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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.

 

The Surprising Benefits: Saving Your Vehicle Better through Chapter 13

September 24th, 2018 at 7:00 am

Chapter 7 is limited in how it can help with your vehicle loan. Chapter 13 can do much more—buy more time and often reduce your payments. 

 

Problems to Solve

Last week we addressed the kind of help Chapter 7 “straight bankruptcy” provides on your vehicle loan. Mostly it clears the deck of your other debts so that you can afford to keep your vehicle. Hopefully Chapter 7 accomplishes that.

But what if you can’t afford the contractual monthly payments even then? What if your vehicle isn’t worth what you owe on it? What if you’re behind on your payments or insurance and can’t catch up fast enough?

If you can’t or don’t want to keep your vehicle Chapter 7 also gives you the option of surrendering it. The benefit is that it legally write off your obligation to pay the “deficiency balance.” That’s the often surprisingly large remaining debt after a vehicle repossession or surrender. Writing off the debt is better than being saddled with it if you don’t file bankruptcy.

But what if you definitely need to keep your vehicle but can’t do so under Chapter 7? What can Chapter 13 do for you better?

Chapter 13 Buys Time—Often much More Time

If you are late on your vehicle loan payments, filing a Chapter 7 case will prevent an immediate pending repossession. But then virtually always you’ll have to catch up on any arrearage within the next month or two. That’s of course on top of keeping up on ongoing monthly payments.

Chapter 13 usually gives you much more time. Instead of giving you weeks to catch up, usually you’d have many months to do so. Exactly how much time you’d have depends on many factors. But generally you’d start paying your regular payments as they became due, and then chip away at the arrearage over the course of at least several months.

Chapter 13 “Cramdown” May Reduce Monthly Payments—Sometimes Significantly

You don’t always have to pay your regular monthly payments as they come due after filing under Chapter 13. If you qualify for “cramdown” you would likely pay less per month on the vehicle loan—possibly much less.

Cramdown is an informal term for the Chapter 13 procedure for legally re-writing the loan if your vehicle is worth less than you owe. To qualify your vehicle loan must be more than 910 days old at your Chapter 13 filing. (That’s slightly less than two and a half years.)

The loan payments are reduced because the loan is restructured based on the value of the vehicle. You pay that secured portion of the loan through monthly payments. Those payments are usually much less because they are based on the vehicle value instead of the contract balance.

Also, the payments are further reduced under Chapter 13 if the amount to be paid is to be paid out over a period longer than the time left on the contract.

Finally, if your vehicle loan has a relatively high interest rate, you can often also reduce that rate.

Each of these helps reduce the monthly payment on the loan.

You May Not Need to Catch Up on Missed Payments

If you qualify for cramdown you usually don’t have to pay any missed payments after filing a Chapter 13 case. You just pay going forward, at the reduced monthly payment.

Not having to scramble to pay missed payments is a huge benefit. You can concentrate on your most important obligations, such as the crammed down monthly payment.

Catching Up on Lapsed Vehicle Insurance

If you’d fallen behind on your vehicle insurance, that would be an extremely important obligation to focus on. You DO have to reinstate lapsed insurance quickly in order to keep your vehicle—in either Chapter 7 or 13. So the fact with cramdown you may not have to pay any missed payments or else be allowed to catch up more slowly means that you’d have more money available to reinstate your insurance.

Examples, Please

No doubt the benefits listed above sound great. It’s great to have much more time to catch up or to not need to catch up at all. It’s great to have reduced monthly payments, to pay less overall on a vehicle until it’s yours free and clear.

But these benefits would make more sense and be even more impressive if we showed how they work in practice. We’ll do that in our blog post next time.

 

The Surprising Benefits: Saving Your Vehicle Better through Chapter 13

The Surprising Benefits: Saving Your Vehicle through Bankruptcy

September 17th, 2018 at 7:00 am

Bankruptcy can get you out of the dilemma that a vehicle loan can put you in. Chapter 7 works if you can afford the loan payments afterwards.  


