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Archive for the ‘Secured Debts’ Category

Cramdown on Furniture and Other Personal Property Debts

June 10th, 2019 at 7:00 am

Cramdown lowers vehicle loan payments and the total paid on the loan. But you can also get similar benefits on other personal property debts. 


 

Our last 4 blog posts have been about Chapter 13 cramdown of vehicle loans. For most people filing a consumer bankruptcy case, their vehicle loan is their largest and most important personal property debt.

But cramdown can also apply to debts secured by personal property other than your vehicle. Some examples are furniture and appliance loans, secured credit cards, and pawnbroker loans.  Cramdown on such debts can reduce both monthly payments and the total you pay on the debt. Often both your immediate savings and the long-term savings are significant. If you’re behind on payments you’d likely not need to catch up.  

If the secured debt is large enough, or if keeping the collateral is important enough, the opportunity to cram down the debt may be reason enough to file under Chapter 13 “adjustment of debts” instead of Chapter 7 “straight bankruptcy.” Or if you have decided on Chapter 13 for other reasons, the savings on your non-vehicle personal property loan(s) will likely help you have a successful Chapter 13 case.

Cramdown Divides a Debt into the Secured and Unsecured Portions

Bankruptcy law divides an undersecured debt into secured and unsecured portions. See Section 506(a)(1) of the U.S. Bankruptcy Code. (“Undersecured” means that the collateral securing a debt is worth less than the amount of the debt it is securing.)

Chapter 13 cramdown allows you to create new payment terms based on the secured portion only. Besides the reduced amount of principal being paid, the payments usually stretch out over a longer period. The interest rate is often also reduced.  These all usually result in a reduction in the monthly payment.

Then you pay the remaining unsecured portion usually only to the extent that you can afford to, if at all. That generally reduces the amount you pay before you own the collateral free and clear at the end of your case.

For Example

Assume you bought bedroom and living room furniture a year ago for you and your kids. You had moved to a new job and thought you could easily afford the monthly payments. You financed the entire $5,000 price of the furniture, at 15% interest, and monthly payments of $200. The first payment was not due until 6 months later.

But now a year from the purchase, the income from your new job has not turned out to be as much as you’d expected. Plus some old income tax debts have caught up with you. So now you’re filing a Chapter 13 case.

What happens to the furniture debt? It’s an undersecured one, with the depreciated furniture now worth only $2,500 while the debt is still $4,500. (That high balance is because of the 6 months of no payments and then irregular payments the following 6 months.)

You’d pay the $2,500 secured portion of the debt over the 36 months of the Chapter 13 payment plan. The annual interest rate would be lowered to around 5%. The resulting monthly payment is only $75 per month.

The remaining $2,500 unsecured portion of the furniture loan would be lumped in with your other general unsecured debts. You’d pay it only to the extent that you had money left over during your payment plan after paying your other more important debts (such as your unpaid income taxes).

So here’s the end result. Without bankruptcy cramdown, you’d have to pay the $4,500 balance plus about $1,000 of interest, a total of about $5,500. With Chapter 13 cramdown, you’d pay $2,500, plus only about $200 of interest, resulting in a total of as little as $2,700. (This assumes paying nothing on the unsecured portion.)

Just as importantly, paying only $75 per month instead of $200 would ease up on your cash flow. That would give you crucial money each month for either necessary living expenses or high-priority debt—such as taxes). This could make possible for you to meet your Chapter 13 goals—such as paying off the taxes you must pay.

Cramdown Timing Condition on “Any Other Thing of Value”

There is one timing condition related to personal property debts secured by other than a “motor vehicle.” If you bought “any other thing of value,” cramdown is not available for 1 year after its purchase. Section 1325(a)(5) of the Bankruptcy Code, and the “hanging paragraph” referring to that subsection, found right below Section 1325(a)(9).  Cramdown is available after that 1-year period has passed.

 

A Handy Guide to Chapter 7 vs. 13 for Your Secured Debts

January 22nd, 2018 at 8:00 am

When is it better to reaffirm your secured debt—such as a vehicle loan—in a Chapter 7 case or instead cram it down under Chapter 13?  

 

The last 4 weeks of blog posts have been about options for keeping collateral through Chapter 7 and Chapter 13. Mostly these options have involved reaffirming a secured debt in Chapter 7 or cramming it down in Chapter 13. Here is a handy summary and guide.

Reaffirmation in Chapter 7

You can only reaffirm a debt in a “straight bankruptcy” Chapter 7 case. Here’s what you need to know about reaffirmation:

