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Auto Loans and Bankruptcy A Dangerous Combination
by Howard A. Chorost, Attorney at Law Tucson, Arizona
If you are in the Credit Union business, you make car loans. It's a necessary part of the
services you offer your members.
A previously seldom enforced provision of the Bankruptcy Code will have a profound
impact on your credit unions's ability to maintain their security interest in auto loans following a
member's bankruptcy unless you pay careful attention to what I have to say and take appropriate
remedial measures.
In short, under current bankruptcy law, a bankruptcy trustee often has the ability to
invalidate a lien on an auto loan unless your credit union is able to prove that they have taken all
appropriate measures to perfect the lien by filing required documentation with the Arizona
Department of Transportation not later than twenty days from the date your member obtains
possession of the vehicle.
The reason we are having difficulties with the bankruptcy trustee is that our Department
of Transportation, unfortunately more often than not, will take several weeks or sometimes even
months to issue a title reflecting your credit union's lien. When a trustee is reviewing a
bankruptcy file looking for assets, he is unable to ascertain the date that the documents were
delivered by your credit union to the Department of Transportation. As a result, he may then
question whether your credit union's lien is subject to avoidance. If he does, you are looking at a
spending lot of legal fees defending your lien rights.
What can you do to prevent this from happening to your credit union? I have two simple
suggestions which you should implement immediately:
1.If you are mailing in your liens to DMV, mail it via Certified Mail, Return
Receipt Requested. After you receive your "green card," staple it in the file.
2. If you are hand-carrying the liens to DMV, have an extra copy available and ask
the clerk to date-stamp that copy. Then place the date-stamped copy in your file.
The issues presented here are complex. Several state statutes, federal statutes, and case
law come into play in analyzing this situation. If anyone has any questions, please feel free to
telephone or e-mail me and I would be more than happy to answer your questions.
Howard Chorost is the Principal of the Law Firm of HOWARD A. CHOROST, P.C. in
Tucson, Arizona. His practice focuses on the representation of credit unions. He can be
contacted by calling (520) 792-0011, or via the Internet at www.credit-union-lawyer.com
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