrender the property to the creditor in satisfaction of the debt.
The debtor may alternatively retain the property secured by a pre-petition lien. However, if the debtor chooses to do so the debtor must either reaffirm the debt or redeem the property free from the pre-petition lien.
This can arise with almost any type of property, but as to 722 Redemptions we are mainly talking about motor vehicle secured by a pre-petition note and lien.
Most motor vehicle loans involve both a promissory note and a lien, which represents a lender's right to the vehicle as the collateral for its loan. This lien generally gives the lender the legal right to repossess the vehicle and to sell it, without first going to court, if the debtor defaults on the terms of the promissory note.
The automatic stay, while in place, deprives the lender from taking and selling the vehicle, but the automatic stay does not last forever. It can end while the Chapter 7 is still pending, but it will absolutely end when the bankruptcy is discharged.
When the debtor receives a bankruptcy discharge, the debtor's obligations under the promissory note are discharged, and there is no legal obligation for the debtor to continuing paying for the vehicle. However, the lender’s pre-petition lien on the vehicle survives bankruptcy. The lender is then entitled to take and sell the vehicle after discharge if there is a continuing default on the note, although the lender cannot hold the debtor responsible for any deficiency owed after the sale of its collateral -- the motor vehicle.
If the debtor surrenders the vehicle, the debtor is free of the vehicle and the note obligation.
The problem is that the debtor often needs that vehicle in order to maintain a living and to care for the debtor's family. The debtor might have a lot of trouble immediately financing a new vehicle after bankruptcy. Besides the debtor already has an idea of what is wrong and what is right about the vehicle the debtor already owns.
If the debtor does not wish to surrender the secured vehicle, then the debtor must decide on whether to reaffirm or redeem.
Although an oversimplification for the purpose of brevity, a reaffirmation essentially takes the note out of the debtor's bankruptcy, and the debtor continues to be personally liabile on the debt. The debtor is then required to make the same payments, at the same interest rate, on the same balance, and under the same terms that existed at the time the debtor filed bankruptcy.
Redeeming the vehicle from a lien requires the debtor to pay off the entire value of the lien in one lump sum. For redemption purposes, the value of the lien is the value of the collateral securing the vehicle.
Redemption is worth the careful consideration of the debtor if the vehicle is worth less than what is owed on the pre-petition note. Although the value of a vehicle is determined at replacement value (the amount the debtor could replace this exact vehicle, in its present condition, in today's market), most often more money is owed on a vehicle than its replacement value.
This can be due to the depreciation of the vehicle. But, it could also be due to a credit union's loanliner agreement or a financial institution's cross-collateralization agreements that makes the vehicle liable for more debts than the vehicle note by itself. In other words, the lien on the vehicle could also be supporting the credit card balance, overdraft loan, or other notes and obligations that would otherwise be unsecured. (It is terribly important that a bankrutpcy attorney look at the all of the note instruments between the debtor and the lender and not just the vehicle note).
Then, of course, if it is a tote-the-note there are always problems with these car lots which make a living finding reasons to reposses and sell the same vehicle, or who place telematics in the vehicle to disable it without immediate payments.
To use a automobile dealer's term, with reaffirmation the debtor is leaving bankruptcy with "negative equity". This means that the debtor is leaving bankruptcy as the debtor came into it -- owing more money than the debtor has equity to support the debt. This is rarely good.
Some attorneys propose a "fourth option" in which the property is not redeemed or reaffirmed, but the debtor continues to make payments on the vehicle after filing bankruptcy and discharge. This is highly controversial as many courts have stated there is no fourth option. Worse, after discharge the bankruptcy court probably loses jurisdiction to decide these repossession issues. Some lenders believe that since the personal liability of debtor has been eliminated then there is a default as to the note and security agreement allowing the vehicle to be repossessed. In reality, the lender is most often concerned that it will screw up the process of demanding money once the bankruptcy is discharged without a reaffirmation agreement, allowing the lender to get sued for violating the discharge injunction. In short, the lender does not want to mannually monitor the note every single month for the remaining life of the loan. The lender calculates, that with potential pitfalls, it is just cheaper to pick up the vehicle. Therefore, with the fourth option the debtor is always at risk of losing the vehicle without notice after discharge.
Regardless of the legal pros and cons of the fourth option, the truth of the matter is, irrespective of personal liability, the debtor is still stuck post-petition paying for the negative equity, but now also stands the risk of losing the vehicle despite payment on the vehicle.
Therefore, the best option available to a debtor wishing to keep their vehicle is often redemption. However, the problem with redemption is getting the money to pay off the retail value of the vehicle.
This problem is increasingly being resolved by a group of creditors who make loans to allow the debtor to redeem their vehicles from their pre-bankruptcy lenders. Among these are Fresh Start Loans, Leap, 722 Redemption Funding. A debtor may also be able to obtain funding through a private lender, another credit union, another financial institution, employer or family member depending on the debtor's personal relationships.
These loans are usually high interest loans. Nobody should pretend that they are not. However, many debtors filing bankruptcy already have a hight interest auto loan for more than the amount of the new redemption loan. Even if the debtor does not, the monthly payment may be lower with redemption given the lesser amount owed. In cases of loanliner agreements and cross collateralized loans, the amount might be a lot less. Most "negative equity" is eliminated. And, the new post-petition loans can help the debtor reestablish credit sooner.
With this background, were does the lawyer come in?
A motion has to be filed with the bankruptcy court in order to redeem the vehicle. The Court has to determine the value of the vehicle and an order has to be signed requiring the post-petition lender to release the lien to the new lender or the debtor, depending on if there is financing.
