Homestead Exemptions

    Virginia Code §34-26 and §34-4 provide for commonly used exemptions in bankruptcy.
   Virginia Code §34-26 is the "poor debtor's" exemption. This law was updated in 1992. Instead of listing exempt items such as horses, oxen, cattle, bushels of wheat, corn, etc. (as it was pre-1992), the statute now sets out categories with dollar limitations: tools of trade up to $10,000.00; household furnishings up to $5,000.00; family heirlooms up to $5,000.00; motor vehicles up to $2,000.00; and wearing apparel up to $1,000.00.
    In July of 2020, the legislature expanded Virginia Code §34-4. It was expanded both in the amount of the exemption and simplifying the procedure for claiming the exemption. The Homestead Exemption now provides for an exemption for real and personal property up to $5,000 in value (or $10,000 in value if the householder is 65 years of age or older), plus an additional exemption of $500.00 for each dependent (a dependent is an individual who derives support from the householder and does not have assets sufficient to support himself).  An individual may also exempt from creditor process “real and personal property used as the principal residence of the householder or the householder’s dependents in an amount not exceeding $25,000.00 in value.”
   The 2020 changes removed the provision that stated that the Homestead Exemption was exhausted after it was claimed during a lifetime. Now the exemption shall be counted against the maximum individual exemption limit only for a period of eight years from the date of such claim of exemption. To the extent used or exhausted, after the passage of eight years from the date of the claim of an exemption, the householder is able to use any portion of that claimed Homestead Exemption again. This change is consistent with the Bankruptcy Code’s time limits on an individual’s ability to obtain a discharge after receiving a discharge in a prior case.
    The 1992 statutory charges resulted in an increase in the debtor's effective exemptions of personal property, as well as a severe decrease in effectiveness of the previous frequently used "Sheriff's levy" on personal property. The 2020 statutory changes resulted in major changes in the amount of the exemption over a lifetime and the procedure for claiming.

Attorney's Fees on Collection Accounts

    Creditors rightfully expect their debtors to pay the attorney's fees that result from collection procedures.  Courts, however, normally refuse an award of attorney's fees unless the debtor has executed a document awarding such costs in the event the account is turned over to an attorney for collection.  Many creditors utilize a standard form contract, or note, which has such a provision.  Because many forms are multi-state, and because states' laws vary, most standard forms provide for "reasonable attorney's fees."  Traditionally, most courts in Central Virginia have interpreted "reasonable" to be the equivalent of 25% of the principle amount of the judgment, regardless of the actual legal fees charged, whether hourly or contingency.  However, these days may be coming to an end due to court rulings!
    The Virginia Supreme Court, in the case of Coady v. Strategic Resources, Inc., ruled that an award of attorney’s fees rests within the sound discretion of the trial court.  In the case of J. R. Mullins, et al. v. Richlands National Bank, the Virginia Supreme Court ruled that the trial court must determine the reasonableness of attorney's fees when disputed.  In the case of Chawla v. BurgerBusters, Inc., the Virginia Supreme Court ruled that a party requesting an award of attorney’s fees must establish a prima facie case that the fees requested are reasonable.  In the case Schlegel v. Bank of America, N.A., et al., the Court denied the request for attorney’s fees, citing the “test” to be used.  It is as follows:  In determining whether a party has shown the reasonableness of the fees, the fact finder may consider the time and effort expended by the attorney, the nature of the services rendered, the complexity of the services, the value of the services to the client, the results obtained, whether the fees incurred were consistent with those generally charged for similar services, and whether the services were necessary and appropriate.
    With all of this said, you could win a contested trial on the merits, but be forced to present an “expert witness” (i.e., another attorney) to testify to the reasonableness of your attorney’s fees! To avoid this problem, and, to insure at least a fighting chance of obtaining at least the 25%, or even 33 1/3^rd % (which most attorneys charge in percentage collection cases), creditors should make certain that their forms specify "____% attorney's fees", or amend the standard form to "____%" and have the debtor initial adjacent to the change.
    It is important to note that the judicial award of attorney's fees is made upon the entry of judgment.  If creditors take their own judgment, no attorney's fees will be awarded, even though the judgment may eventually be turned over to an attorney for collection.  In this case creditors, not the debtor, will bear the full cost of collection.  Accordingly, I recommend that creditors timely turn over all accounts to their attorney for prompt action.

Deed in lieu of Foreclosure

In certain cases it may be more practical for the lender to seek or accept from the borrower a deed in lieu of foreclosure rather than incur the expense of foreclosure – this is at the lender’s discretion.  If the lender agrees, in return for voluntarily surrendering the property, the borrower will seek either partial or complete satisfaction of the debt.

1.      Considerations.  Before accepting the deed in lieu of foreclosure, the lender must consider many matters:

a.    Value of the property vs. the amount of the debt.

b.    Other debts on the property.  A deed in lieu of foreclosure does not extinguish prior or junior liens or encumbrances. Thus the lender, in accepting the deed, accepts the property with the liens.  It is possible for the lender to structure the deed in lieu of foreclosure so that it does not release the deed of trust so as to preserve a future foreclosure to extinguish subordinate liens.

