Priority and Secured Debt
In this article we will begin discussing Priority and Secured Debt. Not surprisingly, the largest form of priority debt is clearly taxes, especially federal taxes. The same government which collects those federal taxes is the same government which enacted the bankruptcy laws, and which determined that most of those taxes would not be dis-chargeable (wiped out) in bankruptcy. With secured debt, the Court gives a petition filer four choices: (1) the petition filer can keep the item which secures the indebtedness and continue to make the regular monthly payments; (2) the petition filer can surrender (give it back) the item which secures the indebtedness, and owes no more money for that item; (3) the petition filer can “redeem” the item which secures the indebtedness, and only pay the fair market value for the item being redeemed and; (4) the petition filer can file a Motion for Lien Avoidance (discussed below). To better understand the concept of redeeming collateral, bankruptcy law only allows a creditor to be “secured” up to the value of its collateral. Any debt which is owed in excess of the value of the collateral would be considered an unsecured debt, and treated the same as all other unsecured debts. An example would be my desk. My favorite desk sells for about $900.00 new. If a furniture store were to sell me that desk on credit and retain a purchase money security interest (P.M.S.I.) in the desk, I would have to make regular monthly payments, including interest, until the desk was paid off. However, in bankruptcy, I could pay the holder of the P.M.S.I. the fair market value of the desk and treat the remaining balance as an unsecured debt. Now you may ask, what is the fair market value of my desk? My response would be that, in a garage sale, I would be lucky to get $50.00 for my executive desk. Now, you want to know, how do you get my desk for $50.00?
In order to get the desk for fair market “used desk” value, a Motion to Redeem must be filed in a Chapter 7 case, or a Motion to Value Collateral must be filed in a reorganization case (Chapter 11, 12 or 13). In order to file this motion, a basis for the opinion of the value must be attached to the motion requesting the bankruptcy Court to determine value. One method of valuation is the opinion of the owner of the property. However, unless the owner of the property has some special or expert knowledge with regards to the property owned, it is likely be determined that somebody who deals on a regular basis in the property to be valued would have a more credible opinion of that property’s value. Therefore, in order to establish values, a person filing a motion to redeem or motion to determine secured status usually needs to get an appraisal from somebody who deals in used goods of the kind, or to hire a professional appraiser (professional appraisers often work with bankruptcy attorneys, and a professional appraiser who works in your area can be referred to you upon request). Once a written estimate of value is obtained, it is attached to the motion, filed with the Court, and served on the party which holds the security interest in the collateral being valued. The party holding the security interest then gets a period of time to file a response which either agrees with the proposed value, or to suggest a value of the collateral that it thinks is more reflective of the fair market value (if no response is filed, the Court will generally grant the motion based on the value alleged in the motion).
Please keep tuned, as I will be finishing this article in the next blog post. Remember if you have any questions regarding Priority and Secured Debt please contact our office below:
By: Joel S. Treuhaft, Esquire
Continued here: Priority and Secured Debt part 2