When an individual files an assignment in bankruptcy the issue of how the trustee in bankruptcy (trustee) will deal with that individual’s house or automobile is of great concern to them.
Although the trustee wants to facilitate the rehabilitation of an honest but unfortunate debtor during the bankruptcy process, he or she also has a statutory obligation to ensure that the interests of the bankrupt’s unsecured creditors are protected and that they receive the maximum recovery of the amounts owed to them. This generally consists of realizing on the bankrupt’s unencumbered property for the benefit of the unsecured creditors and collecting any surplus income payments that the bankrupt may be required to pay.
Secured creditors generally are not affected by the bankruptcy of a customer. The loan agreements in place prior to the bankruptcy generally will remain in force even though a bankruptcy has occurred. It is at the discretion of the secured creditor whether to continue with the existing lending relationship.
The trustee will however determine if the secured creditor’s rights to collateral pledged by the bankrupt (house or automobile) rank in priority to the interests of the trustee.
In the case of a mortgage on a home, the trustee will ensure that it is properly registered against the home and that monies were actually advanced that gave rise to the mortgage being granted to the secured creditor.
If the trustee is satisfied that the mortgage is properly registered and is securing monies advanced under the mortgage security, the trustee will acknowledge the priority of the lender over the trustee’s interest in the property. The bankrupt and the lender can continue the lending relationship without interference by the trustee.
The trustee may still have an interest in the property if there is equity available to the bankrupt. This equity will have to be made available to the unsecured creditors of the bankrupt.
Regarding an automobile or other personal property of the bankrupt, secured creditors are required to register a security interest in the personal property with the Personal Property Registry (PPR) to ensure that they maintain priority to the collateral over the interest of the trustee.
This registration is the mechanism by which a secured creditor perfects its security interest in the collateral and gives it priority over other parties. The registration must occur before the bankruptcy and be completed to secure the asset for which the monies were advanced. A registration cannot secure previous monies advanced to a bankrupt. Such an event would be viewed as preferential and may be overturned by the court at the request of the trustee.
The trustee will obtain a report from the PPR of all registrations against the bankrupt. If the secured creditor has perfected its security, the trustee will acknowledge that the secured creditor’s interest ranks in priority to the interest of the trustee.
If there is equity in the automobile, the trustee will discuss with the bankrupt making the equity in the automobile available to the unsecured creditors.
What happens if there is a problem with the security of a lender?
If the trustee determines that the secured creditor has not properly registered its security interest in the property pledged, the trustee will take steps to disallow the secured creditor’s status regarding the collateral and have the secured creditor’s claim rank as an unsecured claim.
Also, if the trustee determines that there was no consideration given in exchange for the security granted, the trustee may challenge the legality of the security granted utilizing the provisions of the bankruptcy legislation or available provincial statutes.
The above is meant to provide an overview of how the trustee looks at the claims of secured creditors. Not all situations are the same and individuals should consult with legal counsel or a trustee to obtain the appropriate information regarding the issues affecting a particular secured claim.
» Wayne K. Palmer is a senior manager in BDO’s Brandon office. He is responsible for both the consumer and commercial practices in Brandon and surrounding areas, including Boissevain, Minnedosa, Neepawa and Dauphin. Wayne has more than 25 years experience in the financial recovery services field.