The answer is no, but the questions are: What’s a non-possessory, non-purchase money security interest, and why would that matter in New York bankruptcy?
Pawned property is a commonly understood concept, and I’ve written about how it contrasts with repossessed property. The Bankruptcy Code specifies that pawned property is not property of the bankruptcy estate. Although, the pawnbroker must meet a few specific requirements to benefit from this exception. Specifically, it must be licensed by the state to pawn property, it must hold the property, the debtor must be under no obligation to repurchase the property, and neither the debtor nor the trustee may have redeemed the property under state law. As a result, pawnbrokers tend to be in better positions than other creditors.
So what is a non-possessory, non-purchase money security interest? It’s like a pawn deal with one crucial difference: The debtor holds on to the property while the creditor perfects a lien on it. In other words, the debtor enters into an agreement with the creditor that gives the creditor a right to repossess the property if the debtor doesn’t pay the loan in a timely manner. Moreover, the debtor must own the property prior to the agreement. Small banks or finance companies typically collateralize debtors’ personal belongings as non-possessory, non-purchase money security interests.
Why do these loans matter? A non-possessory, non-purchase money security interest is a lien on a debtor’s property that is both part of the bankruptcy estate and benefits from the rules governing lien avoidance. If a lien on the property impairs the debtor’s ability to use an exemption, then the debtor can avoid the lien.
For example, if a debtor pledged a piece of jewelry as collateral to a creditor while retaining possession of it, then the debtor might be able to avoid the lien on the jewelry to the extent it interferes with the debtor’s jewelry exemption, which is $1,100 in New York and $1,600 under the federal exemptions. By contrast, if the debtor pawned the item, then there would be no exemptions and no lien to avoid.
Lien avoidance for non-possessory, non-purchase money security interests applies to a handful of property classes:
- Household items, e.g. furnishings, clothing, books, musical instruments, jewelry, and other items
- Professional items, like tools of trade or professional books
- Prescribed health aids
These classes extend to properties belonging to dependents of debtors. The source is section 522(f) of the Bankruptcy Code.
If you are in financial difficulties and offered some of your property to a creditor, then it’s important to know what the property’s status is. The difference can affect how easily you can keep the property after a bankruptcy. Talking to an experienced New York bankruptcy lawyer will help you understand your options and the best way to proceed.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