Here’s the Problem

You’re paying on a car or truck. You absolutely need this vehicle for getting to work, and to keep your life going. You can’t do without it.

But you’re having trouble keeping up on the loan payments. You owe lots of other debts, so keeping current on the vehicle loan is a big challenge. It’s a big stressor every month.

On top of that there’s a good chance that you owe more on your vehicle than it is worth. You know that if you somehow found other reliable transportation and surrendered your present vehicle—or if it was repossessed—you could easily still owe thousands of dollars of “deficiency balance.” That’s the amount you would owe on the loan after the surrender or repossession.

The amount you’d owe would very likely be much more than you expect. That’s because repossessed vehicles are usually sold at auto auctions, resulting in less credit to your account than you’d expect. Plus the costs of repossession/surrender and sale, and late charges and such would all be added to the balance. So giving up the vehicle doesn’t seem to make any sense.

As a result you feel stuck. You really need the vehicle but you can’t afford pay for it. And even if you could somehow do without it, you’d likely still owe thousands of dollars from letting it go.

Chapter 7 Regular Bankruptcy Gives Limited Help

Chapter 7 bankruptcy accomplishes two things regarding your vehicle loan. First, if you want to keep the vehicle, Chapter 7 would likely get rid of most of your other debts. Maybe then you could afford the vehicle payments. Or second, if you surrendered the vehicle, Chapter 7 would likely discharge (legally write off) the deficiency balance. If you had a way to get another reliable vehicle, or could do without, this might solve your problem.

What Chapter 7 doesn’t do is give you the power to change the terms of your vehicle loan. It’s “take it or leave it.” If you want to keep your vehicle, you’re virtually always stuck with the contract terms. That includes the monthly payment amount, the interest rate, etc.

Plus, you’re almost always required to “reaffirm” the debt. This legally excludes the vehicle loan from the discharge of your debts. You continue to owe it in full in exchange for keeping the vehicle.

This is economically risky. You’re paying for something that isn’t worth what you’re paying. And if you later surrender the vehicle or it’s repossessed, you would owe a deficiency balance. You’d owe it in spite of your prior Chapter 7 case because you reaffirmed the debt.

If You’re Behind on Your Vehicle Loan, or on Insurance

It’s worse if you aren’t current on your loan payments at the time of your Chapter 7 bankruptcy filing. Almost always your vehicle lender would require you to quickly catch up—within a month or two of filing. This would be on top of keeping current on the ongoing monthly payments. Or else you’d lose the vehicle in spite of filing bankruptcy.

If you’ve also let your insurance lapse, it’s even more problematic.  Your lender knows how dangerous lack of insurance is for itself, so it would “force-place” insurance on your vehicle. Your contract almost certainly allows it to do this. Force-placed insurance tends to be very expensive while at the same time provides you very little coverage. Under Chapter 7 you would likely have to pay for any such insurance, plus reinstate your own insurance. And you’d likely have to do this very quickly, not long after filing your Chapter 7 case.  

Chapter 13 Can Solve These Problems

Chapter 13 “adjustment of debts” can solve these problems that Chapter 7 can’t.

First, Chapter 13 can buy you much more time. A Chapter 13 payment plan would likely give you much more time to catch up on any missed loan payments. It would also likely give you lots more time to pay for any force-placed insurance.

Second, if you qualify for “cramdown” you would likely pay less on the vehicle loan—possibly much less. Cramdown is an informal term for the Chapter 13 procedure for legally re-writing the loan in situations in which the vehicle is worth less than you owe. With cramdown you could both pay less monthly and pay less overall before the vehicle became yours free and clear. And if you’re behind on loan payments, you would not need to catch up at all on any of those missed payments.

Next week we’ll tell you how Chapter 13 could both buy you time and save you money on your vehicle loan(s).

 

The Surprising Benefits: Getting Back Your Repossessed Vehicle

May 28th, 2018 at 7:00 am

It’s much easier to prevent repossession by filing bankruptcy beforehand. But if you’ve already been repo’d, you now have to act very fast. 

