Protecting your security in "Workouts"/ Lien Avoidance: Non-Purchase Money Security Interest

             Creditors sometimes assist debtors who are struggling to meet their obligations by refinancing their debt.  This could be a good collection strategy, and it could also be a good plan to keep the debtor out of bankruptcy.  In doing "workouts", however, be careful not to jeopardize your lien.

        As we have previously discussed, debtors may avoid non-purchase money security interests under Bankruptcy Code §522(f).  Remember, this Code Section provides that debtors may avoid a creditor's interest in personal property subject to homestead exemption if such interest is not a purchase money security interest.

            Example #1:  A debtor borrows $5,000.00 to purchase a car from a seller.  Debtor executes the lender's promissory note which designates the debtor's car as security for the loan.  A valid lien is then perfected on the vehicle title.

             Question: Can the debtor avoid the lender's security interest?

             Answer: No. The lender's interest is a purchase money security interest.

       Example #2: A debtor borrows $5,000.00 to pay off old loans. The debtor executes the lender's promissory note which designates the debtor's existing car as security for the loan. A valid lien is then perfected on the vehicle title.

            Question: Can the debtor avoid the lender's security interest?

            Answer:  Yes.  Since the security interest was not for the current purchase of goods and/or services, the interest is not a purchase money security interest.

        When a lien is "reworked", the purchase money security interest is extinguished according to some courts, thus transferring it into an ordinary security interest whose priority is determined according to the time of filing or perfection.  Thus, if the debtor files bankruptcy within 90 days of the refinance, the creditor may lose his lien.  Keep this in mind when doing "workouts".  Sometimes you can feel comfortable that the debtor will not file bankruptcy due to your efforts - most times you cannot be sure.

Debt Collections: You Need a Plan, From the Beginning

            Any business or lending institution that extends credit to its customers or members will inevitably be faced with bad debts.  To insure maximum collection results, creditors should establish credit and collection policies before a problem occurs.

             Before you extend credit, there are several things that you can do to reduce your risk.  

             1.         Obtain full names, addresses, telephone numbers, places of work, social security numbers and dates of birth.

             2.         Obtain the name of the customer's bank, branch, and account number.

             3.         Review a credit report.

             4.         Ensure that all credit terms are clear.

             5.         Have personal guarantees for small businesses.

             6.         Perfect security interest in events of large credit.

             When accepting personal checks, take the following precautions:

         1.         Insist on two pieces of identification, at least one of which has the customer's photo.  A driver's license and a credit card are ideal.

             2.         Require checks to be made out in your presence.

             3.         Compare the signature on the check with that on the ID.

             4.         Limit checks to the exact amount of the sale.

             5.         Accept only checks drawn on local banks.

          6.         Verify the customer's address and phone number on the check.  Also note the customer's social security number and/or driver's license number.

         7.         Be cautious when accepting checks with low numbers (indicating that the account was recently opened).

            8.         Consider subscribing to a check verifying service.  For a modest fee, such a service allows you to call a toll-free number and learn immediately if you can safely accept the check.  If a check bounces after being verified using this procedure, the service will cover your loss.

             When the debt is in default, act promptly!  The longer you wait, the harder collection will probably be.  The firm of Lafayette, Ayers & Whitlock, PLC usually recommends immediate telephone calls, followed by a series of two or three letters.  In the final letter, give a definite and short deadline with the promise of attorney action.

            The decision as to when a creditor should deliver its accounts to counsel for collection is not always an easy one.  Some creditors deliver collections accounts to counsel after the initial demand has failed to produce results.  Some creditors desire to have their credit/collection manager take their judgment and attempt collection by payment plan, garnishment, or even sometimes, sheriff's levy.

             The problem frequently encountered by creditors who pursue their own judgments, however, is that in most cases the ability to collect without the assistance of counsel ends prior to the receipt of payment in full.  When this occurs, counsel must normally assume collection activities after the trail is cold.  Further, since the creditor was not represented by counsel at the time of judgment, the judgment order does not include attorney's fees; nevertheless, attorney fees will now be charged to the creditor.  In addition, if the creditor's credit/collection manager failed to properly docket the judgment, collection could be forever impaired.