Docketing Judgments to Secure an Interest in Real Estate

    In previous editions of Creditor News we have been discussing the benefits of using real estate to improve creditors’ positions.  As I have emphasized, properly securing debts through real estate could make the difference between collecting the funds and incurring a loss.  In this edition, we will review the benefits of docketing judgments to aid in the collection of your debt.
    Docketed judgments create a lien against the debtor’s real estate in the county or city in which the lien is docketed.  Accordingly, make sure that you know where your debtor owns, or may own (e.g., through future purchase or inheritance), real estate.  Once recorded, the lien will take priority in line with the date of recording (with some limited exceptions).  Depending upon your debtor’s problems, you may have equity to cover your lien.  Obviously you will want to “get in line” sooner rather than later to give you the best chance of collection.
    Once a lien is in place, it must be addressed at any sale or refinance of the real estate.  The lien must also be addressed in bankruptcy -- if the debtor does not file a motion to strip the lien, the lien will survive a bankruptcy discharge.
    If all other collection measures are unsuccessful, you can consider bringing a creditor’s bill, which is an action to force the sale of real estate to satisfy a judgment under Virginia Code §8.01-462:

                        Jurisdiction to enforce the lien of a judgment shall be in equity.  If it

                        appears to the court that the rents and profits of all real estate subject
                        to the lien will not satisfy the judgment in five years, the court may
                        decree such real estate, any part thereof, to be sold, and the proceeds
                        applied to the discharge of the judgment.

   Although creditor’s bills may be costly, given the right judgment it is an effective collection tool.  Determining what judgments are "right" requires experience and good judgment.
    We have experienced attorneys and staff who can seek judgment and then docket and enforce the same.                    

Retention of Collateral in Chapter 7 Cases

    The United States Bankruptcy Court at Richmond, in the case of Tidewater Finance Co. v. Cooper, ruled that where the debtors had fallen behind in their payments but were not in default in paying for their vehicle at the time they filed their petition or at the date of a hearing on relief from stay, the creditor on the vehicle was not entitled to relief from the stay, and that the debtors could retain the collateral and continue to make payments pursuant to the contract.  

    In Cooper Judge Tice noted that there was a split among the U.S. Circuit Courts regarding the correct interpretation of 11 U.S.C. §521 (2).  Some Circuits have held that a debtor who desires to retain exempt or abandoned property has only two choices:  redemption or reaffirmation.  While most Circuit Courts have determined that relief from automatic stay should be denied and that creditors could not compel debtors to redeem the collateral or reaffirm the debt as long as the debtors are current on their payments.

    Judge Tice stated that our Circuit Court (the 4^th Circuit Court) follows the majority view and has decided that a debtor who is not in default can retain collateral after discharge without reaffirming, redeeming, or surrendering the collateral.  Judge Tice stated that the 4^th Circuit Court determined that Bankruptcy Code §521 (2)(A) is a procedural provision merely to inform the lien creditor of the debtor’s intention.  Judge Tice noted that in the case of In Re:  Belanger the Court did not specify from which date the debtor's default is to be measured – the filing date, the date of the creditor’s motion, the hearing date, or simply default at any time. 

    Judge Tice further noted that in the case of Am. Nt’l Bank & Trust Co. v. DeJournette, arising out of the U.S. District Court for the Western District of Virginia, the Court determined that a defaulted debtor should be treated differently, and that a debtor who defaulted after filing does not have the option to retain the collateral, and must choose among the Bankruptcy Code §521 (2)(A) options of surrender, redeem or reaffirm.

    Judge Tice opined that the situation in DeJournette could be distinguished from that in Cooper.  In DeJournette, the debtors were delinquent at the date of the filing of their bankruptcy petition.  As of the date of the hearing, the DeJournette debtors had paid payments to bring them current on their loan; however, the debtors did not pay the late charges or legal fees and costs associated with their prior arrearage.

    In Cooper the debtors were not in default when they filed their Chapter 7 bankruptcy petition because they were within the contractual grace period, nor were they in default on the date of the preliminary hearing on relief from stay.  While there was a time in between debtor’s bankruptcy filing and the date of the hearing where the debtors fell behind in their payments, they were current as of the hearing date.

    In Cooper Judge Tice found that the creditor failed to demonstrate any real harm or risk of financial loss resulting from the continuation of the stay.  The debtors were current in their monthly payments and had adequate insurance on the vehicle.  Thus, allowing the debtors to remain in possession of the vehicle in exchange for payment of the monthly installment placed the parties in the same position as they were prior to the debtors’ bankruptcy filing.  Further, if the debtors failed to make their monthly payments, the creditor could elect to repossess.

    The result of Cooper is a bitter one for creditors – unless the debtor is in default at the time of the bankruptcy filing, or, sometime thereafter, the debtor can retain the collateral and simply keep paying without the requirement of a reaffirmation agreement.  This could result in the debtor using the collateral for a number of years, diminishing its value, and then walking away from the debt and leaving the creditor with worthless collateral.