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Repossessions: 8.2.7.10 Stays Pending Appeal

Once the automatic stay is terminated by order of the court or otherwise, if an appeal is contemplated, obtain a stay pending appeal. The rules provide a fourteen-day delay in the effectiveness of an order granting relief from stay in order to provide the debtor time to seek a stay pending appeal, but a court may order otherwise.145 Therefore, if an appeal is contemplated, a debtor should argue against any language in the court’s order changing the normal fourteen-day delay of relief from the stay.

Repossessions: 8.3.1 General Rule

Filing for bankruptcy activates two other automatic provisions relating to the debtor’s property: sections 542 and 543.147 These sections can be used to require the creditor to turnover to the trustee property in which the debtor has an interest.

Repossessions: 8.3.2 Scope

Unfortunately, due to poor drafting of the statute, a question arose as to whether an entity must surrender property in which the debtor’s present interest is less than a possessory interest, such as the right of redemption.152 For example, under state law, a debtor may have the right to redeem an automobile that was validly repossessed just prior to the bankruptcy.

Repossessions: 8.3.3 Procedure

A party obligated to turn over property has an obligation to do so immediately upon notice of the bankruptcy filing. Creditors or other parties in possession should be notified immediately of this duty in a manner similar to that used to give notice of the automatic stay.158 Because some holders refuse to turn over the debtor’s property, the debtor’s attorney should be ready to obtain a court order for turnover, seeking immediate interlocutory relief if necessary.

Repossessions: 8.3.4 Issues of Possession After Turnover

Section 542 requires turnover of property to the trustee and not to the debtor. However, the procedure to be used to transfer such property from the trustee to the debtor is not set out in the Bankruptcy Code. As a result, the trustee may not feel free to relinquish to the debtor even exempt property before the exemptions are approved. The Bankruptcy Rules do not address this problem.

Repossessions: 8.4.1 Overview

The powers of avoidance contained in section 522 can greatly expand upon federal and state exemption rights. The power to avoid transfers is expansive, in part, due to the broad definition of “transfer.” Section 101(54) defines this term to include any lien, execution sale, setoff, or any other mode of disposing of or parting with an interest in property, whether voluntarily or involuntarily, including foreclosure of the debtor’s equity of redemption.

Repossessions: 8.4.2 Exempt Property

The Bankruptcy Code gives the debtor the power to avoid (or nullify) many types of prebankruptcy transfers of exempt property. Therefore, the concept of “exempt property” is of critical importance to exercising the debtor’s avoidance powers.

Repossessions: 8.4.3 General Transfer and Lien Avoidance Principles

With certain limitations, the debtor may invalidate numerous types of transfers172 and recover valuable interests in property, as long as those interests could be claimed as exempt under the exemption scheme selected by the debtor. If only a portion of the transferred property may be claimed as exempt, the transfer may be avoided only to that extent.173

Repossessions: 8.4.5 Power to Avoid Judicial Liens

A similar but separate power granted to the debtor under the Code allows the debtor to avoid many forms of judicial liens on property. Section 522(f)(1)(A) gives the debtor an unqualified right to avoid any judicial lien that impairs an exemption, subject only to an exception for domestic support obligation debts.

Repossessions: 8.4.6.1 Only Involuntary Transfers Covered

The trustee has the power to avoid some prebankruptcy transfers of the debtor’s property. Section 522(h) allows the debtor to exercise that power when the trustee does not choose to do so.190 This section applies only if the transfer was not voluntary and the debtor did not conceal the property.

Repossessions: 8.4.6.2 Strong-Arm Clause

Under section 544(a), the trustee as a “hypothetical lien creditor” is able to avoid a wide variety of transfers.191 All of these rights depend on the powers given to lien creditors under state or local law.

Repossessions: 8.4.6.3 Preferences

Under section 547 of the Bankruptcy Code, the trustee may avoid transfers of the debtor’s property to a creditor for an “antecedent debt” while the debtor was “insolvent”193 that were made within ninety days before the filing of the bankruptcy petition.

Repossessions: 8.4.6.4 Fraudulent Conveyances

Section 548 of the Code gives the trustee (and thus the debtor in some instances) the ability to avoid transfers based on either actual or constructive fraud.203 The trustee may avoid a transfer if the transfer was made within the two years204 before the case was filed and the transfer meets the actual or constructive fraud conditions specified in section 548(a).

Repossessions: 8.4.7 Procedure for Use of Avoiding Powers

The debtor must take some form of affirmative action to exercise the debtor’s avoiding powers. The Federal Rules of Bankruptcy Procedure prescribe the procedure to be followed.

Rule 4003(d) provides that lien avoidance under section 522(f) shall be by motion in accordance with Bankruptcy Rule 9014. Unlike many other rules, this rule sets no time limit for the filing of such a motion.218 However, early action is likely to minimize the issues which may arise. No filing fee is required for a motion filed by the debtor.

Repossessions: 8.5.1 Purpose

In chapter 7 straight bankruptcy cases, consumers may retain possession of many of their secured goods by paying no more than the value of the collateral. Section 722, which creates this limited right of redemption, is an important feature of the Bankruptcy Code.222

Repossessions: 8.5.2 Limitations

Redemption is a simple procedure in chapter 7 cases for the debtor to remove a creditor’s lien by paying the creditor the value of the property. However, the right of redemption can only be used in cases of dischargeable consumer debts224 secured by tangible personal property225 that has been either exempted by the debtor or abandoned by the trustee.

Repossessions: 8.5.3 Payment of Redemption Amount

Section 722 provides that the redemption amount must be paid to the secured creditor “in full at the time of redemption.” Section 722 does not give the debtor the right to pay the amount of the allowed secured claim in installments.

Repossessions: 8.5.4 Redemption in Practice

Consumers frequently redeem household goods, such as appliances, and motor vehicles secured by purchase-money security interests.231 Except when the creditor agrees to installment payments, section 722 is usually used by low-income debtors to redeem items of low value, as the total value of the item must be paid in cash. The cash involved must either be exempt property or cash that is not property of the estate.232

Repossessions: 8.6.1 Allowed Secured Claims

Critical to an understanding of most of the provisions dealing with secured claims is a familiarity with the “allowed secured claim.” Although not defined,241 the term is explained by section 506 as that portion of a secured creditor’s claim that equals the value of the collateral. A secured creditor has an allowed unsecured claim to the extent that the creditor’s interest is less than the total amount of the claim. Put another way, an allowed secured claim may not exceed the value of the collateral, if any.

Repossessions: 8.6.2.1 In General

A chapter 13 plan gives the debtor great power to affect the rights of secured creditors because the debtor’s plan may “modify the rights of holders of secured claims.”249 Most of the debtor’s flexibility under chapter 13 comes from this broad right to modify the rights of secured creditors.

Repossessions: 8.6.2.2 Requirement of Adequate Protection

One limitation on the rights of chapter 13 debtors to deal with secured creditors is that adequate protection must be given to creditors having liens on property used, sold, or leased by the debtor. At least until a plan is confirmed, it is clear that a creditor may request relief from the automatic stay if adequate protection has not been provided.250