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Pass the Means Test by Filing Bankruptcy in 2018

November 12th, 2018 at 8:00 am

The timing of your bankruptcy filing can determine whether you qualify for quick Chapter 7 vs. paying into a Chapter 13 plan for 3-5 years.

 

Timing Can Be SO Important

There are lots of ways you could greatly benefit from meeting with a bankruptcy lawyer sooner rather than later. You may save yourself lots of money by choosing an option that would not be available to you later. 

There are many situations this could happen. Today we’ll address how filing sooner—say, before the end of 2018—might enable someone to pass the “means test” when that might not be possible later. Passing the means test means you’d likely qualify to file a Chapter 7 “straight bankruptcy” case. Otherwise you may be required to file a Chapter 13 “adjustment of debts” case.

Chapter 13 can be great in the right circumstances. But you don’t want to be forced into filing one quickly because you’re desperate for immediate relief from your creditors. If you had to file a Chapter 13 case because you didn’t have the flexibility to strategically time your filing, this could easily cost you many thousands of dollars. It could mean that you couldn’t discharge most of your debts in a matter of 3-4 months without paying anything on them vs. paying on those debts for 3 to 5 years.

Timing and Income in the Means Test

The means test requires people who have the “means” to do so, to pay a meaningful amount on their debts. If you don’t pass the means test you’re effectively stuck with filing a Chapter 13 case.

Be aware that a majority of people who need a Chapter 7 case successfully pass the means test. The most direct way to do so is if your income is no larger than the published “median income” amounts designated for your state and family size. What’s crucial here is the highly unusual way the means test defines income. This unusual definition creates potential timing advantages and disadvantages.

The Means Test Definition of Income

When considering income for purposes of the means test, don’t think of income as you normally would. Instead:

1) Consider almost all sources of money coming to you in just about any form as income. Included, for example, are disability, workers’ compensation, and unemployment benefits; pension, retirement, and annuity payments received; regular contributions for household expenses by anybody, including a spouse or ex-spouse; rental or other business income; interest, dividends, and royalties. Pretty much the only money excluded are those received under the Social Security Act, including retirement, disability (SSDI), Supplemental Security Income (SSI), and Temporary Assistance to Needy Families (TANF).

2) The period of time that counts for the means test is exactly the 6 full calendar months before your bankruptcy filing date. Included as income is ONLY the money you receive during those specific months. This excludes money received before that 6-month block of time. It also excludes any money received during the calendar month that you file your Chapter 7 case. To clarify this, if you filed a Chapter 7 case this December 15th, your income for the means test would include all money received from exactly June 1 through November 30 of this year. It would exclude money received before June 1 or received from December 1 through the date of filing.

The Effect of this Unusual Definition of Income

This timing rule means that your means test income can change depending on what month you file your case. To the extent you have flexibility over when to file, and if there are any shifts in the money you receive over time, you have some control over how much your income is for the means test when you do file your case.

So if you receive an unusual amount of money anytime in December, it doesn’t count if you file a Chapter 7 case by December 31. This unusual amount of money might be an employer’s annual bonus, a contribution from a parent or relative to help you pay expenses, or an unexpected catch-up payment of spousal/child support. Remember, if you file bankruptcy in December, only money received June through November gets counted.

Even relatively small differences in money received can make an unexpectedly big difference. That’s because the six-month income total is doubled to arrive at the annual income amount. So for example let’s say you got an extra $1,500 from whatever source(s) in December. If you file in December that extra doesn’t count, as just discussed above. But if you wait until January to file, December money is counted becasue the pertinent 6-month period is now July 1 through December 31. That extra $1,500 gets doubled, increasing your annual income by $3,000. That could push you above the designated “median income” for your state and family size. If so you’d likely not pass the means test and not qualify for Chapter 7, leaving you with Chapter 13 as your only option.

Conclusion

It is a fact that most people wait way too long before their initial consultation meeting with a bankruptcy lawyer. There are many very understandable reasons for this. But do yourself a favor and be the exception. See a lawyer not because you’re at the very end of your rope and need immediate relief from your creditors. Instead see one because you want to learn about your options. Do this sooner and you may have some significantly money-saving options that you might not have had otherwise. 

 

The Surprising Benefits: Keeping Your Vehicle Lease under Chapter 13

November 5th, 2018 at 8:00 am

You can keep your leased vehicle under Chapter 7 if you’re current. If not, or have other reasons to do a Chapter 13 case, that’s works too.