             The firm recommends that creditors immediately deliver accounts to counsel upon the failure of the demand for payment.  Creditors should ensure that provisions for attorney fees and interest are included in all loan, contract and/or account documents so that counsel can assess these costs upon delivery.  The firm further recommends that all accounts be delivered while the "trail" is still warm--no more then sixty days from default.

          The firm has aggressive collection counsel and staff who represent numerous Credit Unions, Homeowner Associations, property management companies, loan companies, businesses, doctor's offices, and private citizens.  The firm is willing to pursue accounts from start to finish, or even finish accounts already in progress.  Please call me at 545-6251 for more information.  Eddie.

Advertisements of Sale

    The Code of Virginia provides specific guidance as to advertisements for foreclosure sales.  The sale must be properly advertised or it will be void upon order of the court.
    Virginia Code §55-59.2 states that if the deed of trust provides for the number of publications of the advertisements, no other or different advertisement shall be necessary, provided that: if the advertisement is inserted on a weekly basis, it shall be published not less than once a week for two weeks, and, if such advertisement is inserted on a daily basis, it shall be published not less than once a day for three days, which may be consecutive days.  If the deed of trust provides for advertising on other than a weekly or daily basis, either of these statutory provisions must be complied with in addition to the provisions of the deed of trust.  If the deed of trust does not provide for the number of publications for the advertisement, the trustee shall advertise once a week for four consecutive weeks; however, if the property, or a portion of the property, lies in a city or county immediately contiguous to a city, publication of the advertisement may appear five different days, which may be consecutive.  In either case, the sale cannot be held on any day which is earlier than eight days following the first advertisement or more than thirty days following the last advertisement.
    Advertisements must be placed in the section of the newspaper where legal notices appear, or, where the type of property being sold is generally advertised for sale.  The trustee must comply with any additional advertisements required by the deed of trust.
    Virginia Code §55-59.3 requires advertisements to describe the property to be sold at foreclosure; however, the description does not have to be as extensive as in the deed of trust – substantial compliance is sufficient so long as the rights of the parties are not affected in any material way.  The statute does require the property to be described by street address, and, if none, the general location of the property with reference to streets, routes, or known landmarks.  A tax map number may be used, but is not required. 
    Virginia Code §55-59.2 requires the advertisement to state the time, place and terms of the sale.  If the deed of trust provides for the sale to be conducted at a specific place, the trustee must comply with this term.  If there is no mention in the deed of trust, §55-59(7) provides that the auction may take place at the premises, or, in front of the circuit court building, or, such other place in the city or county in which the property or the greater part of the property lies.  In addition, the sale could be held within the city limits of a city surrounded by, or contiguous to, such county.  If the land is annexed land, the sale could be held in the county of which the land was formerly a part.
    The statute provides that the advertisement shall give the name or names of the trustee or trustees.  In addition to naming the trustee, the advertisement must give the name, address and telephone number of the person who may be contacted with inquiries about the sale.  The contact person can be the trustee, the secured party, or his agent or attorney.

Using Homeowner Association Liens to Secure an Interest in Real Estate

    In recent 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 using homeowner association liens to aid in the collection of your debt.
    Virginia Code §55-516 provides for special procedures for the collection of homeowners association dues.  This code section allows associations to place a lien on the land for unpaid assessments, as well as give associations a priority over certain other debts.  To perfect the lien, however, it must be filed before the expiration of twelve months from the time the first such assessment became due and payable.  This filing must be by a memorandum filed in the circuit court of the county or city where the development is located.  The memorandum must contain the information specified in the statute.  Before filing the lien, written notice must be sent to the property owner by certified mail giving at least ten days prior notice that a lien will be filed.  Suit to foreclose on the lien must be brought within thirty six months of filing.  We will review foreclosure suit procedures in the next issue.
    We have experienced attorneys and staff who can examine title, file homeowner association liens, and litigate to enforce the same.