 

When Does a Lender Repossess a Vehicle?

When CAN a vehicle lender repossess your vehicle? Just about all vehicle loan contracts let the lender repossess the minute you are late on a payment. There may be a legal grace period, but not usually. This is also true for other breaches of the contract, such as if you let the vehicle insurance lapse.  So usually a lender can repossess, without warning, when you are not in fully compliance with any contract obligations.

But most lenders don’t repossess right away. They’d usually rather have you make the payments so that they earn the interest on the contract. But they have the legal right to repossess, and sometimes act very fast.

So how much time do you have before your lender would actually repossess? That depends on your payment history and the repossession practices of the lender. It’s truly hard to tell how many days you  can be late, or how long your insurance can be lapsed, before repossession.

Much Better to File BEFORE Repossession

Filing bankruptcy stops repossession from happening immediately. It literally stops the repo agent from taking your vehicle even if he or she has already started to do so.

The moment your bankruptcy lawyer electronically files your case the “automatic stay” goes into effect. This “stays,” or legally stops, virtually all collection efforts against you and your property. Specifically, filing bankruptcy stops the enforcement of lender’s liens against your property. A vehicle repossession is an enforcement of a lender’s lien on your vehicle, and so it is stopped. See Subsections 362(a)(4) and (5) of the U.S. Bankruptcy Code about the “stay… of… any act to… enforce any lien” against your property.                                                                                                          

Filing a Chapter 7 vs. 13 Case to Stop Repossession

A Chapter 7 “straight bankruptcy” will stop a pending repossession. It will give you a bit of time to bring your loan current. Usually you’ll have no more than about 2 months, sometime less, seldom more. If your insurance has lapsed you’ll have to reinstate it pretty much right away.

Stopping repossession by filing a Chapter 13 “adjustment of debts” gives you lots more time to catch up on the late payments. Instead of a couple months under Chapter 7, under Chapter 13 you get as much as a few years to catch up. Also you may qualify for “cramdown” of the vehicle loan. If so, after stopping the repo you may not need to catch up at all. Plus you may be able to reduce your monthly payments and pay less overall for the vehicle than you would have under the contract. “Cramdown” is not available in Chapter 7. But even under Chapter 13, you still need to pay to reinstate any lapsed insurance quickly to be able to keep your vehicle.

Getting Back Possession AFTER Repossession

Whether you can get your vehicle back after it’s already been repossessed depends on timing and the bankruptcy Chapter you file under.

As for timing, you DO have to act fast. Otherwise it will be too late to get it back, even through bankruptcy.

Bankruptcy’s “automatic stay” stops the lender, at least temporarily, from taking the next steps after the repossession. That’s because those next steps are at least arguably part of the lender’s enforcing its lien on the vehicle, which bankruptcy stops. This may depend on your state’s laws and local interpretations of bankruptcy law. Your bankruptcy lawyer will talk with you about this in your conversation about the repossession.

The next steps after repossession usually involve selling the vehicle, often in an auto auction. Once your lender sells the vehicle, it’s too late to get back your vehicle through bankruptcy.

Chapter 7 vs. 13 in Getting Back Possession

Assuming you file fast enough, whether you actually getting your vehicle back often depends on whether you file under Chapter 7 or Chapter 13.

A Chapter 7 case will work only if you have a fair amount of money immediately available. You’d have to pay the repossession costs (of likely hundreds of dollars) plus bring the account fully current. If you’re not current on insurance you’ll also have to pay to reinstate it.

Even all that may not be enough. If your lender still doesn’t want to cooperate, it may be able to avoid giving back your vehicle.  Whether or not it can be forced to depends on how your local bankruptcy court interprets the law.

Filing Chapter 13 is much more likely to be effective. That’s because it provides a legal mechanism for you to catch up on the back payments over a much longer period of time. This is done through monthly payments in your court-approved Chapter 13 plan. You will still likely have to pay the repossession costs up front. Plus you’ll have to be current on insurance. Then if your plan shows that you’ll catch up on the back payments, most lenders will voluntarily return your vehicle. If not, the bankruptcy court would likely order the lender to do so.

