The passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 will bring about sweeping changes in
bankruptcy law this October. On the consumer side, the new law is designed make more
individuals file under Chapter 13 so that they must pay a minimum percentage of their unsecured debt, as opposed to filing under Chapter 7 to achieve a discharge of most, if not all of such debt. In
addition, the new law contains provisions favorable to consumer creditors such as mandating that, in a Chapter 13 case, a creditor with a lien on a motor vehicle purchased within 910 days of the
filing gets to retain its lien until the debtor pays the entire debt, not just the secured portion (i.e, no “cram down”).
Some sources predict that a by-product of the new law will be a significant increase in individual claims and class action lawsuits by individuals alleging violations of consumer protection statutes like the Truth in Lending Act (TILA), Fair Credit Reporting Act (FCRA) and Fair Debt Collection Practices Act (FDCPA). The goal of such claims would be to extract damages or favorable settlements from consumer creditors in an attempt to
offset the financial strain that consumers may face under the new bankruptcy law. If the prediction comes true, some comfort can be taken from the recent decision of the United States Supreme Court in
Koons Buick Pontiac GMC, Inc. v. Nigh, 125 S.Ct. 460 (2004), which involved an alleged violation of
TILA.
Nigh, the consumer in the Koons case, attempted to purchase a used truck from a dealer. The dealer agreed to provide financing and had Nigh sign a retail installment sales contract. After failing to find a lender to purchase an assignment of Nigh's original contract, the dealer required Nigh to sign two new contracts with terms the dealer hoped would be more attractive to potential lenders. Nigh later discovered that one of the contracts
contained a charge for an accessory that he never requested or received on the truck he purchased. Nigh sued the dealer alleging a TILA violation and other claims.
The issue before the Supreme Court was whether TILA allowed Nigh to recover an uncapped
recovery of twice the finance charges under the contract (approximately $25,000), or limited his damages to a statutory maximum of $1,000. The federal trial court and court of appeals interpreted some ambiguous language in TILA to allow Nigh to recover the higher damage award. However, in a decision that may calm creditors’ fears, the Supreme Court ruled that the statutory $1,000
maximum award applies to personal-property-secured loans and all other
TILA-regulated consumer credit transactions, except closed-end mortgage transactions, which are subject to a
separate statutory cap of $2,000.
In sum, while the courts may interpret consumer protection laws in a manner that provides some shield to creditors, if you are engaged in consumer lending of any type, now is the time to be proactive and re-evaluate your compliance procedures so that you can avoid being the target of any increase in litigation claims of this nature.
Lisa Sumner
is a Partner with our Bankruptcy and Creditors’ Rights practice group representing secured and unsecured creditors, creditors’ committees and debtors in business bankruptcy cases and negotiations regarding workouts. For further information or questions regarding compliance with the Fair Credit Reporting Act or related issues, please contact Lisa Sumner at 919.783.2869 or
lsumner@poynerspruill.com.
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