Expert: Terry Leeders - 12/4/2011

Question
Terry,

If I get a loan for a car from a bank then I file for bankruptcy before the loan is paid off, the bank gets the car, right?

If I set up a rent-to-own contract on a house I own and the renter files for bankruptcy, do I get the house back?

If I own a business then sell it to a person under a contract which states they pay me a set monthly amount until the asking price is paid off, then they file for bankruptcy, do I get the business and all the inventory back?

The reason I ask these questions is because my new employer did the latter with a person and that person filed for Chap 7.  The courts then seized all of the inventory, tools, machinery and files from the business even though the person that filed didn't own the business or anything in it, it was still under lien from my current employer.  Now everything they owned is in storage waiting on the courts to finalize the bankruptcy.  They, my employer, were told to get the attorney that represents the person that filed and go to the storage unit to see the items in it, then make an offer to buy the items, yet the way I see it, they still own it.

In addition, the person that was supposed to buy the business from them sold machinery and inventory online and at pawn shops, then filed, then left the state.  Because of this, shouldn't he be held accountable under criminal charges?

Thanks for your input.

Answer
CAR:
With a chapter 7 you have several options for financed vehicles.
1. Surrender the car, debt is eliminated with the discharge.
2. Keep car, continue making regular payments, sign a reaffirmation agreement during the case to keep the debt post-filing.  Stay legally responsible to pay for remaining balance according to contract.
3. Keep car, file a redemption motion in bankruptcy to buy the car for fair market value (what it's worth today - which is usually less than what is owed due to depreciation).  You would pay lender the lump sum fair market value, with the court discharging the remaining balance for the over-financed portion.  Obviously most bankruptcy clients don't have that kind of cash, so there are lenders wiling to finance that portion.   Check www.722redemption.com for one example.
4. This option is not technically approved by bankruptcy, and is a case by case with the lender: keep making payments, do NOT reaffirm debt.  Debt is discharged in the case, but some lenders allow debtors to keep cars if the payments and insurance stays current.

HOUSE: If the debtor assumes the contract, nothing changes. Payments continue per contract.  If the debtor rejects contract, house goes back to seller/landlord, subject to local eviction laws.  The title wouldn't transfer until paid in full.   

BUSINESS: Short answer: depends.  The contract would most likely include provisions putting a lien against the business and assets in the event of default.   The lien may need to be recorded depending on your state laws regarding security interests.  If so, the seller would be entitled to money or assets back in the event of a default.  The buyer can reaffirm such debts though, since they are secured, and can continue to keep them and continue to pay on them per contract.   

If the debtor has unprotected equity in any of these assets, and does not exempt them, the trustee can liquidate these assets to get to the equity to pay the creditors.  In doing so, the trustee pays off perfected security interest liens on these assets first.

So, your employer needs to provide the trustee with the documents and information necessary to show that they have a) a lien against the asset and b) that that interest is perfected (recorded properly according to state law.).  

They should definitely seek out an attorney for specific advice in this situation to protect their interests.

Thanks for your question. Let me know if you have any other questions.  Thanks in advance.
Bonuses are appreciated for useful answers.