Eric North, an attorney with Moore, Brewer, Wolfe, Jones, Tyler & North
Credit unions need to stay on top of the ever changing regulations pertaining to bankruptcy and collections.
Eric North, an attorney with the La Jolla, Calif.-based law firm of Moore, Brewer, Wolfe, Jones, Tyler & North, reviewed some of these changes and ran through several hypothetical scenarios to illustrate what is allowed under bankruptcy law during a session at the conference.
The first scenario involved “Bob,” who has a credit card with his credit union. He pays it off, then declares bankruptcy. One year later, he puts $1,000 on the card, then misses a payment. In this case, because it is a post-petition debt, the CU is allowed to call Bob and can attempt to collect.
Scenario two: A credit union repossesses Bob’s car on Monday. Bob then files bankruptcy on Tuesday. Does the CU have to return the car?
According to North, Bob can object based on the CU exercising “control” over what still is his property.
“Most courts have ruled the car must be returned, although in some states the credit union can wait until a court orders the return of the car,” he explained. “Some circuit courts have ruled a creditor holding the car and refuses to return it is simply refusing to act, so there is some gray area – by circuit and by state.”
In collections, the debtor can “redeem” a repossessed car by paying the balance. The debtor can do so at any time before the sale of the vehicle by the credit union, he added.
North also emphasized the importance of understanding the rules related to automatic stay. Under bankruptcy law, the automatic stay means a creditor cannot enforce a lien. Also, creditors cannot start or continue any judicial action that they could have brought prior to the debtor filing for bankruptcy protection.
“You cannot enforce any prejudgment, and you cannot do any act to obtain possession or exercise control over property of the estate,” North explained.
A recent case from New Jersey has added a potential wrinkle to bankruptcy law, North said. He said in most cases the automatic stay ends at different times, most relating to the meeting of creditors.
One area thought to be clear relates to a debtor’s statement to reaffirm or redeem, followed by performance. Some courts have ruled the violation by the debtor of failure to file the statement or failure to perform means the automatic stay ends. However, a circuit court in New Jersey said the debtor must violate both to trigger the end of the automatic stay.
Another legal change North said CUs need to be aware of pertains to the statute of limitations for debt. The statute varies from state to state, and varies by type of debt. If the pertinent statute of limitations expires during a period of stay due to bankruptcy, the statute is tolled and extended until 30 days after the automatic stay ends.
Traditionally, the statute of limitations has been treated as a defense, North continued. He said if a creditor attempts to collect on a debt for which the statute of limitations has expired – the debtor has been required to raise the statute as a defense. In recent years, however, an attempt to collect a debt after the statute of limitations has expired has been found to be “deceptive.”
“When trying to collect older debt, be cognizant,” he said.
North said credit unions need to make themselves aware of the ramifications of the Military Lending Act on auto lending. In some cases, he noted, CUs have loans on their books and are trying to collect, but the loans are void.
“There are loans credit unions thought the Military Lending Act did not apply to, but now we find out the law does apply,” he said. “All of you need to check your loans, see if they are made to military or those dependent on military members, and talk to your attorney.”