Do Credit Card and “Store Card” Creditors Have a Right to Repossess What You Bought on Those Cards After You File Bankruptcy?
A few months ago I wrote about “Reaffirming Personal Property Other Than Your Vehicle.” A “reaffirmation” is an agreement in bankruptcy to continue paying on a debt, usually done so that you can keep the collateral on that debt. It is most commonly done with vehicle loans, but this earlier blog post discussed the legal principles at play with other kinds of personal property collateral, such as furniture, appliances, and electronics. Today we follow up on this with some important practical considerations related to what happens in bankruptcy with things you buy with credit cards and cards issued by retail stores (like Best Buy, Daniel’s Jewelers, J.C.Penney, and Mor Furniture).
WHAT’S A “SECURITY INTEREST” AND WHAT DIFFERENCE DOES IT MAKE?
Whether or not a creditor has a “security interest” in whatever you bought makes all the difference in what happens in bankruptcy. A security interest is a package of rights that a creditor retains in the goods you bought, including the right to repossess those goods if you don’t pay the creditor under the agreed payment terms. The creditor’s right to repossess gives the creditor some “security” that you will pay as agreed.
This makes all the difference in bankruptcy because if you buy something with a credit card—let’s say a bed and headboard with box springs and mattress—and the creditor DOES NOT have a security interest in the bed, you can “discharge” (legally write off) the entire credit card debt and keep the bed without paying anything more. But on the other hand if the creditor DOES have a security interest in the bed, the creditor’s rights to the bed are not cut off by the bankruptcy case. That means that you would likely have to pay at least part of the credit card debt. Otherwise you would risk having the creditor repossess the collateral after your bankruptcy case is over.
HOW CAN A CREDITOR WITH A SECURITY INTEREST REPOSSESS AFTER BANKRUPTCY IF THE DEBT IS DISCHARGED?
Generally speaking, a bankruptcy discharge wipes away debts—obligations to pay—but does not wipe away property rights, including security interests.
This may be easier to understand in the context of a vehicle loan. Bankruptcy can discharge the debt you owe on your car, so that, for example, if you surrender the car you won’t owe anything on the loan (no matter how little the car is sold for by your lender). But while the debt is discharged, the lender is still remains on your title as a lienholder, a security interest holder. If you want to keep the car, you have to satisfy the lien, usually by reaffirming the balance on the loan. Reaffirming legally excludes the vehicle loan from the discharge of your other debts. If you don’t reaffirm, after the bankruptcy is over the lender will repossess the car (or will do so earlier if it gets permission from the bankruptcy court). You can’t just discharge the debt and get the car free and clear of the lien.
In the same way, IF a credit card creditor has a security interest in the bed you bought with the credit card, then bankruptcy will discharge the debt but will not wipe away the security interest—the creditors property rights in the bed. The creditor would be able to repossess the bed after the bankruptcy is over, unless you made arrangements to satisfy the creditor’s security interest, again, usually by reaffirming all or part of the credit card debt.
SO DO MY CREDIT CARD CREDITORS HAVE A SECURITY INTEREST IN EVERYTHING I BOUGHT WITH THE CREDIT CARDS?
That’s extremely unlikely. Most major credit card companies do not retain a security interest in ANYTHING you buy with the card. For example, when you make a purchase with a conventional Visa or MasterCard, under most such accounts the bank or financial institution that issued the card simply chooses not to have the right to repossess whatever you purchase.
In order for any particular creditor to have a security interest in your purchased goods, this must be directly and clearly stated in your agreement with that creditor. Yes, I’m talking about that multi-page, fine print contract, usually sent to you on flimsy, almost tissue-thin paper that’s mailed to you (or, these days, emailed to you) at the beginning of your relationship with the creditor—and then amended whenever they feel like it, with more reams of tissue paper fine print!