Lease Assumption under Chapter 7

Our last blog post showed how to keep a leased vehicle by “assuming” the lease in a Chapter 7 case. This means you keep making the lease payments. You also continue being legally bound by all the other terms of the lease contract.

Problems under Chapter 7

But what if you’re behind on your lease payments, and can’t catch up right away? Very likely the lessor would not allow you to assume the lease. And even if you could you’d be in default on the lease immediately and subject to repossession. You could easily end up owing a substantial amount of damages, and still be without a vehicle.

The Solution under Chapter 13

Filing a Chapter 13 “adjustment of debts” case solves this problem by giving much you more time to catch up on late payments.

A Chapter 13 case revolves around a formal court-approved payment plan that you and your bankruptcy lawyer put together. Your Chapter 13 plan will have a provision stating that you are assuming the unexpired vehicle lease. See Part 6 of the Bankruptcy Court’s official Chapter 13 Plan form. Besides listing the name of the lessor, a short description of the leased vehicle, and the monthly payment, you state the “Amount of arrearage to be paid” and the terms by which it will be paid through the plan. Usually you can catch up on the arrearage under terms that would fit within your budget.  

There is an opportunity for objection to such terms, particularly by the lessor. But usually the lessor is happy that you are choosing to continue being liable on the lease contract. Unless your payment history is terrible, or you’ve violated the lease agreement in other ways (such as not keeping insurance in effect) you’re mostly not going to get any objection. If there’s no objection, or any objection is resolved, the bankruptcy judge will approve or “confirm” the plan. (This assumes that the plan is otherwise ready for confirmation.)

This gives your proposed way of dealing with the lease, including the missed payments, the force of a court order. As long as you comply with those terms you’ll be able to keep your leased vehicle.

Limited Benefit on Leased Vehicles with Chapter 13

Chapter 13 gives you less possible advantages with a vehicle lease than if you had a vehicle loan. There is no opportunity for a Chapter 13 “cramdown” with a lease. A loan cramdown potentially reduces the loan’s monthly payments and the total amount paid to own the vehicle free and clear. Chapter 13 does not enable you to reduce your monthly lease payment. It does not take a penny off what you have to pay over the life of the lease.

Chapter 13 merely allows you to keep a leased vehicle through its lease term. The only real advantage it gives you over Chapter 7 is giving you more time to catch up on any unpaid lease payments. That may be an important advantage if you are desperate to keep the vehicle and are behind.

But be careful. Be aware that if you assume the lease under Chapter 13 you continue being liable on the other terms of the lease. For example, at the end of the lease you could owe money for high mileage or extra wear and tear. You could even lose the vehicle if you didn’t keep up the monthly lease payments. On top of that you could owe additional penalties for early termination of the lease.

Conclusion

Do you need a Chapter 13 case for any of the many other advantages it can give you? Then you will likely also be able to keep your leased vehicle as you’re dealing with those other issues.

Are you behind on your leased vehicle and absolutely want to keep it? Are you fully aware of the possible disadvantages of staying in your lease (partially outlined above)? If so, then Chapter 13 provides a way to keep your leased vehicle by catching up on the missed payments over time while you are protected from repossession.

 

The Surprising Benefits: Keeping Your Vehicle Lease under Chapter 7

October 29th, 2018 at 7:00 am

If you file a Chapter 7 case and write off your other debts, will you want to keep your vehicle lease? You can if you’re current on it now.

 

Our last three blog posts have been about rejecting a vehicle lease and giving the vehicle back to the lessor. You can do this either through Chapter 7 or 13. The result is the same in the end.  Assuming you successfully finish the bankruptcy case, you’ll forever discharge (legally write off) any debt you’d owe afterwards.

But you can also usually keep a leased vehicle. Depending on your circumstances, you can “assume” the lease in either a Chapter 7 or 13 case. Today’s blog post is about how this works in a Chapter 7 case. Next week we get into keeping a leased vehicle in a Chapter 13 one.

“Assuming” Vehicle Lease

When you file bankruptcy you make a formal choice about whether or not you want to “assume” the lease. Assuming an unexpired lease generally allows you to keep the vehicle while continuing to be legally bound by the lease contract. You give up the option to reject the lease and discharge—forever write off—any financial obligations on that contract. (Section 365(a) of the U.S. Bankruptcy Code.)

