Bankruptcy expert Leon Bayer answers real-life questions.
I filed bankruptcy last year. I work as a mechanic and use my own tools. One of my creditors is a company that sells tools to mechanics on credit. I bought tools from this company and made payments to them for several years, occasionally buying something new from them.
Because of financial difficulties, I stopped making payments and the company sued me in small claims court. I never went to court because I filed bankruptcy and got a discharge.
Now the tool company is demanding that I pay off my entire balance on the account all at once, or else it will repossess all the tools I bought from them. Can the company do that? I thought my bankruptcy put me in the clear because they never showed up to object. Isn’t there a law saying that a workman’s tools are protected?
Jose in California
I have seen this problem many times. In fact, I’m sure I can correctly guess which tool company you are talking about.
Your bankruptcy did not wipe out the tool company’s right to repossess your tools. However, the company’s decision to sue you in small claims court probably did – so that it cannot now repossess your tools. Read on to learn how this all works.
Bankruptcy Gets Rid of Personal Liability for Debt, But Not the Tool Company’s Security Interest in Your Tools
If you examine your agreement with the tool company, the paperwork will probably say that you gave the tool company a security interest in the tools until they had been paid for. This is just like when you buy a car and get a car loan – you don’t get full title to the car until it is paid for.
A valid security agreement (like a car loan), survives a bankruptcy discharge. While you are no longer personally liable for the tool debt (which means the tool company cannot sue you for reimbursement), the company can repossess the tools if you don’t pay.
There is an exemption that helps to protect your tools of the trade when you file bankruptcy. But that exemption only applies to tools that you already own or that you have equity in.
You Can Keep the Tools That You Have Already Paid Off
Under California law, each payment you make on a retail installment contract should be applied to the oldest thing that you purchased. After the oldest purchase gets paid off, the payments are applied to the next oldest thing in the time line, and so on.
If you made payments for any length of time, it is possible that some of the oldest purchases have been paid for. The tool company has no right to repossess anything that has already been paid for. If say, your earliest purchase was an expensive tool set, maybe it is not fully paid for. But also, it may be partially paid for because all your payments were applied against the price for just that set (after paying interest). If so, you can pay just the remaining balance for that specific purchase and keep that tool set, instead of having to pay off the entire accrued debt that includes subsequent purchases.
The Tool Company May Be Barred From Repossessing Your Tools
However, because the tool company sued you before your bankruptcy, it cannot now try to repossess your tools. Here’s why.
The California Retail Installment Sales Act says that if you don’t pay, a creditor may repossess the merchandise or sue you for the balance due. The law says a creditor must choose one or the other remedy — we lawyers call this an election of remedies.
When the tool company sued you, it chose to seek a money judgment against you in court. In doing so, it forfeited its right to repossess the tools.
Guess what? It sounds like you can keep the tools without paying them a dime.
I suggest you get a lawyer to write a reply to the tool company or to help you get the company off your back.
Leon Bayer is a Los Angeles bankruptcy attorney. He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy. The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo. By answering a question on this blog, Mr. Bayer does not become your lawyer.