  • By reaffirming a debt you legally exclude it from the discharge (write-off) of your debts that bankruptcy otherwise provides you. This means that you are volunteering to continue owing that particular debt. In return you can keep the collateral (such as a vehicle), and start rebuilding your credit.
  • For many debts secured by collateral, if you want to keep the collateral you have to reaffirm the debt. But sometimes you can just continue making payments and not going through a formal reaffirmation. It depends on the creditor. Talk with your bankruptcy lawyer.
  • Reaffirmations are risky because you are stuck with the debt if your circumstances change. This can especially be problem if you can’t make the payments, the collateral is repossessed, and you still owe the remaining “deficiency balance.”  
  • With most vehicle loan reaffirmations you have to accept ALL the terms of the loan. In particular you can’t lower the payments or the total amount you owe. But sometimes, more often with smaller creditors, the payment terms can be changed. Find out from your bankruptcy lawyer about your creditor’s policies.
  • If you’re behind on your payments often you have to catch up quickly if you want to keep the collateral. This is especially true with vehicle loans. By quickly we mean bringing the account current within about 2 months of filing the Chapter 7 case.
  • The reason there’s often not much flexibility in the timing is because reaffirmation agreements must be signed and filed at the bankruptcy court before the discharge of debts. The discharge happens about 3 months after you file your case.
  • If you don’t have a bankruptcy lawyer, or if he or she doesn’t sign the reaffirmation agreement, you must attend a reaffirmation hearing. At this hearing the bankruptcy judge asks you questions about the reaffirmation and decides whether to approve it. Avoid this by being on the same page with your lawyer so both of you sign the reaffirmation agreement.
  • You can change your mind about and cancel—or rescind—a reaffirmation agreement after filing it at court. But the rescission must be within a very short time—within 60 days of the reaffirmation’s filing or before the entry of the discharge order, whichever is later.

Cramdown in Chapter 13

You can only cram down a debt in an “adjustment of debts” Chapter 13 case. Here’s what you need to know about cramdown:

  • Cramdown can often reduce your monthly payment and the total amount you pay on a secured debt. With a vehicle loan, under the right circumstances you can significantly reduce both the monthly payment and the total paid.
  • Cramdown only makes sense if the collateral is worth less than you owe on the debt. The more that the collateral is worth less than the debt amount the more cramdown could help. That’s because you pay the full amount of that portion of the debt equal to the value of the collateral. On a loan with a $15,000 balance secured by a truck worth $9,000, you would definitely pay $9,000 of that loan.
  • The remaining unsecured portion you would usually only pay to the extent you could afford to do so. It would be lumped in with the rest of your “general unsecured debts.” In the above example, the remaining $6,000 unsecured portion would be lumped in with your credit cards, medical bills, etc. Often you pay only a small percent of these unsecured debts, and sometimes 0%.
  • Because you usually pay only a certain set amount of your “general unsecured debts,” adding the unsecured portion of your secured debt to those debts usually does not increase the dollar amount you pay on this group of debts. So that usually does not increase the total you have to pay during your 3-to-5-year payment plan. In the example, assume you owe $50,000 in other “general unsecured debts.” Adding the $6,000 unsecured portion would make it $56,000. But if your plan had you paying only $3,000 towards this pool, whether the total in that pool was $50,000 or $56,000 would increase the $3,000 you’d pay.
  • At the end of your Chapter 13 case the unpaid portion of your “general unsecured debts” are discharged. This means the debts are permanently written off. That includes the unsecured portion of the crammed down vehicle or other secured debt.
  • With cramdown, you don’t need to catch up on any unpaid payments.
  • You can’t do a cramdown on most vehicle loans until the loan is more than 910 days old. That’s about two and half years old. Before that you could get more time to catch up on any late payments. But you don’t get the advantage of paying only the secured portion of the vehicle debt.
  • Similarly you can’t do a cramdown on debts secured by other than vehicles until the debt is more than a year old.
  • These two timing thresholds (910 days and 1-year) do not apply if the collateral was not purchased with the debt. So if you already owned the collateral but then offered it to secured a subsequent loan, there are no 910-day and 1-year timing thresholds. You can do a cramdown at any time.
  • Similarly, these two timing thresholds don’t apply if the vehicle or other collateral was not acquired for “personal use.” So purchases for business or other possibly uses can be crammed down without waiting for these time periods to pass.   

Other Considerations

  • A creditor has much more leverage over you when its debt is legally secured against something you own that you want to keep. So make sure that a debt you believe is secured actually is. Creditors occasionally mess up on the procedures to create a secured debt, which can be complicated. Your lawyer can determine whether your creditor took the necessary steps to create an enforceable “perfected security interest” on your asset.
  • Besides your creditor, you also need to consider the interests of the bankruptcy trustee if you have equity in the collateral. Usually that equity is protected by “exemptions.” Your lawyer will determine if anything you own is covered by the available exemptions. If not both Chapter 7 and 13 have ways of protecting a non-exempt asset.

 

Cramdown on Collateral Not Purchased with the Debt

January 15th, 2018 at 8:00 am

The 910-day & 1-year conditions for doing a Chapter 13 cramdown don’t apply if the creditor doesn’t have a purchase money security interest.

 

The Cramdown Advantage

Last week we got into Chapter 13 cramdown of vehicle loans and furniture loans. Cramdown can be an excellent way to keep personal property that’s securing a loan. It allows you usually to reduce the monthly payment as well as the total you pay on the debt. Often the reductions are significant. Cramdown can enable you to keep a vehicle or some other important personal property that you couldn’t otherwise. It can be a reason to file a Chapter 13 case because it isn’t available under Chapter 7 “straight bankruptcy.”