The “Statement of Intention”

To formally assume the lease in a Chapter 7 “straight bankruptcy” case you say that’s want you want to do in the court documents your bankruptcy lawyer prepares for you. In the “Statement of Intention for Individuals Filing Under Chapter 7” “List Your Unexpired Personal Property Leases” (on page 2). After stating your lessor’s name and the vehicle being leased, there’s a simple question: “Will the lease be assumed?” Check the “Yes” box.  Your bankruptcy lawyer files this Statement of Intention at the Bankruptcy Court (electronically). He or she also delivers a copy of to the lessor. (See Bankruptcy Rule 1007(b)(2).)

You and your lawyer must file this document within 30 days of filing your bankruptcy petition. Often it’s filed with your initial bankruptcy petition and the rest of your documents at the beginning of your case.

Consequences of Assuming the Lease

Be fully aware of the potential consequences before you assume the lease. Filing a Chapter 7 case gives you the opportunity to cancel your lease contract without owing anything. Assuming the lease gives up that opportunity.

If you assume and then in the future you couldn’t make the monthly lease payments, the lessor would take back the vehicle. Then the lessor could sue you for the amount you still owe on the lease contract.

Even if you make all the required monthly payments, you may still owe money at the end of the lease. You could owe substantial charges for excess mileage or damage to the vehicle. You could potentially owe thousands of dollars, and again be sued if you did not pay.

There are situations when it makes sense to keep a leased vehicle by assuming the lease in bankruptcy. But be sure you think about the benefits of getting out of the lease, and understand the risks.

When Chapter 13 Helps You Keep Your Leased Vehicle

In a Chapter 7 case you should generally be current on the monthly payments in order to assume the lease. If you’re not current, be sure that you can immediately get current. If you can’t, the lessor will very likely not allow you to assume the lease.

If you are behind but definitely want to keep the leased vehicle, Chapter 13 may be your better option. It usually gives you much more time to catch up on the missed payments. That’s the topic of our next blog post.

 

Debunking the Three Biggest Bankruptcy Fears

October 26th, 2018 at 8:25 pm

TX bankruptcy attorneyNearly 800,000 Americans file for bankruptcy each year, while millions more struggle with the decision filing. Often, those weighing the decision to file are doing so under the pressure of constant collection calls, the stress of impending foreclosure or repossession, and without all of the information necessary to make an informed decision. Let us help alleviate some of those fears:

Concern 1: My credit will be ruined.

While it is true that you will experience a decline in your credit score initially, also consider the impact late payments have on your credit score. While it may not be an immediate dramatic decline, the slow loss of credit from delinquency can be more harmful than bankruptcy.

As far as being able to apply for a credit card, a mortgage, or a car loan, all of these options will be available to you much sooner than you may anticipate. Many creditors are willing to offer you a credit card as soon as you complete your filing since they know you will be unable to file for bankruptcy again for an extended length of time. Furthermore, borrowers begin qualifying for new mortgages as soon as one year after the completion of a bankruptcy filing.

Concern 2: I will lose everything.

The thought of being homeless and without transportation often scares many families into coping with the onslaught of collection attempts. In reality, only 2% of debtors must turn over their personal property and real estate equity. According to the Texas homestead exemption, as long as you have lived in your home for 40 months or more, you will not lose your home, regardless of how much equity you have in it. If you live in a suburban area, you can keep up to ten acres of land, or if you are in a rural area, you can keep up to 200 acres per family or 100 acres for individual bankruptcy.

Concern 3: Everyone I know will find out I filed for bankruptcy.

We often hear of bankruptcy on the news, but rarely is it anyone we know intimately. While bankruptcy is a matter of public records, the only time it will potentially make headlines is if you have a high profile case. Many newspapers choose not to publish bankruptcy records now to save on publication costs.

A New Braunfels Bankruptcy Attorney Can Help

If you are one of the millions of Americans struggling to make ends meet, a Kerrville, TX bankruptcy attorney will help answer any questions you may have. Attorney Chance M. McGhee has over 20 years of experience with assisting clients to overcome the financial crisis. Call our office at 210-342-3400 to find out how we can help in a free initial consultation.

 

Source:

https://www.thebalance.com/the-three-biggest-bankruptcy-fears-316359

The Surprising Benefits: Ending Your Vehicle Lease under Chapter 13

October 24th, 2018 at 7:00 am

Chapter 7 gets you out of a vehicle lease owing nothing. Chapter 13 is more complicated but can give you pretty much the same good result.

