|
Scenario:
Ms. Jones comes to your dealership and states she is in the middle of a bankruptcy. Regardless, you take Ms. Jones’ information, forward it to a financial institution, and the financial institution approves the financing of the subject vehicle. Although Ms. Jones is in Chapter 13 bankruptcy, you deliver the subject vehicle. Months later, you receive a notice from the Bankruptcy Court indicating that you must appear in court in order to show cause why you sold the subject vehicle to Ms. Jones. What are your legal obligations?
As you know, a Chapter 13 bankruptcy is different than a Chapter 7 bankruptcy. The purpose of the Chapter 7 is to eliminate all of the debtor’s obligations. However, a Chapter 13 bankruptcy, also called a “wage earners plan,” enables the debtor to work out a plan to pay off their debts over a period of up to five years. The debtor along with their attorney and the trustee, will review the debtor’s income and bills and determine whether or not the debtor’s income is sufficient to pay his or her bills. Thereafter, a specific plan is established that the debtor must follow in order to pay off all of his or her debt obligations. The plan is not flexible and any deviation from the plan must meet with the approval of the bankruptcy trustee with the appropriate motion filing with the court. The creditors do have a say-so in the plan. However, once a plan is confirmed, it is binding upon both the debtor and the creditors. It is up to the creditor to make the plan succeed. If the plan does not succeed, then the court can reject the plan and turn it into a Chapter 7 bankruptcy. As stated, a debtor cannot incur new debt without the approval of the trustee and the court. Any new debt that compromises the ability of the plan can result in the plan being rejected by the court.
It is important to remember that any asset that the debtor has is now part of the estate that is controlled by the court. Further, pursuant to U.S.C. § 1325(b)(1), if an unsecured creditor objects to the confirmation of the plan, then the court may not approve the plan unless the plan provides that all the debtor’s projected disposable income will be applied to make payments to unsecured creditors. It must be noted that after the plan has been confirmed, it can be modified at the request of the debtor before the final payments are made. In this case, a proof of claim may be filed by a creditor after confirmation for property or services that the consumer subsequently needs. However, if the debtor knew or should have known that a prior approval by the trustee was necessary in order to incur the debt, and did not do so even though obtaining prior approval was practicable, then it could be disallowed.
This is a complicated balancing act between the debtor, creditors, and the creditors’ attorneys. If the debtor needs to increase her debt, she needs to contact her attorney and find out what approvals are required before buying, refinancing, selling real property or entering into any type of long term loan or lease agreements.
So what happens in the above scenario? Did the dealership ask Ms. Jones whether or not she had a court order indicating the parameters of the loan? If the dealership did not ask for the court order and/or, most importantly, did not call the debtor’s attorney regarding same, then the dealership has a significant problem. It is necessary for the debtor’s attorney to file a motion to incur additional indebtedness with the court to explain why the debtor needs to purchase an automobile. Generally, the vehicle that the debtor is driving is a piece of junk and desperately needs to be replaced for work purposes, etc. However, the trustee must review the financing to determine whether or not the individual can incur the amount and type of the debt. For example, if the order states that an extended service contract cannot be sold to the consumer, then the dealership cannot sell it even though the finance company may approve it.
In the scenario, the dealership did not do what was proper and the debtor and the debtor’s attorney jumped the gun by sending the debtor into the dealership before filing the motion to incur additional indebtedness. The court will place the burden on the dealership to explain why it sold the vehicle, to have any extraneous items removed from the agreement, and to attempt to renegotiate the annual percentage rate in the agreement. Further, the finance company will also be brought to task and ordered to show cause why it financed the vehicle without the necessary documentation. The court has several options regarding this matter. The court can enforce the original agreement or rescind the transaction. If the finance company is not cooperative and, for some reason, does not make an appearance or the dealership does not make an appearance, then the court can hold either party in contempt of court.
If a customer tells you they are in bankruptcy, the best course of action is to ask for their attorney’s name and to contact the attorney. DO NOT SELL AND/OR DELIVER THE SUBJECT VEHICLE TO THAT INDIVIDUAL UNTIL SUCH TIME AS YOU HAVE THE PROPER COURT AUTHORIZATION TO DO SO.
As always, these are highlights of the law and are not to be construed as containing the entire law. This is not to be construed or relied upon as a legal opinion. If you are presented with this problem, contact your legal counsel for advice.
®Robert A. Poklar, 2008
VISIT OUR WEBSITE: WWW.POKLARLAW.COM
ROBERT A. POKLAR & ASSOCIATES
A Limited Liability Partnership
10100 Brecksville Road
Brecksville, Ohio 44141
Telephone: 440-746-1600
Fax: 440-746-1604
Website: www.poklarlaw.com
e-mail: rap@poklarlaw.com |
