These days many lenders are stuck with unsecured claims against debtors who file Chapter 7 bankruptcy. Under certain circumstances, all is not lost, because a creditor may be able to liquidate a debtor’s personal property to satisfy its unsecured claim.
In a recent case out of the Ninth Circuit, a mother guaranteed her son’s $13 million loan by pledging her own personal property as collateral. When the son defaulted on the loan, and the bank came to foreclose on her personal property, the mother filed for Chapter 11 bankruptcy protection, which was soon thereafter converted to Chapter 7. Thirty days after conversion, however, the debtor failed to file her Statement of Intention indicating whether she would surrender or retain that certain personal property pledged to secure her son’s debt. Likewise, the Chapter 7 trustee failed to file a motion for a determination that the pledged personal property collateral is of consequential value or benefit to the bankruptcy estate.
Under §§ 521(a)(2) and 362(h) of the Bankruptcy Code, if a debtor does not file his or her Statement of Intention, the automatic stay is terminated and the personal property collateral is removed from the estate, unless the Chapter 7 trustee obtains a timely determination that such collateral is of consequential value or benefit to the bankruptcy estate. Both of these filings must be made before the date set for the § 341 creditor’s meeting or within 30 days after the petition was filed – whichever is earlier.
The court in In re Blixseth held that the debtor’s failure to file a Statement of Intention and the Chapter 7 trustee’s failure to file a motion for consequential value determination terminated the automatic stay on all of the debtor’s personal property secured by any creditor’s claim – not just that personal property scheduled as securing the claim. This is significant, especially when the scheduled personal property does not satisfy the full amount of the debt, as in Blixseth, where the scheduled property satisfied only 15% of the claim. Thus, a creditor can attach and foreclose upon a debtor’s other personal property to satisfy the claim. But remember, Blixseth applies only to a debtor’s personal property, not a debtor’s real property.
Blixseth could be a boon for Chapter 7 creditors. The time frame to file is very limited, and both the debtor and the trustee must take affirmative actions. The creditor, on the other hand, must only bide its time before it may move to satisfy its claim with any of the debtor’s personal property. Other circuits have not immediately followed suit, but the creditor’s argument in Blixseth is quite persuasive. Creditors in Chapter 7 proceedings with claims scheduled as secured by a debtor’s personal property should monitor Blixseth closely, as it may provide a heretofore unavailable avenue to a debtor’s unscheduled personal property. Although a Blixseth argument has not yet been made in the Eleventh Circuit, the decision is spreading slowly, yet favorably outside of the Ninth Circuit. Given the well reasoned opinion, a creditor within the Eleventh Circuit may be able to rely on Blixseth and reach a debtor’s unscheduled personal property securing the debtor’s loan or guaranty.