Expert: Los Angeles Bankruptcy Lawyer Leon D. Bayer - 12/4/2011

Question
Leon,

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
Dear James,

This is a very interesting question.

I believe the deciding issue is whether or not your employer obtained a valid security interest in the various assets. A security interest is basically a mortgage. If the borrower doesn't pay, the secured creditor gets to repossess the collateral.

Things can go very wrong when a valid written security agreement was not done and correctly perfected. Perfecting the security agreement means that it has been recorded or filed for record in a specific public place, such as the county land title office, DMV, or a state office that is responcible for keeping such records. When properly perfected, the mortgage prevents someone else from buying the same items and claiming rightful ownership.

The filing of a bankruptcy by the borrower creates an estate composed of everything the borrower owns, including assets that are mortgaged or subject to a security agreement. If the borrower is not not paying faithfully, the bankruptcy court may give the creditor permission to repossess the good. Problems arise when the security agreement was not properly perfected.

In that case, the bankruptcy trustee has preceedence in the items, to the detriment of the mortgage creditor. The bankruptcy trustee may liquidate the goods for the benefit of the bankruptcy estate and perhaps benefit all creditors.

You began with an example of three different questions. In each instance, if the security agreement was not validly perfected, the answer to each may be "NO" if the borrower has sold the same same property to an ususpecting person for fair value without notice of the original transaction.

As for the buyer's wrongful selling of collateral, the creditor may have a good case to object to the borrower's bankruptcy relief, and there may have been violations of criminal law. It is time for your employer to go see an experienced bankruptcy attorney. There are short deadlines, so time is of the essense in pursing legal rights, or they can be lost or forfeited.    

If you or other readers want to keep up with my blog postings about life in and out of bankruptcy, you can follow my blog at http://www.bankruptcyblogger.org/, my personal web site at http://www.debt-relief-bankruptcy.com and my Los Angeles bankruptcy guide http://www.thebankruptcyguide.net/