The 910-Day and 1-Year Conditions

But as we’ve been discussing there is a timing condition you must meet to qualify for Chapter 13 cramdown. With vehicles you must have entered into the contract at least 910 days (about two and half years) before filing the Chapter 13 case. With any other kind of collateral the contract must be at least a year old.

So, if you bought and financed a vehicle two years ago you can’t do a cramdown on the loan. If you paid too much and it’s depreciated a ton since then, too bad. You are stuck with the full balance on the vehicle loan.

Purchase Money Security Interest

However, in some circumstances these 910-day and 1-year conditions don’t apply. Then you can do a cramdown at any time. That’s if you did NOT buy the collateral with the proceeds of the loan at issue. Rather you owned the vehicle or other collateral free and clear and provided it as collateral for a loan. If so, the 910-day and 1-year conditions don’t apply and you can do cramdown on newer loans.

An Example

Imagine that eighteen months ago you took out a car title loan for $4,500. You had fallen behind on your home mortgage and were desperate to catch up. The collateral on the title loan was your sole vehicle, which had no liens against it at the time. It’s now worth $2,000.

You knew that the 50% interest rate was crazy but you’d expected to pay the loan off quickly with a tax refund. But your refund was smaller than you expected, and went to other even more pressing expenses. So you renewed the title loan, twice. You now owe $5,500 because of the interest and renewal charges. You’re supposed to pay $500 per month on that loan but have just fallen a month behind. You are afraid your car is about to be repossessed. (See “The consumer perils of a car title loan.”)

You’ve decided to file bankruptcy. On the advice of your bankruptcy lawyer you are filing a Chapter 13 “adjustment of debts” case.  There are other reasons having to do with your home mortgage, but you also learn you can do a cramdown on this car title loan. You can do so even though you’re still a year short of the 910 days since getting the loan.

Chapter 7 vs. 13

If you filed a Chapter 7 case instead you’d be stuck with the car title loan if you wanted to keep your vehicle. The lender might be willing to adjust some of the terms of the loan. But it would have no obligation to do so. Bankruptcy does not remove the lender’s lien from your vehicle’s title. The only leverage you have is your threat to let them take away your vehicle. (That way the lender would only get the liquidation value of your vehicle.) But the lender knows that you likely really need your vehicle. So that threat often doesn’t help make the lender more flexible. As a result, under Chapter 7 you’d likely have to pay the full balance of $5,500, at $500 per month, at the exorbitant interest rate, or close to it.

Under slightly different circumstances there could be a similar result even under Chapter 13. Assume that you’d bought the vehicle and financed it through this lender 18 months ago. You would not qualify for Chapter 13 cramdown because you wouldn’t meet the 910-day rule. You wouldn’t for another year.

That’s because that 910-day condition only applies “if the creditor has a purchase money security interest securing the debt.” (See the unnumbered “hanging paragraph” right after Section 1325(a)(9) of the U.S. Bankruptcy Code.)  “Purchase money security interest” is not defined in the Bankruptcy Code. But it essentially means a creditor’s right to your property created when you use the creditor’s money to purchase that property and immediately give the creditor a security interest in that property.

So if you give a creditor a security interest in collateral you already own, the 910-day and 1-year conditions don’t apply. (That’s a non-purchase money security interest.)  You can go ahead and cramdown this car title loan.

Cramdown at Work

The result is that you and your lawyer would propose to pay $2,000 as the secured portion of this loan. Your payment plan would have you pay, say, $100 per month (instead of $500). You’d reduce the interest rate to about 6% (instead of 50%).

The creditor would not have much say about this, except possibly to dispute the value of the vehicle. It might also have some argument with the appropriateness of the monthly payment amount and interest rate. But most likely the terms would end up as you proposed or not much different.

The remaining unsecured portion of $3,500 would be lumped in with all your other general unsecured debts. You would pay these only to the extent that you could afford to pay them during the 3-to-5-year plan. Because all or most of your money would instead go towards secured and priority debts, likely little or nothing would be available to pay this $3,500.

At the end of the Chapter 13 case, whatever wasn’t paid would be discharged—permanently written off. You would end up paying a fraction of what you would have otherwise on the title loan. You would be able to keep your vehicle when it would have been very difficult or impossible without cramdown.

 

Verifying that a Creditor Has a Valid Security Interest

January 12th, 2018 at 8:00 am

A creditor’s rights over you in either Chapter 7 or 13 vastly increase if it has a security interest. Now’s the time to find out for sure.

Reaffirmation vs. Cramdown

The last four blog posts have compared Chapter 7 reaffirmation with Chapter 13 cramdown of a secured debt.

With reaffirmation you keep the vehicle or other collateral but continue to owe the debt. Usually you owe the full debt, and the monthly payments remain the same. But sometimes the debt and monthly payments can be reduced if the collateral is worth less than the balance.

With cramdown you keep the collateral and usually pay less monthly and les overall. The debt is divided into secured and unsecured portions. The secured portion is equal to the value of the collateral; the unsecured portion is the rest of the debt. You pay the secured portion over time, with monthly payments usually less than the usual contract amount. Often the interest rate is reduced as well. The unsecured portion you pay only to the extent you can afford to do so during your Chapter 13 plan. Whatever you can’t pay is discharged—permanently written off.