 

How to Get Back a Repossessed Vehicle

May 25th, 2018 at 9:17 am

repoIn the United States, 170 million consumers depend on a vehicle for daily activities. From trips to the grocery store to a daily commute to work, Americans rely heavily on having independent transportation. Unfortunately, when financial hardship strikes, lenders are quick to repossess their vehicles, even if payments are only one month behind, in some cases. The next part of ur “Surprising Benefits” series explains how filing for bankruptcy can stop a repossession from occurring or even return a repossessed car back to your possession.

If It Is Still in Your Possession

In the state of Texas, repo agents do not need to notify you before taking your vehicle. Realistically, if your payment is in default, even just by a short time, a repossession agency may already be looking for your car, truck, motorcycle, RV, or any other vehicle burdened with a loan. Filing for bankruptcy may be a viable solution to your situation. Bankruptcy places an “automatic stay” is on all collection attempts for all loans, including your vehicle. For many Americans, this stay is enough to catch up on payments, without including it in the bankruptcy process.

After It Is Repossessed

If the car is already repossessed, there is still a possibility of having the vehicle returned; but you must act fast. Lenders work quickly to send the repossessed cars to auction and often have them sold within two weeks. Once the vehicle is sold to a third party, it is too late to have it returned, and you may still owe money to your lender. Typically, the amount the car earns at auction goes toward the original loan balance and the debtor is responsible for the difference, which will include interest and repossession fees. Filing for Chapter 13 bankruptcy stops the sale of the vehicle, renegotiates the terms of the loan over the next three to five years, and returns the car to your possession. A lender may still hold the debtor responsible for the repossession fees. However, many find that preferable to losing the car entirely and still owing.

Ask an Attorney

If your vehicle loan is in default, there is a possibility that you are up for repossession. Depending on the bank and your past payment history, you may have a more extended amount of time, but this is not guaranteed. Stop the guessing game today by contacting a Schertz, TX bankruptcy lawyer. Law Offices of Chance M. McGhee understand how frustrating it is avoiding collection calls and the damaging impact losing a car can have on your career and your ability to put food on the table. Call us at 210-342-3400 today to schedule your free, no-obligation consultation to further explore your vehicle-saving options.

 

Sources:

https://hedgescompany.com/automotive-market-research-statistics/auto-mailing-lists-and-marketing

https://www.citylab.com/transportation/2014/02/9-reasons-us-ended-so-much-more-car-dependent-europe/8226/

Cramdown on Vehicle Not Bought for Personal Use

January 17th, 2018 at 8:00 am

The 910-day condition for doing a vehicle debt cramdown don’t apply if the vehicle was not “acquired for the personal use of the debtor.”  

The Cramdown Advantage

The last several blog posts have been about the advantages of Chapter 13 cramdown, especially the cramdown of vehicle loans. Cramdown can be an excellent way to keep your vehicle. It usually allows you to reduce the monthly payment as well as the total you pay on the debt. Often the payment reduction is significant. You can often save thousands of dollars compared to what you’d usually pay on the debt overall.  Through cramdown you may be able to keep a car or truck that you couldn’t afford to otherwise.

Because of these advantages vehicle loan cramdown may be a reason to file a Chapter 13 case. It’s not available under Chapter 7 “straight bankruptcy.”

The 910-Day Condition on “Personal Use” Purchases

As we said in a blog post last week, there is usually a timing condition you need to meet to do a vehicle loan cramdown. In most consumer bankruptcy situations you must have entered into the contract more than 910 days (about two and half years) before filing the Chapter 13 case. So if you bought and financed a vehicle more recently you wouldn’t be able to do a cramdown.

