By Kevin H. Morse and Barry A. Chatz, Arnstein & Lehr
(Barry A. Chatz is chair of Arnstein & Lehr LLP’s Bankruptcy & Creditors’ Rights practice in the firm’s Chicago office. He represents lenders, unsecured creditors, corporate debtors and trustees in numerous matters around the country. Kevin H. Morse is an associate in Arnstein’s Bankruptcy & Creditors’ Rights practice in the firm’s Chicago office, where his practice focuses on bankruptcy law and litigation.)
More often than not, and these authors are included, articles examining bankruptcy law explore the theoretical side of the law rather than how the law is actually being applied in the regular, “run of the mill” cases which will never come across a bankruptcy judge’s desk or be reviewed by an appeals court. These cases are usually found in the consumer Chapter 7 and 13 contexts. Below is a brief examination of issues which are currently affecting the administration of consumer bankruptcy cases.
SECTION 362(A): THE GET OUT OF TOWING FREE CARD
Parking tickets are expensive. Multiple parking tickets that lead to your car being towed are really expensive. However, wily debtors, and possibly on the advice of counsel, have increasingly been using the automatic stay provisions to retrieve their towed vehicles without having to pay the towing fee or for the bankruptcy filing. The typical situation, which has been occurring at least 10-15 times each month for the Chapter 7 trustees in Chicago, begins with the debtor filing a chapter 7 case without paying the filing fee. The debtor will then petition the court for an in forma pauperis exception to the filing fee. These pro se debtors will not file their bankruptcy schedules or other required documents as required by the Bankruptcy Code. Instead, by the time of their § 341(a) meeting of the creditors, the debtor has presented his petition and notice of bankruptcy filing to the towing company and regained possession of the vehicle without paying the required fees, penalties or costs. The bankruptcy court receives no funds from the debtor and the chapter 7 trustee will not receive his $60.00 fee.
These “tow truck” filings usually occur at the end of the month when the city is seeking additional funds and strictly enforces its towing policies. Unfortunately for the city, when a debtor plays his “get out of towing free card” the city has expended significant time and money without any recourse to obtain its unpaid fees and costs. All of the parties involved, except for the debtor, end up paying for this scheme. Is there a way end this apparently abusive use of the bankruptcy system? The timing of a typical bankruptcy case makes it ideal for the debtor. The debtor has forty-five days from his filing date until he has his meeting of creditors with the trustee. He can also likely set out his in forma pauperis request far enough in the future to run to the impound and retrieve his car. The Office of the United States Trustee has been aggressively and successfully seeking dismissal of these cases on an expedited basis. How this abusive practice can be prevented remains to be determined.
THE REAL ESTATE VALUATION ROLLERCOASTER
Finally, for the first time in years, the real estate market appears to be headed on an upward trend. Nobody actually knows exactly where real estate prices are going and the real time valuation for a property is difficult to obtain. This is particularly troubling for Chapter 7 trustees who, unless they have a very recent appraisal, need to rely on the debtor’s schedules or imperfect internet sources, such as zillow.com.
These imperfect, online websites are a fine tool when property is unquestionably underwater and only a broad picture of the value is needed to determine there is no equity in the property. With the real estate market beginning to change, and the potential for equity rising, these imperfect databases are losing their value to trustees and secured creditors. A trustee’s first duty, as listed in the Bankruptcy Code, is to “collect and reduce to money the property of the estate for which such trustee serves.” 11 U.S.C. § 704(a)(1). However, the trustee is also required to “investigate the financial affairs of the debtor,” (11 U.S.C. § 704(a)(4)) but how is the trustee in today’s marketplace efficiently able to do that with the tools currently available? If the online estimate is too low, the trustee risks abandoning property that is potentially a valuable asset to the estate. If the online estimate is too high, the trustee is at risk for expending estate assets (if any) for little or no economic gain.