Reaffirmation apples only to Chapter 7 “straight bankruptcy.” Cramdown applies only to Chapter 13 “adjustment of debts.”

A Valid Security Interest

Both reaffirmation and cramdown are needed only with debts that are legally secured against something you own. Your creditor must have a valid, legally enforceable security interest in something you own. Otherwise the debt is just a general unsecured debt. If so you could discharge that debt without paying anything to the creditor. You don’t have to enter into a reaffirmation agreement to pay the debt in full or in part. You don’t have to pay the secured portion in a cramdown if the debt is not secured at all.

Consider this example. Assume you took out a personal loan of $6,000. You agreed to give the lender a security interest in all your furniture. But the creditor does not have you sign anything but a promissory note. That’s an agreement to pay the debt. The creditor does not have you sign a security agreement or anything else stating that you are backing up the debt with a right to the furniture if you don’t pay the debt.

Then a year later you file a bankruptcy case.

Effect of No Security Interest in Bankruptcy

Assume that the amount owed on the debt is now $5,500, and your furniture has a replacement value of $3,000.

If you file a Chapter 7 case you could very likely simply discharge that debt without paying anything. And the creditor would have no right to your furniture.

If instead this creditor DID have a security interest in the furniture, one of three things would likely happen in a Chapter 7 case:

  • If you wanted to keep your furniture, the creditor could insist that you agree to pay the debt under the original monthly payment and all the other terms of the loan.
  • Acknowledging that the furniture was not worth the amount of the debt, the creditor could reduce the amount reaffirmed to closer to $3,000, and maybe reduce the monthly payments.
  • You could surrender the furniture to the creditor and pay nothing.

In a Chapter 13 case one of two things would likely happen:

  • If you wanted to keep your furniture, through cramdown you’d pay $3,000 plus (possibly reduced) interest. You’d pay the remaining $2,500 if and to the extent you could afford to do that in your payment plan.
  • You could surrender the furniture to the creditor and pay the remaining debt if and to the extent you could.

So you can see that the creditor has infinitely more leverage when its debt is secured than when it’s not. This is true in both Chapter 7 and 13.

Determine If a Debt is Really Secured

The key lesson in this is to find out whether debts you think are secured really are. Most of the time if you think a creditor has a security interest in something, it actually does. But sometimes your understanding about this ends up being wrong. So talk with your bankruptcy lawyer about each one of your seemingly secured debts. Now is the time to find out whether your assumption is wrong and/or a creditor has neglected to make its debt a legally secured one.

 

Example of Reaffirming vs. Cramming Down Furniture Loan

January 10th, 2018 at 8:00 am

An example comparing the reaffirmation of a debt secured by furniture in a Chapter 7 case and cramming down that debt in a Chapter 13 case. 

 

Last time we showed how cramdown on a vehicle loan can reduce the payments and the total amount you pay. The amount you save monthly and in total may be enough to justify filing a Chapter 13 case. The alternative is usually paying the full monthly payments and the full contract balance through Chapter 7 reaffirmation.

Cramdown on Debt Secured by Non-Vehicle Personal Property

The concept is the same with secured debts on personal property other than your vehicle. Chapter 13 allows you to re-write the debt based on the value of the collateral, such as furniture you bought. That collateral value amount becomes the secured part of the debt. You pay that part in full, with interest but often at a lower interest rate. The monthly payment is almost always less than the contract amount. That’s because it’s based on the value of the collateral, which is less than the full loan balance.

Also, the total paid on the debt is usually less because the remaining unsecured part of the loan almost always is never paid in full, and is often paid quite little.

The following example helps make sense of this, including how furniture/personal property cramdown is different from vehicle loan cramdown.

The Background Facts

Let’s say Michael and Jessica moved 2 years ago to their present home in a new state, pursuing job opportunities. They bought a substantial amount of furniture and appliances for the home and their two middle school-aged children. That seemed to make more sense at the time because their kids had just outgrown their beds and other furniture. They bought and financed $5,500 worth of stuff.

After 6 months grace period, they began making the $180 monthly payments. At an interest rate of 24% per year, these payments were to last 48 months.

Then a year ago Michael was hit with a serious illness that lasted 6 months. Although he’d thought his work-based insurance was decent, he still ended up with $18,000 in medical bills. He had some disability insurance through work, but it provided only a portion of his normal income. So Michael and Jessica did not have the money to make the furniture/appliance loan payments, or pay the medical bills. Today they still owe $5,000 on the furniture/appliance loan. They also fell behind on their other substantial unsecured debts—personal loans and credit cards.  They are now being sued by a collection company on one of the larger medical bills.

The Chapter 7 Reaffirmation Option

They go to see a bankruptcy lawyer about their options. The lawyer informs them that a Chapter 7 bankruptcy filing would discharge—legally write off—all of the medical debts and indeed all of their debts. They would no longer owe anything on them.

An exception is the furniture/appliance loan. They COULD surrender all of the furniture and appliances and owe nothing. But that would largely empty out their home. Jessica and Emily are hesitant to do that, mostly because it would be hard on their kids.