But that only applies when “the collateral for that debt consists of a motor vehicle… acquired for the personal use of the debtor.” (See the unnumbered “hanging paragraph” right after Section 1325(a)(9) of the U.S. Bankruptcy Code.)  So if your vehicle was acquired for business use, or some other non-personal use, the 910-day condition does not apply. You could do a cramdown on the loan in a Chapter 13 case filed at any time.

An Example

Imagine that eighteen months ago you bought a truck for a business that’s in your name. You financed the entire $50,000 purchase. The truck is now worth $32,500.

Your business has just failed and you need to file bankruptcy. You need to keep the truck because you sold your other vehicle to try to keep the business going.

On the advice of your bankruptcy lawyer you are filing a Chapter 13 “adjustment of debts” case.  There are other reasons to do so having to do with income tax debts. But you also learn you can do a cramdown on this truck loan and save money. You can do so even though you’re still a year short of the 910 days (about two and half years) since getting the loan.

Again, that’s because that 910-day condition would only apply if the truck was bought for “personal use.” If it was clearly bought for the business, you can do a cramdown without waiting the 910 day from the purchase to the Chapter 13 filing. (Your lawyer will review the loan documents to make sure they don’t indicate the purchase was for personal use.)

As a result your truck loan would effectively be rewritten based on the $32,500 current truck value. You would very likely be able to reduce the monthly payment on the loan. You would also very likely be able to pay thousands of dollars less overall before you owned the truck free and clear. Finally, besides saving you money immediately and long-term, it may enable you to keep the vehicle when you could not afford to do so otherwise.

 

Reaffirming a Debt That’s Not Current

December 25th, 2017 at 8:00 am

You usually have to get current on a secured debt before you can reaffirm it. But the terms of a reaffirmation agreement may be negotiable. 

 

Two blog posts ago we introduced reaffirmation agreements, and in the last one we discussed their risks. Today we get into what happens if you are not current on a debt that you want to reaffirm.

Reaffirmation Basics

Reaffirming a debt means excluding it from the legal write-off (the “discharge”) that you get in a Chapter 7 case.

The most common reason to reaffirm a debt is to be allowed to keep the collateral securing that debt.  There are occasional other reasons. For example you might agree to reaffirm a debt because you allegedly incurred it fraudulently. So you settle the debt by agreeing to reaffirm and pay a portion. But the vast majority of reaffirmations are done to retain collateral that you want to keep.

Most of the time when you reaffirm, you agree to all the terms of your original debt agreement. For example, you agree that if you fail to make vehicle loan payments the creditor can repossess your vehicle and come after you for any remaining balance. (See our last blog post about this risk.)

The Common Obligation to Get Current First

Because you usually reaffirm all the terms of the original debt agreement, most of the time you have to be current on that original agreement when you enter into the reaffirmation agreement. Otherwise you’d be in default from the start.

Especially with vehicle loans, and particularly with the larger vehicle lenders, they allow no negotiation about this. It’s the same thing with not being able to reduce the monthly payment amount, or the total debt amount. Even if the vehicle is not worth what you owe, if you want to keep the vehicle most of the time they make you agree to pay the full amount owed.

Possibility of Negotiating Past-Due Payments

This does not mean that any of these terms are never negotiable. For example, if you owed $5,000 on a vehicle clearly not worth more than $3,000, it would sure seem to make economic sense for the lender to be willing to lower the balance to, say,$3,750, plus make some money on future interest, instead having you surrender the vehicle.  Or if you were a payment or two behind, to reaffirm for $4,000 and give you time to catch up.

In a reaffirmation the two parties could change any of the terms of the original agreement, if they both wanted to. If you were behind, you could be given time to catch up. Or the payments could be put on the end of the contract, so you could delay catching up until then.

The practical problem is the willingness of the lender. As mentioned above, the larger vehicle lenders tend to be inflexible. For reasons beyond the scope of this blog post, they’ve largely decided it’s take it or leave it. Either reaffirm all the terms of the original deal or surrender the vehicle. Talk with your bankruptcy lawyer to find out whether this is true about your lender.  