 

Ending a Vehicle Lease in Chapter 7

Our last blog post was about how a Chapter 7 “straight bankruptcy” can get you out of a vehicle lease. You can “reject” a financially bad lease, and then discharge (permanently write off) whatever you’d owe after surrendering the vehicle. Otherwise you could owe a lot of money when you get out of the lease.

So if you decide that you don’t want to keep your leased vehicle, and need bankruptcy relief, Chapter 7 is likely the cleanest solution.

Ending a Vehicle Lease in Chapter 13

But what if you have other reasons to file a Chapter 13 “adjustment of debts” case instead? Chapter 13 can be a great way to save your home, catch up on child or spousal support, deal with income tax debt, and solve many other big financial problems, much better than under Chapter 7.

So it’s good news that you can surrender your leased vehicle through Chapter 13 just like under Chapter 7. However, discharging any resulting debt from the lease contract is not as straightforward as in a Chapter 7 case. Here’s how it works.

Possible Debts from Surrendering a Leased Vehicle

First be aware that you could owe various kinds of debts when you surrender a leased vehicle. Surrendering before lease end could make you liable for contractual penalties and/or all the remaining unpaid lease payments. Surrendering the vehicle at the end of the lease could make you liable for high mileage, excessive wear and tear, and the difference between the vehicle’s originally anticipated value at the end of the lease and the actual “realized value” then. Either way the amount you would owe could be thousands of dollars.  

Rejecting the Lease under Chapter 13

Under Chapter 13 you have the options of either rejecting the lease and returning the car, or continuing the lease. For today we’re assuming you no longer need or want to keep and pay for the vehicle.

The immediate benefits of rejecting the lease are just like under Chapter 7. You immediately stop paying the monthly lease payments, and then return the vehicle to the lessor after filing the case. If you’re behind on payments, you don’t have to pay them.

But under Chapter 13 there’s a complication. Your lessor can file a “proof of claim” reflecting whatever amount you would owe under the lease contract. The lessor does so in order to try to get paid part of any remaining debt. This debt is then added to the pile of all your other “general unsecured” debts.

The Category of “General Unsecured” Debts in Chapter 13

In a Chapter 13 case, your debts are divided into categories, one being your “general unsecured” debts. These are the debts that are 1) not secured by any of your property or possessions, and are also 2) not a “priority” debt (various specially-treated ones).

Often you have to pay all or most of what you owe on your secured and priority debts. But this is seldom true with general unsecured debts. Often you pay little or even nothing on your general unsecured debts in a Chapter 13 case. Whether or how much you pay depends on a lot of factors. The main factors are the amount of your secured and priority debts, and how much you can afford to pay to all of your creditors after expenses.

Often Vehicle Lease Debt Does Not Increase What You Pay

In most Chapter 13 cases a debt from surrendering your leased vehicle does not increase what pay in your case. That is, adding what you owe on the lease to your other general unsecured debts does not increase the amount that you pay into your pool of general unsecured debts.

There are two circumstances where that happens, one less common and other very common.

First, in some parts of the country you are allowed to pay 0% of your “general unsecured” debts. This happens if all you can afford to pay during your 3-to-5-year payment plan goes to your secured and priority debts. This leaves no money for the general unsecured debts. Paying 0% of the general unsecured debts means paying 0% on any vehicle lease debt.

Second, in most situations you end up paying the pool of general unsecured debts a specific amount of money. That amount is what you can afford to pay through the plan minus what goes to secured and priority debts. That specific amount gets divided up among the general unsecured debts. This amount being paid to the general unsecured debts does not increase if there is more of those debts. Adding the debt from the surrendered leased vehicle just reduces the amount other general unsecured debts receive. It does not increase how much you pay.  

For example, assume that after you pay all your secured and priority debts you have $2,000 left over to pay all your general unsecured debts over the life of your Chapter 13 plan. Your vehicle lessor files a claim saying you owe $3,000 after surrendering the vehicle. You owe $30,000 to all your other general unsecured debts. Adding the $3,000 lease debt to the other $30,000 means you owe a total of $33,000 of general unsecured debts. But you pay only the $2,000 that is available (over the life of the plan) either way. Having the $3,000 lease debt just means that the other general unsecured debts receive that much less.