Their other option is to reaffirm the debt. This means that they would agree to continue being liable on the debt. They would exclude that one debt from the discharge of debts that the Chapter 7 case would provide them.

Two Possible Reaffirmation Options

As we saw in the last blog, most vehicle lenders require you to reaffirm the debt without any change in its terms. Take it or leave it. If you want to keep the vehicle you must sign back on for the full debt, all of the contract terms. That’s true even if the vehicle is worth less than what you owe on it.

Creditors secured by non-vehicle personal property tend to be more flexible. Furniture and appliances lose their value even faster than vehicle. There is a well-established system of auto auctions for getting cash for repossessed vehicles. But furniture and appliances, and especially electronics, turn almost valueless, and are a pain to cash in. Creditors tend to be happy to get paid something by their customer rather than having to go through the hassle of repossessing and selling the used furniture/appliances for very little money.

So Jessica and Michael may not be stuck with a full reaffirmation. Their lawyer may well have a history of dealing with their furniture/appliance creditor. The lawyer may well be able to negotiate a reaffirmation at reduced monthly payments, on a reduced total debt. For example, both sides could agree the furniture/appliances now are worth only $2,500. Michael and Jessica could agree to pay that amount on monthly payments of $97, for 30 payments, at 12% interest. That would be close to half as much per month ($97 vs. $180), over a shorter period of time (30 months vs. 41 more months on the contract). The savings—both monthly and overall—would be substantial.

Cramdown In Chapter 13

But what if the creditor insisted on a full reaffirmation—$180 per month on the $5,000 contract balance? It’s possible, but again most creditors under these facts would be more flexible.

But if not, Michael and Jessica have the Chapter 13 cramdown option.

There is one condition. The debt has to be at least 1 year old at the time of their Chapter 13 case filing. (This is in contrast to 2 and a half years with vehicle.) Here the debt is 2 years old so this condition is met.

In their Chapter 13 payment plan their lawyer would specify terms very similar to the reaffirmation just mentioned above. The $5,000 debt would be divided into the $2,500 secured portion and the remaining $2,500 unsecured portion. The plan would designate $97 per month to be paid to this creditor over about 30 months at 6% interest. That would pay off the secured portion.

The remaining $2,500 unsecured portion would be put into the pool of medical bills and all the other debts. This pool would be paid only if and to the extent there was money left over. Let’s assume that 5% of this pool got paid in Michael and Jessica’s Chapter 13 case.

So, through cramdown this furniture creditor would be paid the $2,500 secured portion, at reduced interest. It would also receive 5% of the remaining $2,500, or another $125. This is a total of $2,625 (plus some interest). Jessica and Michael and their kids would be able to keep the furniture. At the end of the payment plan the rest of the furniture/appliance debt, and all the rest of their debts, would be forever discharged.

Conclusion

These two options—reaffirmation or cramdown—give a lot of control to Michael and Jessica. They can keep or let go of the collateral. If they keep it and the creditor is sufficiently flexible, a reaffirmation with reduced terms can work well. If the creditor insists on not changing the terms, Jessica and Michael can chose to go along. It would be a way to start rebuilding their credit record faster. But if they want to pay less they can use a Chapter 13 cramdown instead.

 

Rescinding a Reaffirmation Agreement

December 29th, 2017 at 8:00 am

Unlike most legal contracts, you can change your mind and undo a reaffirmation agreement during a short period of time after signing it.  

 

Reaffirmation Agreements

Our last four blog posts have been about reaffirmation agreements in a “straight bankruptcy” Chapter 7 case. In particular the first of these introduced these special agreements and the second one discussed their risks. (The ones dated December 20 and 22.) You might want to look at those before reading further here.

In one sentence: if you want to keep for yourself the collateral on a debt (such as a vehicle), usually you have to agree to continue owing that debt, which you do by signing a reaffirmation agreement. That agreement excludes that one debt from the discharge (the legal write-off) of your debts provided through your bankruptcy case.

Your bankruptcy lawyer should fully advise you of your options and rights before you sign a reaffirmation agreement. One of the rights you should learn about is your time-limited right to rescind the agreement. This is the subject of today’s blog post.

Your Right to Rescind

Your ability to rescind a reaffirmation is laid out clearly in the bankruptcy court’s sample reaffirmation agreement form. It states (see top of page 5):

You may rescind (cancel) your reaffirmation agreement at any time before the bankruptcy court enters a discharge order, or before the expiration of the 60-day period that begins on the date your reaffirmation agreement is filed with the court, whichever occurs later. To rescind (cancel) your reaffirmation agreement, you must notify the creditor that your reaffirmation agreement is rescinded (or canceled).

Timing of Rescission

Notice the two-pronged deadline—either before the court’s discharge order or within 60 days of the reaffirmation agreement’s court filing. The discharge order is usually entered about 60 days after your “meeting of creditors.” That in turns usually comes about a month after the filing of your Chapter 7 case. More often than not a reaffirmation agreement is filed after the “meeting of creditors.” So, usually the rescission deadline is 60 days after the reaffirmation agreement gets filed at the bankruptcy court.