Replacement value is not a science. Lenders and debtors often do not agree. Too often the parties rely on the NADA or Kelly Blue Book guides to determine value, but these guides are problematic. First, they value vehicles that are only in excellent condition, while most vehicle in bankruptcy are only in fair condition, leading to an exaggeration in the value provided. NADA and Kelly are more suited to due diligence guides for lenders to accept loans on vehicle from dealers without the need to do independent inspections. Then there is the Black Book. Although Black Book only deals with trade-in values, it does rank the value of vehicles depending on whether the vehicle is in excellent, good or fair condition. You can look at it this way -- car dealers use Black Book to buy and price vehicles for sale on their lots, and use NADA and Kelly to get a vehicle approved for a loan for 100% of the purchase price. The dealer can accomplish this when it is selling a vehicle for a good or fair condition price, but the lender performs its maximum due diligence based on an excellent condition. NADA and Kelly requires the reader of the guide to subjectively argue reductions to get the value down from excellent condition to the actual fair condition of the vehicle. Black Book only requires the dealer or purchaser to add its profit margin to the trade-in value of the accurately rated vehicle.
Second, however, NADA, Kelly and Black Book are only good for filing motions and arguing with the lender in an effort to achieve a settlement of value. Should the motion to redeemed go to a hearing, these guides are not generally admissible by themselves, unless all parties agree.
So the question arises as to why this is a practice niche and not just a service provided by the bankruptcy attorney?
There are a lot of reasons for his.
Increasingly, Chapter 7 bankruptcies are being filed pro se. Redemption lenders have a general rule about dealing with these debtors because they do not want to be caught in a quandary of practicing law without a license.
But, the truth of the matter is that most Chapter 7 bankruptcy lawyers do not have the time or inclination to do this type of work. These reasons are many as well. Among these is that it is another level of work they are not set up to handle efficiently without increasing lawyer and non-lawyer staff. And, if they do, it could very well be an unprofitable task as a result of the new hires.
It can require court work, and many no-asset-type Chapter 7 attorneys operate on volume and they do not want to routinely get involved in matters that take them away from the office or distract them from managing their core bankruptcy cases.
Redemption work is time sensitive. The debtor has to fulfill its stated intention quickly in order to keep the automatic stay from lifting.
Even if bankruptcy attorneys typically attend hearings, other than creditor meetings, for their Chapter 13 cases and otherwise, this type of motion practice is typically set on different dockets, on different days. You take a Chapter 7 attorney out of his or her office another day, or keep them on the phone negotiating with creditors, and you are refusing the attorney another opportunity to meet with new, potential clients and to make money in the area their office is actually set up in to handle.
It is not that the attorney cannot get paid more money for redemption work, but they need a degree of volume in order to make it profitable for them. They would rather do no work than do some work for a little or no profit.
Because of the narrow type of work they generally perform, and the systematization needed and attention to the detail that is required to keep a bankruptcy law firm operating, these firms are prolific referral sources to firms that do not compete with them directly.
So the work is referred, but how does the 722 redemption attorney get paid from a debtor that does not have money?
The quick answer is from the debtor out of the proceeds of the 722 redemption loan. The lender will secure your legal fees and pay them to you at closing out of the loan proceeds.
Redemption loan companies will secure your fee, but they do not allow the attorney to bill that much money per case. It is true that most fees run $600.00 up to maybe a $1,000.00. Although that is not a lot, the overhead of this type of operation is also very small. A 722 attorney can practice out of his or her home, for example. The forms can be standardized for the pleadings are not many and are all about the same. No staff is necessarily required. NADA, Kelly and Black Book are all online, as are sites like CarFax. The debtor submits the loan application online. There is little reason to meet with the debtor other than by phone, email and fax unless the attorney has to appear in Court, at which point the attorney can meet with the client in Court. (This typically works well becaue the debtor usually already has a bankrutpcy attorney). The bankruptcy court and process is entirely paperless and online, including the filing of pleadings and orders. Because the debtor has already filed bankruptcy, there are no filing fees to collect or pay for these motions. Building referral relationships with bankruptcy attorneys takes time but it often results in continuous referrals and it does not cost any large amount of money to build or maintain these relationships. And, because redemption is time sensitive, it does not require a long time between being retained and receiving your fee through the redemption lender.
In short, if you are licensed in the federal district court(s) in which you practice, and you have a computer and a cell phone, you are in business. Your office overhead can be limited to some gas for your vehicle, a cell phone and broadband payment each month,which you most likely already pay, and some certified mail expenses (also all handled online).
You also may be able to renegotiate the debtor's existing lender, or the redemption lender may be able to provide replacement financing if the redemption does not work out. You can get your fee from this financing as well.
And then, because this process is not that usual, and lenders are not geared up to deal with it well, you might be able to get some side work in litigating a violation of the discharge injunction or consumer laws when the deliver does not timely deliver the title free and clear of all liens, or fails to properly note the lack of personal liability on a credit report.
Although a lawyer is not likely to get rich doing this type of work, the lawyer should be able to build a $7,000.00 to $20,000.00 a month practice that has very little overhead, and in an area that most other lawyers are neglecting.
A very complete and interesting blue print for a niche practice that I for one never even thought of and I have done some level of bankruptcy work for years. If I were starting fresh, I'd certainly give it a real close look.
Posted by: Patrick Stiehm | March 07, 2012 at 04:44 AM
Regarding chapter 13 post confirmation cases, I have clients always asking if any lenders will loan money during their plan term to purchase a new or used car. Do the 722 lenders loan to chapter 13 debtors?
Posted by: Brian Allen | May 05, 2012 at 02:27 PM