Chapter 13 As a Negotiating Threat

Be aware that the Chapter 13 “adjustment of debts” option usually gives you much more power over your vehicle lender if you’re behind on your secured debt. You almost always have many months and sometimes even years to catch up. If you qualify for “cramdown” you would likely be able to lower the monthly payments. Usually you could even reduce the total amount you pay before you get the title, sometimes significantly.

When you talk with you lawyer ask how Chapter 13 would affect your vehicle or other secured debt. Ask whether threatening to turn your case into a Chapter 13 one might encourage your lender to be more flexible. And of course give appropriate consideration to filing a Chapter 13 case instead for the benefits it would give you.

 

Be Cautious about Reaffirming a Debt

December 22nd, 2017 at 8:00 am

Reaffirming a debt, including a vehicle loan, can be a very sensible choice. But be fully aware of the risks and possible other options. 

 

Last time we introduced reaffirmation agreements as a good way to keep collateral like a vehicle under Chapter 7. Essentially, you get to keep the vehicle or other collateral in return for agreeing to remain liable on the debt. Plus this enables you to put positive information on your credit report as you make each monthly payment.

But reaffirming a debt comes with risks. You need to be clear about those risks as you consider whether to sign a reaffirmation agreement.

We’ll focus again today on vehicle loan reaffirmations because they are common, and a handy way to explain the issues.

Passing up Your One Opportunity to Escape the Debt

Chapter 7 “straight bankruptcy” gives you the near-lifetime opportunity to get out from under your debts. Don’t pass up on this opportunity as to any of your debts unless you do so with your eyes wide open.

Be especially careful with relatively large debts, such as a car or truck loan.

Are you are simply assuming that you want your present vehicle and its debt, without seriously considering other alternatives?  Stop and think about whether you have ANY alternatives. Do you have a friend or relative who’d sell (or maybe even give) you another, cheaper, but reasonably reliable vehicle? Does public or other alternate transportation make sense considering how much money you’d save, on monthly payments AND the other many costs of vehicle ownership? What other transportation could you get with the money you’d save without a vehicle payment and the other costs?

Sometimes it absolutely makes sense to get rid of all of your other debts and just reaffirm one. But think long and hard about whether it might be better for you—on the short run and long—to not reaffirm and thus get rid of ALL your debts.

Reaffirmation Risk

The big risk when you reaffirm a debt is having to pay it later when you wished you didn’t. 

Circumstances change. In the context of a vehicle loan, you might not be able to afford the payments like you expected. The vehicle may cost lots more in repairs. A much less expensive vehicle may come your way and you wish you weren’t stuck with the reaffirmed one.  Your job or other life circumstances may change so you don’t need the vehicle so much.

If your vehicle gets repossessed at some point after you’ve reaffirmed the debt you’ll very likely owe a substantial balance. That’s because the creditor will likely sell the repossessed vehicle at an auto auction for very little proceeds. It will apply those modest sale proceeds to the debt, but after likely adding large fees related to the repossession. The creditor will then demand payment of this “deficiency balance” in a lump sum. If you don’t pay it quickly vehicle creditors usually don’t hesitate to sue for that balance.

So after having gone through bankruptcy months or years later you end up with a new serious debt problem. You’d also significantly hurt your credit record just when you’d hoped to make progress after your bankruptcy filing.

Avoiding this Risk

Of course you can avoid this risk by surrendering your vehicle or other collateral and not reaffirming the debt. Any potential deficiency balance or other obligation would then be discharged—permanently written off. This would happen within 3 or 4 months after your bankruptcy filing, and you’d be completely free of the debt.

You MIGHT be able to keep the collateral WITHOUT reaffirming the debt. In SOME circumstances you could just keep current on the payments, fulfill any other obligations on the debt (such as maintaining the required insurance on the vehicle), but NOT enter into a reaffirmation agreement. Under some state laws the creditor could not or would not repossess the vehicle. Then if your circumstances later changed you could surrender the vehicle without owing anything. Because you had not reaffirmed the debt the creditor would only have rights to the collateral itself. It would have no further rights on the debt, including to any deficiency balance.