Technically the credit card company is not “retaining” a security interest; rather you are “granting” them a security interest in what you bought. When you buy something at a store, you become its owner—the credit card bank was never the owner so it can’t retain any rights. The bank doesn’t have any right to repossess unless YOU give them that right. Of course, the creditors that want to have a security interest in what you buy make you grant them a security interest as a condition for letting you make purchases with their card.
So, to oversimplify for a moment, whichever of your credit card creditors required you, in your contract with them, to grant them a security interest in your purchases, they have a security interest. Otherwise they don’t.
If you have nothing but conventional Visa and MasterCard credit cards, it may well be that none of these creditors have a security interest in what you purchased with these cards.
HOW CAN I FIND OUT WHETHER I’VE GRANTED A SECURITY INTEREST IN PURCHASES ON MY CREDIT CARD ACCOUNTS?
The place to start is the written agreement that governs your relationship with each one of your credit card creditors. Every one of them should be reviewed because there is no other way to know whether you’ve granted a security interest in your purchased goods. For example, I’ve been referring to “conventional” Visa and MasterCard accounts as generally not creating security interests. But these brand names are found on all kinds of financial accounts, so you have to look at the contracts themselves.
Looking at one example, here is a “Visa Credit Card Agreement” with Regions Bank, a large regional bank with branches in the South and Midwest. You’d have to plough through its 10 pages and nearly 10,000 words to learn that it does NOT have a clause in which the purchaser grants a security interest in the items purchased.
In contrast, here is a “Credit Card Agreement for Best Buy Retail Cards” in which the purchaser DOES grant a security interest in the goods he or she purchases. Deep in the middle of this Agreement’s 6,000 words or so is the following:
A “Security Interest” is our interest in an item that you buy using your Account that secures the payment of your Account.
Except as noted below, you grant us a security interest . . . in the following items financed using your Account:
• any goods you buy with your Card . . .
Each good you buy using your Account:
•secures your entire Account balance until that good is paid in
•may be taken from you if you do not pay on time.
You can see similar language granting a security interest in the credit card agreements of Daniel’s Jewelers (see p. 2) and More Furniture for Less (see p. 3). In contrast, the “JCPenney Credit Card Account Agreement” has no such language, so the creditor can’t repossess whatever you buy there (assuming it’s governed by this particular Agreement).
These diverse agreements should make clear that it’s necessary to review their actual language—as well as that of any amendments—to know whether or not you’ve granted a security interest in your purchases.
DOES THE CREDITOR HAVE A SECURITY INTEREST IN ANYTHING I EVER BOUGHT WITH THE CARD?
No, generally once you pay off a certain purchased item, the creditor’s security interest in that item is released. Unless agreed otherwise, the debt is no longer secured by that item.
For example, if two years ago you bought the bed referred to above for $1,200, paid the account down to $0, and then purchased some other furniture bringing the balance on the account to $2,000, the bed no longer secures any part of that $2,000 balance.
But the accounting on this can be quite complicated when the account has been active for many years and many items were purchased, ongoing interest has continued accruing, and many payments were made during that span of time.
There may even be a question whether a creditor can retain a security interest on an item seemingly paid off from a “first-in-first-out” accounting perspective just by saying so in the agreement. For example, the paragraph on security interests in the Daniel’s Jewelers agreement referred to above says that “items purchased previously on your account may secure later purchases.” This language is not clear but raises the question how long the “items purchased previously” would continue to “secure later purchases.”
CAN I GIVE THE CREDITOR A SECURITY INTEREST IN MY PURCHASES EVEN IF I DIDN’T KNOW I WAS DOING SO?
Giving a security interest in whatever you buy has big consequences. And yet the sentence or two through which you supposedly give away these important rights are usually buried in the middle of many pages and thousands of words of fine print. Most likely you don’t have any idea that the language is there or what it means. Is it fair to be able to give away such property rights without your actual knowledge that you are doing so? In other words, are these “granting of security interest” clauses enforceable against you?
I’ll address this in my next blog post.