Loans, Collateral, & Bankruptcy
by Mary Beth Guard, BOL Guru
Question: We have a loan with two co-signers. One of the co-signers pledged a CD as collateral. The other co-signer has just filed bankruptcy. Can we declare the loan in default and apply the CD against the loan?
Answer: Answer: I posed this question to Sam Ott. He responded that it depends on two things: the type of bankruptcy proceeding filed and the purpose of the loan. Unless the bankruptcy filing was made pursuant to Chapter 13 and involves a consumer debt, the non-bankrupt co-signers are not protected.
Under a Chapter 13 proceeding, however, the automatic stay of action also applies to any individual that is liable on a consumer debt with the bankrupt debtor. As a result, a creditor in such a situation may not act, commence or continue any civil action to collect all or part of a consumer debt unless approved by the Bankruptcy Court.
A Chapter 13 creditor may be allowed to proceed against a co-debtor if:
the claim is based on the dishonor of a negotiable instrument;
the co-debtor received consideration for the claim held by the creditor;
the plan filed by the debtor proposes not to pay the creditor's claim; or
the creditor's interest would be irreparably harmed by the continuation of the stay.
If the bankruptcy was filed under Chapter 13 and involves a consumer debt, your institution should consult its attorney regarding the possibility of seeking relief from the stay from the Bankruptcy Court.
If the bankruptcy filing is not a Chapter 13, the bank should be able to look to the non- filing co-signer for payment of the loan and, if not made, proceed against the collateral.
The original version appeared in the January/February 2003 edition of the Oklahoma Bankers Association Compliance Informer.
BankersOnline is a free service made possible by the generous support of our
advertisers and sponsors. Advertisers and sponsors are not responsible for site content. Please help us keep BankersOnline FREE to all
banking professionals. Support our advertisers and sponsors by clicking
through to learn more about their products and services.
Print Friendly!
Email This Article!
Discuss NOW!
