Priority and Secured Debt
In this article I will continue the Priority and Secured Debt discussion as was started here: Priority and Secured Debt
If a Response is filed, and the value of the collateral is not agreed upon, the Court will conduct a hearing. To return to the example of the desk, let us say a Response was filed to my Motion to Redeem whereby the secured creditor alleged that the resale value of my desk was $200.00. My motion supported by an appraisal alleges that the fair market value of the used desk is $50.00. The appraiser would testify to this based on the age and condition of the desk, its original value, and the value that similar desks in the local marketplace would bring. Although there may be evidence to support that in a retail establishment a used desk similar to mine might bring $200.00, that would constitute the retail price after the cost of repossession, reconditioning, storage, re-advertising and commission. The Court will consider all the evidence before it to determine the value of the desk.
The same concept works with regard to a vehicle. Let us say I purchase a new car which costs $26,000.00. The minute I drive it off the lot I am lucky to get $20,000.00 for the same car. The problem is, if I have $20,000.00 lying around, I probably do not need to file a Chapter 7 bankruptcy. However, in a reorganization, such as a Chapter 13, a high value item such as a vehicle (but not real property) can be valued through a Motion to Value Collateral, and paid for, at the Court-determined value, plus a reasonable interest rate over 36 months or less (more time may be available if the secured creditor consents to payments over a period greater than 36 months). However, in the reorganization, a portion of the unsecured balance of the item being valued must be paid as well.
The fourth way secured debt can be treated is called a lien avoidance. A lien avoidance occurs in one of two instances. First, for people who own homesteads, if a judgment is obtained against them, and then re-recorded in the county where their homestead is situated, most title companies in the State of Florida will consider the judgment a cloud on title until there has been a judicial determination that the real property was homestead at all times the judgment lien attached to the subject property. The bankruptcy Court has the jurisdiction and power to determine homestead property and avoid judgment liens which purport to attached to them. To accomplish this, a Motion to Avoid Lien is required to be filed.
The second method of lien avoidance is when you go to a finance company and they agree to loan you money, but require that you pledge items in your house or tools of your trade as collateral for the loan. This type of loan is different from the purchase money security interest loan, because, unlike the P.M.S.I., you already own the property you pledged as collateral to the finance company. In this case, as long as you retained possession of your household goods or tools of the trade, a loan of this type (non-purchase money, non-possessory security interest) can be determined to be an avoidable lien in bankruptcy. Once again, the appropriate Motion to Avoid Lien must be filed. Once the Bankruptcy Court determines that a loan is this type, it can enter an order avoiding the lien, and treat the debt as unsecured, usually wiping it out completely.
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By: Joel S. Treuhaft, Esquire