 

The Surprising Benefits: Rejecting Your Vehicle Lease under Chapter 7

October 15th, 2018 at 7:00 am

Getting out of a vehicle lease in a Chapter 7 case requires simply that you formally state that you “reject” it. Then you owe nothing more.

 

Last week we showed how a vehicle lease can be unexpectedly expensive, and that you can escape through Chapter 7. Today we show you how.

The Option of “Rejecting” the Lease

When you file bankruptcy you get to choose whether or not to keep your leased vehicle. Specifically you choose to either “assume” or “reject” the lease. Assuming the lease means keeping the vehicle and continuing to be legally bound by all the terms of the lease. Rejecting the lease means letting the vehicle go. This allows you to “discharge”—forever write off—all of your financial obligations on the lease. (See Section 365 of the Bankruptcy Code generally about the assumption and rejection of unexpired leases. Warning: it’s very complicated and confusing!)

Rejecting a car or truck lease can be a good idea in various situations. As we discussed last week leases come with a number of hidden costs and financial risks.

If you can’t make the lease payments and surrender the vehicle, you will most likely owe a lot of money. Or if you’re nearing the end of your lease and the vehicle has high mileage or unusual wear and tear, you can also owe a lot. Rejecting your vehicle lease in bankruptcy at any point in the lease gets you out of it without having to pay anything more on it.

Giving Notice of Lease Rejection

To reject the lease, you simply state your intention to do so. You do that in the Chapter 7 documents that your bankruptcy lawyer prepares for you. The specific form is appropriately called the “Statement of Intention for Individuals Filing Under Chapter 7.” As you can see on the form itself, on page 2 you “List Your Unexpired Personal Property Leases.” (A vehicle is “personal property.”) So you state your lessor’s name and the vehicle being leased, and whether or not you’re “assuming” the lease. If you are not assuming it you are deemed to be rejecting it.

Your bankruptcy lawyer delivers a copy of the Statement of Intention to the lessor and the trustee. (See Bankruptcy Rule 1007(b)(2).)

Timing of the Statement of Intention

Your lawyer must file/deliver the Statement of Intention within 30 days after the filing of your Chapter 7 case. If your “meeting of creditors” happens to be before then, the deadline to file is the date of that “meeting.”

If you don’t file/deliver this form by this deadline the lessor can then immediately repossess the vehicle. In other words the protection against repossession—called the “automatic stay”—that you imposed by filing your case expires if you don’t file/deliver the Statement of Intention on time. (See Section 362(h)(1)(A) of the Bankruptcy Code.)

Often the Statement of Intention gets filed the day you file all your other documents. But your lawyer may wait until the later deadline to file to give you more time with your vehicle. That’s because the “automatic stay” also expires if you don’t “take timely the action specified in such statement.” (Section 362(h)(1)(B).)

The Lessor’s Reactions

At any point your lessor may file a motion asking for permission to take possession of the vehicle. This is also called a motion for relief from the automatic stay or to lift the automatic stay. The faster the lessor gets possession the faster it can resell it and recoup some of its losses. So sometimes a lessor will file such a motion to make sure it gets possession as fast as the law allows.  

But often a lessor just relies on your Statement of Intent and the expiration of the automatic stay as described above. It doesn’t file a motion but just communicates with your lawyer to arrange for your surrender of the vehicle at a time that is reasonable for both you and the lessor.

So, talk with your bankruptcy lawyer, both about whether you should reject your lease, and how to best do so.

 

How to Rebuild Credit After a Texas Bankruptcy

October 14th, 2018 at 9:51 pm

Texas bankruptcy lawyerThough many people think a bankruptcy can ruin their credit for the rest of their lives, that is not necessarily true. When you file for a Chapter 7 or Chapter 13 bankruptcy, it stays on your credit report for at least seven years. Though that can be disheartening, you should not worry too much – you can start to rebuild your credit right after you file for bankruptcy. Often, people find that their financial situations and credit scores are even higher than they were before bankruptcy, given you can change the reason you became buried in debt. Though it can seem daunting, rebuilding your credit score after you file for bankruptcy is crucial. Here are XX ways to help build your credit back up.

Create a Budget

One of the first ways you can make sure you are on the track to financial success is by creating a monthly budget to keep track of your spending. There are numerous websites and apps that can help you do this, but they all essentially do the same thing – take your monthly earnings and subtract monthly expenses, budget for a few luxuries and then use what is left over to pay off debt, invest, or deposit into a savings account.