The problem is that usually you don’t know when your reaffirmation agreement is filed. Furthermore, once it’s filed most lawyers will understandable assume that you’re not going to change your mind about it. So you’ll be told about your right of rescission but then most of the time nobody figures out or tracks when that right expires.

(The exception might be when there is a specific reason that you are considering rescinding even at the time you sign the reaffirmation agreement. We’ll give an example towards the end of this blog post.)

Seriously consider specifically asking your lawyer to determine your rescission deadline, and then calendar it. Your circumstances could change even in that short time so you don’t want the deadline to pass unnoticed. It’s good for you to consider one last time whether you really want to stick with that debt.

Notice of Rescission

If you do change your mind and want to rescind the reaffirmation agreement, instruct your lawyer to give the appropriate notice to the creditor.

Make sure that lawyer’s representation has not ended. Some lawyers end their responsibilities to you at the discharge and closure of the case. That often happens before the rescission deadline. Don’t just assume that your lawyer is continuing to represent you and “will take care of it.” Get verification that he or she is accepting the responsibility and is giving the creditor notice of rescission.

If you are not represented by a lawyer, you must make absolutely sure that you notify the creditor adequately. Mail the notice by certified mail, return receipt requested, so that you get verification well before the deadline. Use the address in your creditor schedules, after verifying it is accurate. Under certain circumstances it may make sense to send notice to more than one address. For example, if the creditor has been represented by a lawyer definitely give notice to the lawyer as well.                                                                                            

Circumstances to Rescind

The vast majority of the time you will not rescind a reaffirmation agreement. You’ll have understood what you signed and its consequences. Your circumstances likely won’t change much during the short time between signing the agreement and your deadline to rescind. Your well-informed decision to reaffirm will stand the test of time.

However, you would consider rescinding if somehow you didn’t understand the consequences of reaffirming, or your circumstances changed.

Considering the safeguards in place it’s hard to not be well-informed about what reaffirming a debt means. If you’re represented by a lawyer he or she must certify that certain specific details were explained to you. If you’re not represented by a lawyer you go to a reaffirmation hearing where a judge does the same thing. But if somehow something was still not clear, you can simply get out by rescinding.

Circumstances can change in countless ways. You may suddenly get access to another less expensive vehicle, and decide to get out of your reaffirmation agreement. You may realize that you can’t afford the vehicle after all. Your insurance may go way up because of a couple tickets or an accident. The vehicle may need a string of repairs you can’t afford.

One other situation is if you are not sure whether you want to reaffirm at the point you have to decide. For example, you may be waiting to hear if you got accepted for a better-paying job enabling you to pay the vehicle loan payments. So you sign the reaffirmation agreement to allow you to keep the vehicle. Then you don’t rescind if you get the job; you can rescind if you don’t.

To be clear, you don’t need any particular reason to rescind. You have an absolute right to do so within the stated time.

 

The Reaffirmation Hearing

December 27th, 2017 at 8:00 am

You don’t need to go to a reaffirmation hearing, unless you don’t have a lawyer, or he or she does not sign the reaffirmation agreement. 

 

Reaffirmation Agreement

If you want to keep the collateral on a debt usually you have to exclude that debt from the legal write-off (“discharge”) of your debts that you receive in a Chapter 7 “straight bankruptcy” case. You exclude that debt from the discharge by signing a “reaffirmation agreement.” You remain legally liable on that debt. Through that document. most of the time you agree to all the terms of your original debt agreement. See this sample form reaffirmation agreement.

For example, you agree to pay the same monthly payment at the same interest rate as originally agreed. And you agree that if you don’t make the payments the creditor can repossess the collateral. And in most circumstances the creditor can then come after you for any remaining balance owed. (See our recent blog post about this risk of owing a “deficiency balance” after repossession.)

Conditions When Don’t Need Court Approval

After you sign a reaffirmation agreement it is filed at the bankruptcy court. Most of the time it then goes into effect without the need for court approval. So there’s no reaffirmation hearing.

 The reaffirmation agreement does need court approval in two circumstances. If:

  • you don’t have a bankruptcy lawyer representing you, or
  • your lawyer does not sign the reaffirmation agreement

Why Would My Lawyer Not Sign the Reaffirmation Agreement?

By law your lawyer has the option of signing off on the reaffirmation agreement. To do so he or she would need to sign off on the following specific considerations:

that—

(A) such [reaffirmation] agreement represents a fully informed and voluntary agreement by the debtor;

(B) such agreement does not impose an undue hardship on the debtor or a dependent of the debtor; and

(C) the attorney fully advised the debtor of the legal effect and consequences of—

(i) an agreement of the kind specified in this subsection; and

(ii) any default under such an agreement…

See Section 524(c)(3) of the U.S. Bankruptcy Code.

Subsections (A) and (C) would not likely be a problem for most lawyers. He or she would make sure you were “fully informed” and “fully advised” as indicated. Subsection (B) could sometimes be more challenging. Your budget may show that as much as you want or need the collateral (for example, a vehicle), you can‘t afford the loan payments and its other costs (insurance and maintenance, for a vehicle.) If so, the reaffirmation agreement appears to be “impose an undue hardship” on you and your family.