Talk with your bankruptcy lawyer about whether this “pass-through” option is available on your vehicle or other secured loan. It depends on your state’s laws, the practices of your lender, and sometimes your specific circumstances.

Choosing to Accept the Risk

Reaffirming a debt may be completely sensible. If you definitely need or even strongly want your vehicle (or other collateral), can afford both the monthly payment and other costs of ownership, can do so long-term, reaffirming the debt can be a prudent choice. Just do it only after getting fully informed of the risks and seriously considering the alternatives.

 

Chapter 7 Buys Time to Change to Another Vehicle

November 8th, 2017 at 8:00 am

Filing a Chapter 7 case stops repossession of your vehicle temporarily. If you are getting another vehicle, that can be valuable time. 

 

A week ago we went through a list of ways Chapter 7 buys you time with your vehicle lender. Included was that it “gains you some time to get another vehicle before surrendering your present one.” We’ll show you how this works.

Transitioning to Another Vehicle

The two different types of consumer bankruptcy give you a number of ways to keep a vehicle that you’re having a hard time making the payment on.

Chapter 7 stops a repossession if you’re behind on payments or insurance. It discharges all or most of your other debts so that you can better afford your vehicle payments. This can also help you afford insurance, vehicle repairs and maintenance, and the other costs of ownership. If you’re a little behind on payments it gives you a month or two to catch up.

Chapter 13 does most of these and more. If you’re behind on payments you get many months to catch up. You can fit that in with other urgent debts—such as child/spousal support and income taxes—on  a flexible schedule. If you qualify for “cramdown” you can even lower your monthly payment and significantly reduce the total you pay for the vehicle before it’s yours free and clear.

But what if AFTER getting well informed about these options you still want to surrender your vehicle and get another one? Real life situations in which this might happen include:

  • You’ve learned that the vehicle you’re paying for is a lemon, unreliable, and will cost too much to keep repaired.
  • Your life circumstances have changed and you don’t want or need a vehicle that’s so expensive.
  • You simply have a way to get another cheaper vehicle, and need to get out of your vehicle loan obligation.

Buying Time by Stopping a Repossession

If you behind on your vehicle loan at all, your vehicle is at risk of repossession. How fast your lender will repossess depends on its policies and on the history of your relationship. Usually you have to be a full month late, sometimes even two months. But you can’t assume this—it can happen whenever you are behind.

If you let the vehicle’s insurance lapse—even without being late on loan payments—that’s separate grounds for repossession. Lenders can be very aggressive about this, because they risk losing their entire collateral. And you are showing yourself to be irresponsible in their eyes.

In these situations your Chapter 7 bankruptcy filing will not buy you much time, but the time it buys could be extremely helpful. A repossession is often very, very disruptive. One minute you have your car or truck and the next it’s gone. You have no transportation to work and to everywhere else you need to go. Preventing that huge disruptive surprise is a big benefit.

Buying Time Even If You’re Current

Even if you’re not behind on vehicle loan payments or insurance, Chapter 7 gives you an orderly process for surrendering your vehicle.

It also gives you a chance to calmly consider whether you should or shouldn’t keep your vehicle and its debt. You sit down with a bankruptcy lawyer who has only one job: to help you decide what is best for you and your future. You look at what your budget will look like after filing the Chapter 7 case. You think about whether there’s room for that vehicle payment. You have a bit of time to figure out whether and how you could get ahold of replacement transportation.

Procedure and Timing

Whether you’re current or behind, how much time will filing Chapter 7 buy? Partly it depends on the aggressiveness of your lender, especially if you’re behind.

In every Chapter 7 case you have to specifically state what you intend to do with collateral on all secured debts. You do so with a document called a “Statement of Intention.” This is usually filed at the bankruptcy court along with the rest of your Chapter 7 documents. But for tactical or other reasons it can be filed later. The document itself states:

You must file this form with the court within 30 days after you file your bankruptcy petition or by the date set for the meeting of creditors, whichever is earlier, unless the court extends the time for cause. You must also send copies to the creditors and lessors you list on the form.

