Due to the Bankruptcy Code’s automatic stay (a federal injunction that the federal courts take very seriously), you can’t repossess the collateral. The only option: Get the automatic stay lifted, then move forward with repossession. There are basically four ways for the stay to lift:

1. File a Motion for Relief from Stay. The filing fee is $150, and typically a lawyer is going to spend about 2.5 hours working on it, depending on how complicated it is, and assuming the court doesn’t schedule a hearing (if the court schedules a hearing–which is rare–the fees escalate).

2. Get the debtor’s attorney and the bankruptcy trustee to stipulate to the Relief from Stay. There is no filing fee, so that’s good. Unfortunately, it’s often very difficult to get the debtor’s attorney and trustee to stipulate.

3. Wait for the debtor to obtain a discharge (which, in a simple bankruptcy case, typically happens in about three-four months), then ask the trustee to abandon the property. The discharge, when combined with an abandonment, equals relief from the automatic stay for purposes of repossessing collateral.

4. Wait for the bankruptcy case to terminate. After the Order of Final Decree is entered, the automatic stay lifts for all purposes.

Do you have to give it back? In all likelihood, yes. The Bankruptcy Courts have held that, until a debtor is completely divested of all ownership in the car, the car is still part of the debtor’s bankruptcy estate and therefore subject to the automatic stay. Under Michigan’s UCC, ownership continues until the bank has exercised its post-default remedies to the point that the debtor no longer has the right to redeem. In re Gordon, 2006 U.S. Dist. LEXIS 421 and In re Sanders, 291 B.R. 92 (2008).

It’s worth noting, however, that more and more courts are ruling that a creditor does not have an affirmative duty to return the seized property, unless the debtor first provides the creditor with adequate protection. See In re Brown, 237 BR 316 (1999). If the collateral is valuable, a creditor should probably explore the issue a bit more before it abjectly surrenders its collateral.

Chapter 11 features, features, a well tested “plan approval” procedure. First, managers, and it that fails, then groups of investors, propose a “plan” for the reorganization of the bankrupt company. The plan compromises the claims of the lower tranches of debt (usually turning debt into equity and giving shareholders a token residual equity position for their shares) so that the company becomes solvent (the operating profit now can pay the remaining debt obligations on time). The bankruptcy judge must be convinced the plan is viable (or he will send the company into Chapter 7, a liquidation) and divides the investors into classes. Those classes whose claims are “impaired” by the plain — they are not receiving full payment on their obligations — vote by class on the plan (the vote seeks two majorities, one by number of creditors voting and one by the amount of the claims being voted). Some secured creditors, with high priority, may not vote because they are not impaired. If enough classes vote in favor, the judge has the option of “cramming down” the plan on those classes that do not. If the plan “passes,” the company emerges from Chapter 11. A 363 sale is an emergency sale of the company, proposed by management and approved by the judge, before any plan has been proposed, let alone passed. A 363 sale can be an end run around the entire Chapter 11 procedure. Once the company is sold, the Chapter 11 turns into an Chapter 7 — the proceeds of the deal are the only thing left to do for the court. Over twenty years ago, the Circuit Courts recognized that a 363 sale was a method of avoiding Chapter 11 procedures and thus they restricted the process with a threshold — the assets must be time sensitive (like vegetables in a railroad car). Here we see the government doing the same thing — they are avoiding the Chapter 11 procedure, to avoid the claims of those pesky creditors that are not going along with the government’s version of the a workout, by selling the companies first and quickly in 363 sales. The argument is that the companies must move quickly or lose all their customer. Yet last month was both companies best sales month in several months — after the bankruptcies were either announced or known. These 363 sales are, in essence, total cram downs without a vote. The danger? Managers sell the company cheap to reward themselves and their go along creditor buddies (read, the UAW and the government as debt holder here). Bankruptcy judges, eager to avoid a year of hearings and decisions, and eager to “save” jobs of employees by keeping the company doors open, have a strong incentive to go alone. In these cases, first Fiat and now a Chinese company (and the government itself in buying the “new GM”) are getting too sweet a deal in these 363 sales. In the government’s case, the sweet deal is an avoidance of the difficult question of whether the “new GM” will survive – whether it should be thrown into a Chapter 7. Taxpayers and unsecured, non-union creditors are taking the hit.