Usually you and lawyer can produce a budget that shows that you CAN afford to keep the collateral. But if not, your lawyer would understandably be reluctant to certify that the agreement did not impose an undue hardship. If he or she didn’t sign the reaffirmation agreement so certifying, you’d have to get court approval at a reaffirmation hearing.

The Reaffirmation Hearing Procedure

At the time scheduled for your reaffirmation hearing wait in the courtroom until the judge’s clerk calls your case. If you have a lawyer he or she will likely be there as well.

Approach the podium when the clerk calls your case. The judge will explain the purpose of the hearing. Then you’ll need to provide evidence showing that reaffirming the debt will not impose an undue hardship on you. You’ll need to show that you can make the payment while still being able to pay all your other necessary expenses.

You will also likely need to tell the judge that you understand “the legal effect and consequences of” the agreement. You will also specifically need to show you understand what happens if you default on the reaffirmation agreement.  Particularly, the judge needs to be assured that you know that you will be liable on the debt in spite of filing bankruptcy.

If the judge is satisfied that you will not suffer an undue hardship, and that you understand what you are doing, she or he will approve the reaffirmation agreement. You’ll be able to keep the collateral as long as you abide by the agreement.

But if the judge is not satisfied, he or she will disapprove the agreement. At that point, if the creditor requires a binding reaffirmation agreement, it will be able to take back the collateral. That is not a result you want. So make sure you discuss all this with your lawyer early in the process to avoid this from happening.

 

A Debt Reaffirmed under Chapter 7

December 20th, 2017 at 8:00 am

You can usually keep collateral you need to keep by entering into a “reaffirmation agreement” with the creditor during your Chapter 7 case. 

 

Last time we got into debts that you might voluntarily pay after a Chapter 7 case out of personal obligation. Today we cover debts voluntarily paid but for the purpose of keeping the collateral that’s securing the debt. This is usually done by “reaffirming” the secured debt.

There can be lots of important side issues with “reaffirmations.” For example, do you always have to reaffirm a debt in order to keep the collateral? What happens if you’re not current on the debt you want to reaffirm? Can you reaffirm a debt when it’s unsecured—when there is no collateral to retain?  When is reaffirming a debt dangerous?

We’ll get to those and other side issues next time. But today we’re introducing reaffirmations in their most straightforward form.

The Straightforward Scenario

Let’s say you’re current on a debt that’s secured by something you definitely want to keep. It could be a home mortgage, a vehicle loan, or a furniture contract—or just about any secured debt. We’ll focus on vehicle loans, since they’re likely the most commonly reaffirmed.

You want and need to keep the vehicle, and maybe have had to work hard to keep the loan current. In fact one of your legitimate reasons for doing bankruptcy is to get rid of other debts so that you CAN keep current on your vehicle loan.

You may even be wonder whether filing bankruptcy might mean you wouldn’t be allowed to keep paying your vehicle loan. Rest assured that’s virtually never a problem. Your creditor wants to be paid, and paid in full. Having you reaffirm the debt makes that much more likely.

The bankruptcy court will generally not have any issue with you reaffirming a secured debt. Assuming your bankruptcy lawyer agrees that it’s in your best interest to keep your vehicle and remain liable on the loan, he or she will sign off on it and the court will allow the reaffirmation to go through.

The Chapter 7 Reaffirmation Agreement

You reaffirm a debt by signing a reaffirmation agreement. This paperwork is usually prepared by the creditor and presented to you through your lawyer. You review it carefully, get fully informed about its effects by your lawyer, have him or her sign it, you sign it, and then it’s filed at the bankruptcy court. It must be filed before the time the court grants you a discharge of your debts. That usually happens about 60 days after your “meeting of creditors,” or about 3 months after your Chapter 7 filing.

The main consequence of a reaffirmation agreement is that it excludes that particular debt from the discharge of your debts. You would owe that single debt as if you hadn’t filed the Chapter 7 bankruptcy case at all. See Section 524(c) of the U.S. Bankruptcy Code about the effect of a reaffirmation agreement.

Rescinding a Reaffirmation Agreement

Even after getting well informed by your lawyer and signing the agreement you might change your mind. Your vehicle may all of a sudden need an expensive repair. You may get access to a less expensive vehicle. Or you might get another job enabling you to use public transit and no longer need the vehicle.

Reaffirmation law gives you a SHORT rescission period to change your mind. Your deadline to rescind is either at the time the court discharges your other debts or 60 days after the reaffirmation agreement is filed at court, whichever is later. You rescind by simply telling the creditor that you are doing so. You don’t need to give any reason. See Section 524(c)(4) of the Bankruptcy Code about rescinding a reaffirmation agreement.

Benefit to Your Credit Record

Reaffirming a debt is one of the quickest ways to improve your credit record after bankruptcy. Assuming you want to keep your vehicle (or whatever collateral is on the debt), and it’s in your interest to do so, you can start putting your positive payment history into your credit record the first month after completing your case (if not even a bit sooner). Assuming you’re acting responsibly otherwise your on-time payments should have a positive effect on your credit.