(See also Section 521(a)(2) of the U.S. Bankruptcy Code about this.)

On the Statement of Intention you declare, under penalty of perjury, your “intention about any property… that secures a debt…  .” You declare whether you want surrender or retain the vehicle. If you want to retain it you say whether you want to redeem the vehicle or reaffirm the debt. (These two options are discussed in recent blog posts.)

Practically speaking you usually have to surrender your vehicle between about 30 and 45 days after your Chapter 7 filing. If your lender is unusually lax you may get a little more time than that.

The Surrender Itself

Arrangements for the surrender itself are made between your lawyer and the lender or its lawyer. The surrender is almost always done in a way that’s convenient to you. Usually you either drive the vehicle to an agreed location or give the keys to the lender whose representative picks up the vehicle from wherever you agree to leave it.  This in infinitely better than a repossession. 

 

Chapter 7 Buys Time to Redeem Your Vehicle

November 6th, 2017 at 8:00 am

If your vehicle is worth less than its debt, and you can get the money representing that value, you can “redeem” the vehicle free and clear. 

 

Two blog post ago we went through a list of ways Chapter 7 buys you time with your vehicle lender. Included was that it buys “time to gather funds to redeem your vehicle for less than you owe on it.” This “redemption” option deserves more attention.

Reaffirmation and Redemption

If you want to keep your vehicle in a Chapter 7 “straight bankruptcy,” your two options are “reaffirmation” and “redemption.” You can either reaffirm the debt or redeem the vehicle.

Reaffirmation is far more common. You enter into a reaffirmation agreement, agreeing to repay the loan as if you had not filed bankruptcy. You almost always recommit to paying the entire loan balance, reaffirming that you want to pay it. You agree to remain liable on the original loan, excluding it from the discharge that you are receiving of all or most of your other debts. (We covered reaffirmation a few months ago.)

Redemption is far less common. But it can sometimes save you lots of money so it’s worth knowing about.

Redemption in Contrast to Reaffirmation

It might help to think of redemption as being the opposite of reaffirmation in three ways:

  • You don’t resurrect the vehicle loan (excluding it from the discharge of debts) as in reaffirmation. With redemption you get rid of the loan.
  • You don’t agree to pay the full amount of the loan. With redemption you pay only the current retail fair market value of the vehicle.  
  • You don’t pay the debt through your regular monthly payments. With redemption you must pay off the vehicle’s value “in full at time of redemption.” In practical terms that means you have to come up with that full amount in one lump sum just a month or two after filing your Chapter 7 case.

See the short Section 722 of the Bankruptcy Code about redemption.

Paying Off the Redemption Amount

This lump sum payoff of the vehicle value is obviously often a problem. If you owe lots more than your vehicle is worth you’d love to save the difference. But even if the value is much less than the debt, coming up with the money may seem impossible. Sometimes it is.  Where do people come up with redemption money? Here are three ideas:

  • Brainstorm about creative ways to come up with the necessary cash out of your own assets. Do you have anything you can sell or borrow against to raise the cash? Can you get access to any retirement savings, and is doing so worthwhile? Although you should almost always protect any retirement money, tapping into it might be worthwhile if the amount you’d save on the vehicle loan justify doing so. Overall, think outside the box. Don’t immediately assume you don’t have any way to pull together the money.
  • Consider asking relatives or friends to lend or even donate to you the money you need for redemption. Explain how this will allow you to keep your necessary transportation for much less money. Offer to make the friend or relative the lienholder on the vehicle after redeeming from your original lender.
  • Talk with your bankruptcy lawyer about getting a redemption loan from a financial institution. Certain ones do this specialized kind of financing. You will likely pay a relatively high interest rate, so carefully review the terms with your lawyer. In the right circumstances a redemption loan reduces your monthly payment amount and/or how long you make the payments to make it very worthwhile.

 

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