Maybe not. If the debtor files for bankruptcy before expiration of the redemption period, you have to give the car back . . . if your debtor resides in Michigan.

There’s a “split in the circuits” on this issue, which means some federal circuits say one thing, others say another. Michigan is in the Sixth Circuit, and the Sixth Circuit says, “Creditor, give it back, no exceptions. If you don’t, you’ll be in violation of the automatic stay.” Other circuits (including the Seventh, I believe, which is where Indiana is located) say the creditor can keep the vehicle without violating the automatic stay if the creditor isn’t adequately protected. So if the debtor has let the insurance lapse or the value of the car is less than the debt, you can keep the vehicle pending receipt of adequate protection or issuance a court order directing you to give it back.

So, bank clients south of the border that is 600 yards from my house have it better than bank clients north of that border. I’m not saying it makes sense, but until the Supreme Court rules on the issue or Congress passes an amendment to the Bankruptcy Act that clarifies the situation, that’s what we’re stuck with.

In order to enter into a DMP, you need to consult with a credit counseling agency recognized by major credit card companies. The agency had pre-approved forms and a general idea of what type of payment concessions they could get from the credit card companies.

DMPs have been growing less popular because credit card companies have been offering less concessions, but that trend is apparently going to stop. “[M]ore recent reports indicate that creditors and agencies are co operating in launching a new DMP which they assert will be more valuable to more of the consumers who are defaulting on credit card debt but who cannot not make the payments required under traditional DMP’s.”

It’s worth it for businesses and banks to keep this in mind. They might have customers who can’t pay or need some help, but they don’t want to file bankruptcy. DMPs might become a viable resort again. If your customers get healthier, you’re healthier.

Anywaaaaay, she did a nice thing by donating the black sports bra to the fledgling Sports Museum of America. Unfortunately, the Museum has gone bankrupt. Its memorabilia has been hauled away and put into storage. If she wants The Bra back, she has to pay $250. The Wall Street Journal has the story. Excerpt:

The black sports undergarment she famously exposed to the world after a game-winning goal in the 1999 World Cup had been taken into custody by U.S. bankruptcy court. To secure its release from a storage facility in Newark, N.J., Ms. Chastain would have to pay $250 — plus shipping. “Thank goodness I have another one,” she jokes.

The sports bra is joined by Tony Hawk’s childhood skateboard, race-car driver Richard Petty’s trademark sunglasses and about 500 or so other famous sports artifacts swept up in a unique bankruptcy case. All of the items had been loaned to the Sports Museum of America in New York, a for-profit organization that recently declared Chapter 7 bankruptcy after opening to great fanfare in May. To satisfy creditors, all of the museum’s assets were seized, and if they aren’t claimed promptly, they may face the auction block.

We’ve heard Fed Chairman Bernanke and Treasury Secretary Geithner say that there are no legal avenues to clawing back the AIG bonuses. I’m not so sure that’s true. What about good old fraudulent transfer law? That’s a cornerstone of creditor-debtor law. Would fraudulent transfer law apply?

Every state in the union has a fraudulent transfer law. But there is also a special (and virtually unknown) federal fraudulent transfer statute just for the United States government, as creditor. The federal government could, of course, proceed under a state fraudulent transfer law (I’m not sure which state’s law would apply to AIG), but why bother when it could proceed under its own law?

So would the government be able to clawback AIG’s bonuses with a fraudulent transfer action?

Maybe.

It gets pretty complicated. If you have a lot of money on the line, consult a professional.