Bankrupts beware! Lenders are increasingly claiming security interests

The purpose of filing a consumer bankruptcy case is pretty obvious; to eliminate debts that can’t be paid, so that the debtor can receive a financial “fresh start.”

That ideal is compromised, however, when debts don’t go away despite filing the case.

Sometimes this is a matter of public policy (e.g. the current law on student loans), or debtor fraud (e.g. running up credit cards right before filing).

But another type of debt is also allowed to remain after bankruptcy — secured debts. Technically, the debt goes away, but the secured lender has the right to reclaim its goods.

Most people are familiar with how this works for houses and cars — by far the largest type of secured debt among consumers.

But is it possible for a store chain to claim that the goods you buy on their store issued credit card are secured debts?

It is possible to make that claim, if a security interest clause is buried deep in the fine print of the agreement you sign when you get your card. It seems that one chain or another is trying it at any given time. Years ago, when I started as a lawyer, it was Sears. These days, increasingly, it is Best Buy.

The electronics retailer has for some years included such a security interest clause in their finance agreements; but it is not known for sure if they would actually be enforced by a bankruptcy court.

At the start of 2012, however, I am seeing a pronounced uptick in collection attempts by stores concerning allegedly secured sales of consumer merchandise against debtors who have already declared bankruptcy.

Many of these attempts are being sent out by a Texas law firm called Bass & Associates. They are really not interested, of course, in actually making bankrupt buyers fork over their beloved electronics and jewelry; they are more interested in cutting a “deal” that gets them some money.

For that reason, I usually advise people not to give in to these efforts easily. The ability of this firm and others to litigate a bankruptcy case in Massachusetts or New Hampshire from Texas is unproven. Unless they can show they will actually prevail in a court and convince a bankruptcy judge that the security interest is valid, I would tell consumer debtors to hold on to their goods — and their money!

 

By Doug Beaton

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