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MONTEREY, Calif. – Much was gained in recent bankruptcy reform legislation, but those gains will be lost unless credit unions fight local court interpretations that don’t reflect Congress’ intentions, says industry attorney Eric North. North, a San Jose-based attorney who provides educational Webinars for the California Credit Union League, addressed attendees of the league’s Big Valley Educational Conference during a session reviewing changes in bankruptcy law and how they are likely to be interpreted in California courts. “Credit unions need to know enough about the law to know if what a local judge interprets is open for appeal,” North said, adding, “when you appeal, you’ll receive a better interpretation of what Congress intended.” North warned that many changes have the potential to revert back to pre-reform days in practice, due to manipulation by bankruptcy attorneys and a lack of credit union monies to fight in court. Additionally, North said, the law is poorly written. “This is probably the worst written law I’ve seen come out of Congress. It’s sloppy, and the terminology is inconsistently used, and in some cases, contradicts itself,” North said. Specific provisions in the bill North warned will be challenged, including the income and expense information debtors are now required to provide; the requirement of debtors to choose between surrendering, redeeming or reaffirming collateral; and redemption values of collateral. According to the new law, debtors are now required to provide more income and expense information than before, including pay stubs 60 days prior to filing. Additionally, with Chapter 13 bankruptcies, debtors must file updated annual statements of income and expenses to determine if the debtor is able to increase payments during the five-year repayment plan. “If you don’t enforce this, this is going to be something nobody does – the trustees won’t enforce it,” North said. The attorney also explained changes made to surrendering, redeeming and reaffirming property, including provisions that make it easier for credit unions to require debtors to choose what they intend to do with collateral. When a debtor filing Chapter 7 chooses to redeem property, the new law defines the value of the collateral as retail replacement value, compared to pre-reform wholesale value. While this change sounds good for credit unions, North said, it doesn’t mean easy money. “This is going to be a bigger issue as time goes by, because you’re going to see more redemptions now that it’s harder for debtors to file Chapter 13 and pay over time,” North said. The attorney added that he’s already aware of at least one company that is offering redemption loans to bankrupt debtors. Even though the law states that redemption amounts must be based on replacement value, which is defined as “the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined,” North said credit unions may often disagree with the value a local court assigns. To prepare for this, North encouraged credit unions to develop relationships with local auto dealers who can serve as trusted expert witnesses in a court of law. “Those retailers who want to do business with you, reach out to them and ask that in turn for your business, they help you too,” North said. Credit unions should band together and pool financial resources to appeal challenges to the law, so courts will set legal precedents that will benefit all credit unions, North said. He added that California and Nevada credit unions need to think strategically and select a case they will lose locally, so the case will move up to the U.S. 9th Circuit Court of Appeals, and the appeal, if effective, will benefit the region’s credit unions. -

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