Richardson Law Legal Blog

Posted By Steven J. Richardson on March 5, 2010

Many people don’t realize this when they apply for the account, but credit cards with retail outlets like Best Buy and furniture stores like Raymour and Flanagan grant a lien (just like on a house or a car) to the bank on anything you purchase with it.  This might not make a difference to you, unless you are filing for bankruptcy; then it can make a big difference in whether you can wipe out the debt.

Under the bankruptcy code, a debtor with a secured debt must declare in the petition his or her intentions regarding the collateral: i.e. is he going to surrender it to the creditor, pay of the balance owed, or reaffirm the debt with monthly payments?  The first two are self-explanatory, but the third can come back to haunt you.  In a reaffirmation, you agree in writing that the bankruptcy will not discharge (wipe out) your personal obligation to pay the debt to the secured creditor and that you will make regular payments on the debt over a certain period of time.  If you make all the payments, great; but if you do not, the creditor has the right to repossess the collateral and hold you responsible for any shortfall on the balance due after sale.  With a car loan, this is very straightforward; with a lien held by outfits like Best Buy, it is more complicated.

Under New Jersey Law, a lien can only be perfected if there is a writing in which the borrower/debtor agrees to the lien (this is usually in the card agreement or application form) and the collateral is sufficiently described so as to be readily identifiable.  Under the bankruptcy code, the creditor is only secured as to the value of the collateral at the time the bankruptcy is filed, not the original purchase price.  In almost all circumstances, this means that not all of the balance due is secured.  If the collateral has no value, the creditor is not secured at all.

All of this makes it extremely important that claims of security by Raymour & Flanagan, Best Buy, Sears, and the like, be carefully reviewed.  There are important issues like:

• Do you still have the collateral?  If that Xbox game you bought at Best Buy was a Christmas present, then that comes off the list;
• Is the collateral of any value?  New Jersey health laws do not allow the resale of a mattress or a box spring, so if that bedroom furniture purchase included them, that comes off the list.  It might be an item of consumer electronics, where a newer version has come out, rendering the older one virtually valueless;
• Is the collateral still functional?  I had a client who bought a laptop that later crashed irretrievably and would no longer boot.  This left it with little or no value.
• Is the collateral goods at all?  Is the creditor trying to include, for example, what you paid for an extended warranty on that new flat screen TV?

It is for these reasons that I challenge every claim of security I get on these cards.  Many times the creditor will not be able to come up with all the necessary documentation to prove the lien, or the value of the goods they can identify is negligible.  If the collateral is still in your possession, functioning, and resell-able, the next question is determining current value.  The IRS has a depreciation table that can be useful in coming up with a value for used furniture, although it does not take into account condition.

Once the goods have been identified and given a reasonable, real world current value, you can then negotiate a payment plan if you want to keep the goods.  Oftentimes the creditor will agree to a payout over years with no interest.  Once a deal is in place, a reaffirmation agreement is drafted, which you must sign and get back to the creditor within 45 days of your meeting with the trustee.  This agreement must also identify the collateral with specificity.  More than one agreement I have received on furniture has described it as: “household furnishings.”  Does this mean that if you stop making the payments months down the road, they can repossess the contents of your home?  Most likely not, but it does muddy the waters a bit.

The bottom line here is that if you file bankruptcy and you owe money on a card such as this, you should let your attorney know, and any claims made by these creditors after you file should be looked at carefully.  In this way, you can make sure that, if you do have to reaffirm the debt, the amount is as small as possible to assure you the fresh start you need.

Categories: Bankruptcy, Library
Tags: reaffirmation, secured debt