Open a Secured Credit Card or Use a Cosigner

After you have filed for a bankruptcy, credit card companies see you as a high-risk borrower, meaning there is a greater chance that they will not get their money from you. This can be a problem because one of the main ways of building credit is through credit cards. A way around this is opening a secured credit card, which is slightly different from a traditional credit card because you must put down a deposit to open the card. Another option would be to open a traditional credit card, but have a cosigner agree to pay off the debt if you for some reason are not able to.

Consider a Secured Loan

Credit scores are not all about credit cards – many types of debt are taken into consideration when determining your credit score, so it is good to diversify your debt. Again, lenders are going to see you as a high-risk borrower, so many will likely not allow you to take out a traditional loan, but you may be able to take out a secured loan, which functions much like a secured credit card. Secured loans allow you to borrow money that you already have deposited and some allow you to may payments toward a certain amount, though you would not have access to those funds until all payments were made.

Contact a Kerrville Bankruptcy Lawyer

Though filing for bankruptcy can be intimidating and even embarrassing for some, often bankruptcy is the only choice. By hiring a knowledgeable Boerne bankruptcy attorney, you can ensure that you are doing the right thing for your finances and your family. Bankruptcies can be damaging to your credit score, but there are ways you can rebuilt them. Contact the Law Offices of Chance M. McGhee to discuss your options. To schedule a consultation, call the office at 210-342-3400.

 

Source:

https://www.nerdwallet.com/blog/finance/rebuild-credit-after-bankruptcy/

 

The Surprising Benefits: Escape from Your Vehicle Lease in Bankruptcy

October 8th, 2018 at 7:00 am

Leasing a vehicle is tempting because it seems to be the less expensive way to go. But it’s often MORE expensive. Escape through bankruptcy. 

 

The Temptation of a Vehicle Lease

Leasing can seem like a sensible way to get a new vehicle. You often pay less money down and pay lower monthly payments. So leasing can sometimes be a way to get reliable transportation for less money. At least in the short term.

The Hidden Economic Costs

But there are hidden costs.

First, at the end of your lease term you own nothing. Your payments don’t create any ownership.  They give you nothing more than immediate possession.

At the end of the lease you don’t have a free and clear vehicle as you do after paying off a vehicle loan. You don’t have a vehicle free of monthly payment for a few years after pay-off. Instead of a free and clear vehicle at the end of the contract you’re stuck with figuring out how you can afford another vehicle.

Second, at the end of the lease you have no used vehicle to trade in for your next vehicle. Most likely you haven’t saved up money for a down payment. You haven’t used the lower monthly lease payments to save money for a down payment on your next vehicle. So getting into another leased vehicle may be your only viable option. You end up in a cycle of never really owning a vehicle, trapped into forever making vehicle payments.

The Hidden Economic Risks

Third, you’re hit with big financial penalties if you end up driving the vehicle more than the contract allows. You could also owe money if you have excessive wear and tear on the vehicle’s interior or exterior. You may also be penalized if the vehicle ends up having depreciated more than the leasing company figured it would as of the start of the lease contract.

Fourth, it’s usually harder to get out of a vehicle lease than a vehicle loan. With a loan it’s more likely that you’d build up some equity sooner. So you could sell the vehicle and pay off the loan. In contrast, getting out of a vehicle lease before its term is up is usually expensive. It can cost you thousands of dollars. The amount you would owe would depend on the vehicle’s “realized value.” That’s the relatively low amount the lease company would get from selling the vehicle at an auto auction. That amount isn’t even knowable until you want to get out of the lease so your big exit fee could come as a rude surprise.

As a result of these hidden costs and risks, leasing is usually the most expensive way to have access to a vehicle:

  • you have the car during the period of its greatest depreciation
  • at the end of the lease you have to return it because you’ve not built any ownership in it
  • when you return  it you potentially pay extra to do so
  • then you repeat all this with another lease, continuously making payments
  • so you never to own a vehicle free and clear

Discharging Lease Debts through Chapter 7 Bankruptcy

“Discharge” is the legal write-off of a debt in bankruptcy. (See Section 524 of the U.S. Bankruptcy Code about the “Effect of discharge.”) Under Chapter 7 debts get discharged within about four months of when you and your bankruptcy lawyer file your case.

