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To a debt collector, chapter 13 bankruptcy might signify the end of the road for collecting funds owed by a debtor. But according to Gabriel Herrera, attorney at Kronick, Moskovitz, Tiedemann & Girard and guest panelist for the California Association of Collectors during their second Collection Boot Camp webinar, there are still some opportunities for you and your agency to get paid after a bankruptcy filing. This is particularly true if you have a judicial lien against a debtor’s real property.
Herrera has found that real property values can help you recover at least some of the funds a consumer owes when you have a judicial lien. Here are some of his tips for successfully recovering funds from a debtor filing for chapter 13 bankruptcy.
If you’re holding a judgment lien on the real property value of a property, Herrera says the best way to collect is to be proactive using the tools available to you. Paying close attention to the schedules filed by a debtor during a bankruptcy petition can provide you with information that can help during the collection process and if necessary, performing a Rule 2004 Exam.
Schedule A/B included in the petition (formerly separate Schedule A and Schedule B) will contain what the debtor claims – under penalty of perjury – is the value of her real property. After this value is known, you should compare it to Schedule C, where debtor exemptions are listed, and Schedule D, where you can discover any other liens that are secured by the real property in question. This is important so you may determine whether any equity on that property exists. If there is available equity, this may be good news for your judgment lien. However, if the the liens identified in Schedule D and the exemptions identified in Schedule C exceed or equal the real property’s value identified in Schedule A/B, you should expect an avoidance motion.
Avoidance of Judicial Liens
For a lien to be avoided, there are four requirements which each must be fulfilled:
- There must be an exemption to which a debtor would be entitled
- The property must be listed in the schedules and claimed as exempt
- The lien must impair the exemption claimed
- The lien must be a judicial lien
Your fight will often take place over the third requirement listed above. The condition states the exemptions listed on the property must be considered and there must still be equity in the property afterward. This is the reason that property valuation is crucial to your lien.
“The higher the value of the property, the more likely it is that your lien is going to be able to stick,” says Herrera. “You’ll be able to at least keep your lien so you’ll eventually be able to collect.”
He recommends using Zillow or other property valuation sites when doing your initial research. They’re a great way to make determinations on the real property’s value before you decide to spend money on an appraiser to oppose any motion. Herrera says if you decide it’s worth opposing an avoidance motion, you will need evidence to support your position, which is usually in the form of testimony from an appraiser.
The Avoidance Motion
If you do feel that the debtor’s claim to the value of her real property is lower than its actual worth, there are a few options you have of dealing with the motion to avoid your lien.
Notify Debtor’s Counsel of Possible Objection
One possible solution is presenting your property valuation evidence to the debtor’s counsel. Proving there is equity in the property which can help pay a debt may encourage the debtor’s attorney to negotiate a resolution. The resolution may possibly include a dismissal of the case, and a payment of a portion of what they owe, and then a later refiling without your lien causing them more issues in attempting to obtain a confirmation of their Chapter 13 plan.
However, Herrera cautions that if you are not careful, this may lead to preference issues. Upon entering into such an agreement right before bankruptcy, you risk the possibility of the payment being revoked upon the debtor’s refiling. At this point, after the agreement has been reached, you would no longer have a lien to the property and your ability to collect on the property no longer exists. Any leverage you may have had related to the confirmation of any Chapter 13 plan is minimized.
To avoid this, you can propose an agreement with the debtor’s counsel that requires a 90-day waiting period before the debtor may refile for bankruptcy. If you do enter into this type of agreement, be sure you do not release your lien until after the 90 days. This way, you protect yourself in case the agreement is not honored by the debtor.
Even if notifying the debtor’s attorney doesn’t result in an agreement to pay, it may force the debtor to increase her exemption against the real property, which may expose other assets.
Challenge the Avoidance Motion
The better option for recovery of money owed is to challenge the avoidance motion. If successful, your full lien or a portion of your lien may remain in place. A few ways to ensure a favorable outcome and encourage settlement are:
- Costs of Litigation – Show the debtor from the outset that you are willing to fight. This could be costly to the debtor and may increase the likelihood of a quicker and easier settlement.
- Allow a Portion of Lien to Remain – By reducing the full lien to just a portion, you might encourage the debtor to settle so they don’t risk having to pay the full lien if you win the challenge of their motion to avoid.
- Chapter 7 Settlement – In the case of a chapter 7 bankruptcy, a debtor can pay you with post-petition earnings, which is helpful in recovering at least some of the money they owe.
Seeking Dismissal or Conversion of the Chapter 13 Case
If you are not successful in keeping a portion of your lien, there are other remedies you can seek as well. If the property in question has been severely undervalued, it may be argued that this was done in bad faith.
This is important, because bad faith may be cause for a Chapter 13 case to be converted to chapter 7 bankruptcy, or even dismissed under the Bankruptcy Code.
If the case is converted:
- Property Appreciation Inures to the Benefit of the Estate and Creditors – this means that the amount of appreciation the property has seen may be used by a Chapter 7 trustee to pay the debtor’s creditors. The debtor is not able to keep this appreciation for herself.
- Property Sold to Pay Off Creditors and Liens – the real property can be liquidated and the money is used to pay off liens. Anything leftover can be used to pay unsecured creditors.
- You may Cut a Deal with the Trustee – this is beneficial because the trustee will do the work for you. This way, you won’t need to go through the effort and expense of liquidating the property yourself. The trustee will likely require a carve-out for the bankruptcy estate.
If the case is dismissed:
- Proceed with Normal Collection – if a case is dismissed, it is as if the case had never been filed to begin with. This allows you to return the account to your normal method of collections.
For a best practices guide on collection after bankruptcy, and a glossary of legal terms used in this article, fill out the form below. You can also boost your agency’s collection know-how by reading some of our past Boot Camp articles. Learn about avoiding bankruptcy pitfalls, pinpointing identity theft red flags, and responding to collection disputes to educate your team and build a better agency.