Enterprising lawyers for debtors in Ch. 13 bankruptcies have now discovered a clever new way to inflict a $500 sting on lazy lenders who file sloppy claims. Nothing attracts lawyers like easy money. Now the word is out, at least in the Eastern District of North Carolina. I predict the Middle District will soon follow, and then the Western. Like a virus, the scent of money spreads fast. Could South Carolina be far behind?
Don’t be an easy mark. My aim is to reveal the sting to you and to show you how simple it is to avoid. The solution requires diligence and one dollar. The price of inattention is $500.00 – per sting. There is no limit on the number of stings per lender. Some (large) lenders have already earned the label of “easy marks”. No one wants to join that club.
Modern lenders making vehicle loans now usually dispense with recording liens on paper titles from the NC DMV. Instead, they record their liens electronically. No paper title is automatically printed. Instead, using any of several third-party servicers (e.g., “DealerTrac”), lenders rely on servicers’ homemade e-filing receipts as proof of lien recording. Paperless loans are secured today by paperless liens – very 21st century.
Some borrowers later file Ch. 13 bankruptcies. When that happens, economical lenders promptly file their own Proofs of Claim. To claims secured by titled vehicles, lenders attach prints of the loan notes and those e-title filing receipts. Too many Bankruptcy Trustees have decided those e-title filing receipts are unreliably inaccurate and often misleading. They disdain them as “historic fiction”. Trustees are then filing Objections to those claims. They seek to disallow the claims’ secured status, so the claims get treated as unsecured. Unsecured claims usually get little or nothing in Ch. 13s. Unsecured lenders are left to twist in the wind.
When those Objections to Claim arrive from the Trustees, too many lenders react in one of two ways. Both ways are flat wrong:
- Some lenders do nothing because no one realizes what the Trustee is doing, or why it matters. Then, 33 days after the Objection is filed, the Bankruptcy Judge grants disallowance. The claim gets busted from secured to lowly unsecured status. The lender’s claim gets pennies instead of dollars – at best.
- Some lenders request a printed paper title from the NC DMV. Weeks pass before it arrives by mail. Will it arrive before the Trustee’s Objection is allowed? Will it be matched with the loan file in time? (“Tick…tick…tick”.)
In the meantime, smart debtors’ lawyers seize the chance to make a quick $500 per Objection at the lender’s expense. Here’s how they are doing it:
Lawyers for the debtors get their own copies of those same Objections to Claims. They know well the Trustee’s mistrust of homemade e-filing receipts. They also know that debtors can file claims and amended claims for their own lenders. Now, the race is on:
- While the lender sleeps or awaits the arrival of a paper title by snail-mail, the debtor’s lawyer makes one phone call to the NC DMV. For the cost of $1, the NC DMV will fax (not e-mail) the lawyer that same day an NC DMV “Lien Detail” page, for the vehicle in question. That is a page from the DMV’s own records, stating whether and precisely when the lender filed its lien. Trustees trust Lien Detail printouts from the NC DMV, just as much as they trust paper titles. Then,
- Using the original claim and loan note downloaded from the Ch. 13’s claims register, the debtor’s lawyer quickly files an Amended Proof of Claim. It matches the original claim in all respects, except it attaches the Lien Detail page instead of the e-title filing receipt’s historic fiction. The Trustee is placated and withdraws the Objection to Claim. Problem solved? Nope.
Diligent debtors’ lawyers are then filing Motions for a Supplemental Fee of $500 per claim amendment. Their Motions are being routinely granted by the Judges. That $500 fee is paid by reducing the lender’s secured claim by $500! As the debtor makes his plan payments to the Trustee, the Trustee sends money to the debtor’s own lawyer that would have gone to the secured lender. In effect, lenders are paying debtors’ lawyers for fixing the lenders’ own inadequately-documented claim. Were three Objections resolved by three Amended Claims? That’ll be $1500, please. It’s a sweet little racket.
The Solution is Prevention, Not Cure
Don’t dawdle! Stop using servicers’ homemade e-filing receipts as proof your lien is recorded. If your loan file contains no paper title, do not order one. Sign up today with the NC DMV to get same-day, telephonic access to Lien Detail pages for a dollar each. File those Lien Detail pages to prove your recorded lien. The NC DMV will bill you monthly. React to Objections to Claim the day they arrive. Get your claim(s) amended right away. Remember, you must amend your claim faster than the debtor’s lawyer can amend it for you. Fortune favors diligence.