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.
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