Many people don't realize this when they apply for the account, but credit cards with retail outlets like Best Buy and furniture stores like Raymour and Flanagan grant a lien (just like on a house or a car) to the bank on anything you purchase with it.
This might not make a difference to you, unless you are filing for bankruptcy; then it can make a big difference in whether you will be totally free of the debt!
Liens in Bankruptcy
Under New Jersey Law, a lien can only be perfected if there is a writing in which the borrower/debtor agrees to the lien (this is usually in the card agreement or application form) and the collateral is sufficiently described so as to be readily identifiable.
Under the bankruptcy code, the creditor is only secured as to the value of the collateral at the time the bankruptcy is filed, not the original purchase price. In almost all circumstances, this means that not all of the balance due is secured. If the collateral has no value, the creditor is not secured at all.
Important Things to Consider
All of this makes it extremely important that claims of security by Raymour & Flanagan, Best Buy, Sears, and the like, be carefully reviewed. There are important issues like:
- Do you still have the collateral? If that Xbox game you bought at Best Buy was a Christmas present, then that comes off the list;
- Is the collateral of any value? New Jersey health laws do not allow the resale of a mattress or a box spring, so if that bedroom furniture purchase included them, that comes off the list. It might be an item of consumer electronics, where a newer version has come out, rendering the older one virtually valueless;
- Is the collateral still functional? I had a client who bought a laptop that later crashed irretrievably and would no longer boot. This left it with little or no value.
- Is the collateral goods at all? Is the creditor trying to include, for example, what you paid for an extended warranty on that new flat screen TV?
It is for these reasons that I challenge every claim of security I get on these cards. Many times the creditor will not be able to come up with all the necessary documentation to prove the lien, or the value of the goods they can identify is negligible.
If the collateral is still in your possession, functioning, and resell-able, the next question is determining current value. The IRS has a depreciation table that can be useful in coming up with a value for used furniture, although it does not take into account condition.
If There Is a Lien, Negotiate!
Once the goods have been identified and given a reasonable, real world current value, you can then negotiate a payment plan if you want to keep the goods. Oftentimes the creditor will agree to a payout over years with no interest. Once a deal is in place, a reaffirmation agreement is drafted, which you must sign and get back to the creditor within 45 days of your meeting with the trustee.
This agreement must also identify the collateral with specificity. More than one agreement I have received on furniture has described it as: "household furnishings." Does this mean that if you stop making the payments months down the road, they can repossess the contents of your home? Most likely not, but it does muddy the waters a bit.
If you live in southern New Jersey and are thinking about filing bankruptcy, please call me at 856-432-4113 or contact me through this site to scheduke an appointment to discuss your case.
If you are looking for further information, then download my free book, Top Questions People Ask About Filing Bankruptcy in New Jersey.