Vehicle lease obligations almost always get discharged in bankruptcy. There are certain other types of debts that are never discharged; others in which a creditor can challenge the discharge. But these exceptions don’t usually apply to vehicle leases.

Discharge Early Termination or End-of-Lease Charges

Chapter 7 bankruptcy allows you to escape the lease early. Your circumstances may have changed so that you can no longer afford the monthly lease payments. Or maybe you’ve already even fallen behind on those payments. Or you may just not longer need or want the vehicle. You may simply need the money for more crucial expenses.

Or, instead of trying to get out of the lease early, you may just be getting towards the end of your lease. Because of high mileage or lots of wear and tear on the vehicle, you expect to owe money then.

So, Chapter 7 lets you get out of your vehicle lease at any point without paying anything more on it.

 

The Surprising Benefits: An Example of Vehicle Loan Cramdown

October 1st, 2018 at 7:00 am

Vehicle loan cramdown can greatly reduce your monthly payment and the total amount you pay on your loan. Here’s a helpful example.

 

Cramdown in Chapter 13

Last week we introduced cramdown as an extremely helpful tool for reducing the cost of your vehicle loan. Cramdown can often:

  1. Reduce your monthly payments—sometimes significantly.
  2. Reduce the amount you pay on your vehicle contract altogether—often by thousands of dollars.
  3. Excuse you from catching up on any back payments on your vehicle.

Here’s an example to illustrate just how good cramdown can be.

The Facts in Our Example

Assume you are making payments on a 2015 Ford Fusion SE that you bought new more than three years ago. You bought from a dealer for $27,000. After adding the various fees and taxes, and subtracting your modest down payment, you financed $27,000. Because your credit was iffy your loan was at the high interest rate of 8.9% on a 84-month loan.

The monthly payment of $433 has been tough to keep up on. You’re now a month late and your next payment is due in a week. You know that you’re close to getting your vehicle repossessed.

After 34 monthly payments of $433 you’d normally owe about $18,000 but with a bunch of late fees and other charges you owe around $19,000. Your vehicle is currently worth $13,000, with 55,000 miles (average for a 2015 vehicle).

Under Chapter 7 “Straight Bankruptcy”

If you filed a Chapter 7 case you’d basically have a choice between keeping the car with its present loan terms or surrendering it and writing off the loan.

Assuming that you absolutely need the transportation, you’d have to “reaffirm” the loan. That means that you’d have to catch up on the missed payments and agree to keep it current. You’d be stuck with the current monthly payment amount. You’d be stuck with the high interest rate (costing you more than $9,000 over the length of the contract). If you ever failed to keep current and the vehicle got repossessed, you’d likely owe a large “deficiency balance.” And your vehicle would be gone.

Savings through Cramdown

In contrast, under Chapter 13 cramdown both your monthly payment and the total amount paid would be reduced.

In our example, you and your bankruptcy lawyer reduce the monthly payment as follows. The $19,000 balance on the contract gets divided into the secured and unsecured portions.

The secured portion is based on the current value of the vehicle: $13,000. You have 3 to 5 years to pay that amount. Depending on all the circumstances you should be able to reduce the interest rate—assume down to 4%. $13,000 amortized at 4% over the maximum 60 months works out to only about $239 per month.

What about the Unsecured Part of the Vehicle Loan?

What happens to the remaining unsecured portion in the amount of $6,000? (That’s the $19,000 current loan balance minus the above $13,000 secured portion.) It gets lumped into the pool of your other “general unsecured” debts. So what happens to that $6,000 debt?

It depends. In most situations you effectively pay nothing more during your Chapter 13 case as a result of this $6,000 debt. This would happen for two potential reasons.

0% Chapter 13 Plans

First, after paying allowed living expenses and higher priority debt—including the monthly $239 vehicle payments, and also recent income taxes, home mortgage and support arrearage, and such—you may have nothing left over for the general unsecured debts. Under these circumstances you’d be paying 0% on these debts during your Chapter 13 payment plan. Then at the end of the 3-to-5-year plan those general unsecured debts would be discharged—completely written off. This would include the $6,000 unsecured part of the vehicle loan. You’d pay nothing on it (and still keep your vehicle).

Partial Payment Chapter 13 Plans

Second, you may instead have some money during your plan to pay towards your general unsecured debts. But even then, in most Chapter 13 cases the existence of the unsecured part of your vehicle loan does not increase how much you pay into your plan over the life of the plan.