Chapter 7 vs. Chapter 13

Reaffirmations happen in Chapter 7; technically not in Chapter 13 “adjustment of debts” cases. That’s because under Chapter 13 you generally get to retain your assets in return for working out a repayment plan.

Even without “reaffirmation,” in Chapter 13 if you are current on a secured debt and want to keep the collateral it’s usually just as easy as under Chapter 7.

Chapter 13 can even be a safer way to keep your vehicle. We’ll get into this in an upcoming blog post. For now, be aware that usually keeping a needed, paid-current vehicle works under both options. It’s not likely going to swing your choice towards either Chapter 7 or 13.

 

Many Ways to Buy Time for Your Vehicle and Home through Chapter 7

November 1st, 2017 at 7:00 am

Chapter 7 buys you the crucial time you need in many situations when falling behind in your obligations related to your vehicle or your home.

 

In the last several weeks of blog posts we’ve given many examples of how bankruptcy can buy you time for your vehicle and for your home. Here’s a summary how a Chapter 7 “straight bankruptcy” can do so.

1. Chapter 7 Buys Time for Your Vehicle

  • Stops your vehicle from being repossessed, at least temporarily
  • Gives you a some limited amount of time to catch up if you’re behind on payments
  • Gives a very limited time to reinstate required vehicle insurance
  • Gains you some time to get another vehicle before surrendering your present one
  • Buys time to gather funds to redeem your vehicle for less than you owe on it
  • Buys time to enter into a redemption loan to lower your debt on the vehicle

2. Chapter 7 Buys Time for Your Home

  • Stops your immediate home foreclosure sale, at least temporarily
  • Gives you limited time to catch up on your mortgage through a lump sum payment or in monthly “forbearance” payments
  • A delay in foreclosure usually gives you a few more months to sell your home
  • This delay can give you time to surrender your home while saving up for moving expenses
  • Stops  a lawsuit from turning into a judgment lien, creating a debt that can’t be discharged written off in bankruptcy
  • Stops an income tax lien recording on your home’s title, potentially turning that tax into one that can’t be written off

 

Timing: Qualifying for Cramdown on Personal Property Collateral

September 29th, 2017 at 7:00 am

Chapter 13 cramdown doesn’t just work for vehicle loans. You can also cram down debt for the purchase of “any other thing of value.” 


Our last blog post was about the cramdown of vehicle loans. Cramdown can significantly decrease your monthly payment and reduce how much you pay for your vehicle before it’s yours.  To qualify, your loan has to meet some conditions. In particular the vehicle loan has to be more than 910 days old when you file your Chapter 13 case. (That’s about 2 and a half years old.)

But cramdown also applies to other kinds of purchase loans with collateral, not just vehicles. And instead of 910 days there needs to be only 365 days between your purchase and your Chapter 13 filing. 

Cramdown on “Any Other Thing of Value”

In a Chapter 13 case you can do a cramdown on loans with collateral that is “any other thing of value.” (See Section 1325(a)(5) of the Bankruptcy Code, and the odd “hanging paragraph” referring to that subsection, found right below Section 1325(a)(9).)  So you can often reduce monthly payments and reduce how much you pay for that “other thing of value.”

If you bought the “thing of value” by financing its purchase, you can’t do a cramdown “if the debt was incurred during the 1-year period preceding that filing.”  (From the same “hanging paragraph as above.) After that 1-year period you CAN cram down that secured debt.

An Example

Say you bought a houseful of modest furniture a year and a half ago when you moved your family to your present home. You’d been hired for a promising new job and hoped that it was your ticket for paying off a lot of accumulated debt. But the job did not pay nearly as much as you’d been led to believe. So now you see a bankruptcy lawyer because you need financial relief.

The purchase price for all the furniture a year and a half ago was $7,500. The interest rate on the contract is 18% because of your already weak credit rating.   The monthly payment is $250. Because you didn’t have to make payments for the first 6 months, and then you missed payments and accrued late fees over the last several months, the debt is now still $7,000.

Because most furniture depreciates very quickly it’s all now worth only $3,000.

So if you now file a Chapter 13 case you can do a cramdown on this furniture loan. You qualify because you bought the furniture more than a year ago. 

Through your Chapter 13 payment plan you’d pay the $3,000 value of the furniture, the secured part of the loan.  The interest rate gets reduced, let’s say to 5%. The monthly payment would go down to, say, $100. You’d pay these $100 payments for around 32 months during your 3-year plan.

You’d pay very little on the remaining $4,000 unsecured part of the $7,000 debt. That $4,000 would simply be added to the rest of your “general unsecured” debts. These include any medical bills, credit card debts, and most other debts not secured by collateral. These would all receive whatever money you could afford to pay during the 3-year payment plan—beyond your reasonable living expenses and other higher priority debts (such as the secured part of the furniture loan).

At the end of 3 years your Chapter 13 case would be finished. You’d have paid off the $3,000, saving money from the lower interest rate, and saving cash flow through the much lower monthly payment. You’d have paid little or nothing on the $4,000 unsecured part of the debt. Yet you’d own the furniture free and clear, having paid way less than half of what you would have otherwise. 

 

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