Author: David

Bankrate poses an interesting reader question: Should I buy a car before filing Bankruptcy? Bankrate’s response is measured, and it focuses on ability to pay for the car, balanced with the assumption that the debtor will get better loan terms pre-Bankruptcy than after.

This is pretty common, whether it be borrowers strategically buying with their pre-Bankruptcy credit score or non-strategically buying a car without regard to their finances. Cars, being fairly important to get to work and around town, then become an issue in the bankruptcy case, as the debtor can’t simply surrender it to the creditor.

The changes to the Bankruptcy Code in 2005 recognized this issue and included protections for car lenders. In 11 U.S.C. Sec. 1325(a), Chapter 13 debtors must repay the full debt associated with any vehicle purchased within 910 days of the bankruptcy filing. (In regular terms, that’s about two and a half years.)

So, maybe there’s some benefit to buying a car right before a bankruptcy, but creditors have enhanced rights for those last minute purchases.

Plus, there’s an argument that incurring substantial credit before filing bankruptcy is deceptive  ( i.e. where someone buys a $30,000 car, while also planning a bankruptcy filing), and such transactions could be fraudulent and excepted from discharge. Not to mention, if the filing follows the purchase too closely, the Bankruptcy Trustee may be able to void the transaction and sell the car.

Long story short, you probably shouldn’t buy a car before filing for bankruptcy.

As a creditor’s lawyer, I know how common it is for borrowers to quickly file bankruptcy in response to collections, but I am well aware that there remains a strong stigma attached to filing bankruptcy. This Inside Tuscon Business article discusses some of the most common “myths” about the impact of a bankruptcy filing.

Again, from a creditor’s perspective, a bankruptcy filing isn’t always the worst development. On one hand, a creditor is limited from collection on the few remaining assets, but, on the other, so are all the other creditors–a Trustee is appointed and the assets are administered by the Trustee, equally. Further, if the claim is secured by collateral, then a creditor has a variety of protections that can prompt surrender or payment.

Again, it’s preferred to be paid in full outside of bankruptcy, but, when dealing with some borrowers, the bright light of full disclosure that comes with a bankruptcy filing is a good thing.

The Commercial Appeal in Memphis has a story about David Kennedy, the Chief Judge of the Bankruptcy Court in the Western District of Tennessee (Memphis), who recently celebrated his 30th year on the bench.

Judge Kennedy’s court was the first Bankruptcy courtroom I ever walked into.  It wasn’t as a debtor or as a lawyer; my sister worked in the Court’s IT department, and the Judge, hearing I was a first year law student, invited me to observe during my spring break.

Having never been to court, having never talked to a Judge, and not really knowing what “bankruptcy” was, I was in way over my head. 

But, between each of the docket calls, the bailiff came and took me back to the Judge’s chambers, where the Judge would review the issues raised in each matter with me and talk about the practice of bankruptcy law in general.

I listened intently, but–as you’d expect from a first year dreaming of a career as a prosecutor–I was drowning in deep waters. Even though none of it made any sense to me, I remember Judge Kennedy getting really fired up explaining one issue to me, and he pulled the Bankruptcy Code out to specifically read me 11 U.S.C. Sec. 1334, which states the jurisdiction of the Bankruptcy Courts.

Now, 13 years later (with eleven years of unexpected bankruptcy practice behind me), I never come across 11 U.S.C. Sec. 1334 without thinking about Judge Kennedy and the time he took to show me around and share his passion for Bankruptcy Law with me.  He was so generous with his time with me and, who knows, maybe that day in Bankruptcy Court set my path a little bit for the career I ultimately have found.

In the years since, I’ve run into the Judge in a lot of different places–Memphis basketball games, the Midsouth Commercial Law Institute Seminars–but rarely in his courtroom. Here’s hoping I make it back soon.  

The Nashville Post reports today that the U.S. Department of Labor filed a lawsuit against Corinthian Custom Homes, Inc. for failing to pay withheld employee funds into the employees’ 401(k) accounts. More details are available here.

This is a great sign that the government is watching employers’ bankruptcy filings for this very common issue and taking action when those employers dip into funds it had a fiduciary duty to protect. Corinthian Custom Homes left a lot of people unpaid, and it’s good to see that the Dept. of Labor is protecting the former employees from this type of theft.