Let’s add a few more facts to our example. Assume that you have $40,000 in other general unsecured debts (credit cards, medical bills, old income taxes, and such). Add the $6,000 unsecured part of your vehicle loan, for a total of $46,000 of general unsecured debts. Assume also that over the course of your Chapter 13 plan you have disposable income (after allowed expenses and higher priority debts) totaling $4,000. You pay that $4,000 over time through your monthly plan payments.

If you didn’t owe the $6,000 unsecured part of your vehicle loan, that $4,000 would result in you paying 10% of your general unsecured debts ($4,000 out of $40,000 owed). When you include the $6,000 unsecured part, the $4,000 paid would result in you paying about 8.7% of your general unsecured debts ($4,000 out of $46,000 owed). But either way you’re paying what you can afford to pay—$4,000 over the life of your case. The existence of the $6,000 unsecured part of the vehicle loan has no effect on how much you pay. What you pay just gets distributed a little differently. The other general unsecured debts get pay a little less so that the $6,000 debt receives a small part of the $4,000.

Most Plans Do Not Pay More Resulting from the Unsecured Part of the Vehicle Loan

This happens in most cases that are not 0% plans (discussed above). The only way that an unsecured part of a vehicle loan would increase the amount you pay in your plan is if you have disposable income larger than your other general unsecured debts. In the example, you’d have to have more than $40,000 of disposable income during your plan. Only then would the addition of the $6,000 unsecured part of your vehicle loan to the general unsecured pool increase what you’d pay. That situation is rare. Most people don’t have disposable income during their case larger than their non-vehicle general unsecured debts.

Qualifying for Cramdown

Remember that cramdown is only available in Chapter 13 “adjustment of debts.” Not Chapter 7. Also, to qualify the vehicle loan must be at least 910 days old (about 2 and a half years) when filing the Chapter 13 case.  And finally, cramdown is beneficial for most purposes only when the vehicle is worth less than the balance on the loan. The more it’s worth less, the greater the likely benefit of the cramdown.

 

Which Bankruptcy Option Eliminates All Debt?

September 30th, 2018 at 5:39 pm

debtOne enticing benefit to filing for bankruptcy is the ability to discharge debts, enabling a fresh financial start. The United States bankruptcy code was created to allow honest debtors to free themselves from insurmountable debt; however there are various limitations. Unfortunately, these limitations restrict which debts become eliminated, reduced, or remain the same. Therefore, regardless of whether you file for Chapter 7 or Chapter 13 bankruptcy, some outstanding debts are untouchable.

Which Debts Are Eliminated?

Which debts discharge relies heavily on the type of bankruptcy filed by the consumer. Chapter 13 bankruptcy does not eliminate any debt initially, yet restructures the current sums into an affordable repayment plan. This repayment plan typically lasts three to five years, at the end of which any eligible debts are discharged. When you file for Chapter 7 bankruptcy, any unsecured loans become eliminated immediately. In some instances, unsecured debts make up all of the financial burdens. These debts include:

  • Credit card debt;
  • Personal loans;
  • Medical bills;
  • Payday loans;
  • Older tax debts;
  • Utility bills; and
  • Second mortgages.

Secured Debts Are Non-dischargeable

Chapter 7 bankruptcy does provide significant relief regarding secured, non-dischargeable debts, aside from freeing up a portion of the budget to make regular payments. Alternatively, Chapter 13 includes all financial liabilities in the repayment plan, including secured loans. Non-dischargeable debts include:

  • Taxes within the last three years;
  • Child support payments;
  • Alimony or spousal support obligations;
  • Student loans;
  • Traffic ticket fines;
  • Criminal restitution; and
  • Secured debt on a home or car you plan to keep.

Contact an Attorney

These guidelines are general statements intended to help you determine if bankruptcy may help your situation. Each consumer bankruptcy case depends on a variety of individual factors. Therefore, if you think bankruptcy is right for you, you should discuss your unique circumstances with a proven Boerne bankruptcy attorney. Contact the Law Offices of Chance M. McGhee for a free case review today by calling 210-342-3400. Our experienced team will assess the details of your case and provide honest feedback about the best course of action for your financial future.

 

Sources:

http://www.uscourts.gov/services-forms/bankruptcy

http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics

 

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