A debtor is required file “a schedule of assets and liabilities” which includes Schedule A with a list of all real property and the value of the real property. 11 U.S.C. 521(a)(1)(B)(i). The debtor’s valuation of property, not surprisingly, often reflects the debtor’s best interests. The debtor will often provide a valuation that is too low or simply list the value of the property as “unknown.” A possible alternative is to require a debtor to provide a proof of valuation at the time of the bankruptcy filing and, again, at the § 341(a) meeting of creditors. This alternative arrangement will provide the estate with two benefits. First, the burden of determining whether any value exists for the estate is shifted from the debtor to the trustee. The trustee is reviewing more than 50+ cases each month and requiring the trustee to prove value is overly burdensome and not cost effective. A debtor can easily provide the proof of value (even from an online website) at these two important times. The second benefit of this double valuation system – with values often 45 days or more apart – is that it will provide the trustee with an idea of how the property value is trending. A valuation trend will better allow the trustee to determine whether equity is likely to exist in the property and, once the sale procedures and all required diligence are finalized, whether value will continue to exist or grow for the estate.
There is no doubt that the improving real estate market is better for the economy and the country. After six years of perpetually disappearing real property values there needs to be a more accurate determination for trustees and secured creditors to determine the rise in value of the property at issue.
THE DISAPPEARING USED CAR MARKET
While home prices continue to increase, the value of used cars is beginning to fall from record high prices.1 The National Automobile Deals Association (NADA) has found that used car prices reached peak levels in May of this year. Since that time, prices are down approximately 2.4 percent and analysts believe the average price of a used car will continue to decline by another percent through the end of 2012.2 This downward trend is consistent across all categories of used cars.
This decline is great for potential purchasers of used cars and is actually attributed to the previous record high for the used vehicles.3 Analysts have found that when used cars reached their peak levels, consumers were more likely to spend a little more for a new car than save the money for a used car. This trend left an excess of used cars on the market as consumers traded in their older used cars for a brand new cars rather than a newer used car.
This decline, however, is not great for creditors seeking to recover their interests in the vehicles. It is well-known that the value of new car declines the instant it is driven off the dealers’ lot immediately making the lender under-secured. However, if the used cars at least retained (or increased) their value, the lenders were able to recover a significantly greater portion against their collateral. The continued decrease in the price of used cars will likely have a significant effect on the car financing market. Obviously, the decreased used car price will also decrease a lender’s ability to recover on its loan and this greater loss to the lender will lead to an increase elsewhere in the supply chain. The increased loss on the vehicle, from the declining value, will likely tighten lending on all vehicles available for sale. Currently, the annual percentage rate (APR) on cars is near historically low levels (often less than 1 percent) and if used car values continue to decline an increase in APR will likely not be far behind. An increased APR will put a squeeze on car sales slowing down an important part of our nation’s economic recovery.
A decrease in used car prices puts lenders in a difficult position. The return on vehicles will decrease but any increase in APR will likely have a negative effect on all car sales. If this decline is sustained it will be interesting to see how lenders react and any actions they take to try and protect their interests in the vehicles. As for trustees in bankruptcy hoping to generate value for creditors, fewer vehicles will be available to be liquidated should this decrease in value continue.
1 Liz Opsitnik, Used Car Prices Declining, U.S. News & World Report, June 19, 2012, available at http://usnews.rankingsandreviews.com/cars-trucks/best-cars-blog/2012/06/Used_Car_Prices_Declining/.
2 Used-Car Prices Decline as Summer Winds Down: CarGurus Used-Car Price Index Has Dropped 2.4% Since Spring Break, Business Wire, a Berkshire Hathaway Company, August 29, 2012, available at: http://www.businesswire.com/news/home/20120829006036/en/Used-Car-Prices-Decline-Summer-Winds-CarGurus-Used-Car.
3 Liz Opsitnik, Used Car Prices Declining, U.S. News & World Report, June 19, 2012, available at http://usnews.rankingsandreviews.com/cars-trucks/best-cars-blog/2012/06/Used_Car_Prices_Declining/.