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Archive for the ‘Vehicle Loans’ Category

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.


Timing: Qualifying for Vehicle Loan Cramdown

September 27th, 2017 at 7:00 am

If your vehicle is worth less than you owe on it, with good timing cramdown could reduce your monthly payment AND the total amount you pay.  

Vehicle Loan Cramdown

“Cramdown” is an informal term for one of the most tangible benefits of Chapter 13 “adjustment of debts” bankruptcy. You won’t find the term in the federal Bankruptcy Code, yet lawyers and judges use it all the time.

It refers to a procedure provided under Chapter 13 law for legally rewriting a vehicle loan.  It results, usually, in reducing both the monthly payment and the total you pay for the vehicle. The more your vehicle is “underwater”—worth less than what you owe on it—the more you benefit from cramdown.

Secured and Unsecured Parts of a Vehicle Loan

Cramdown works by dividing the total amount you owe on your vehicle loan into secured and unsecured parts.

The secured part you must pay for sure. But because that amount is less than the total amount you owe, the new monthly payment amount based on it will naturally be less. You can also often reduce the interest rate. Plus you can usually stretch the monthly payments out over a longer period than the original loan.  These all reduce your monthly payment.

The remaining unsecured part of your vehicle loan you pay only as much as you can afford. It’s just part of all your “general unsecured” debts. Usually you pay these only to the extent you have available money during the life of your case, money not already going either to living expenses or to other more important debts. So, often you end up paying the unsecured part of your vehicle loan just pennies on the dollar.

Combining all this, cramdown gets you to a free-and-clear vehicle for a lot less money.

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).

Non-Timing Conditions for Cramdown

Cramdown only works if your vehicle is worth less than the balance on the loan. You’re “cramming down” the loan amount to the secured amount, so this assumes that the secured amount is less.

It’s also worth emphasizing again that cramdown is ONLY available in a Chapter 13 case, not Chapter 7. Chapter 13 provides a way—through the court-approved payment plan—to divide the debt into secured and unsecured parts, and pay accordingly. Chapter 7 “straight bankruptcy” doesn’t let you do cramdown.

Cramdown also requires the motor vehicle collateral to have been “acquired for the personal use of the debtor.”  (See the “hanging paragraph” referred to above.)  So no cramdown on vehicles acquired for business use.

The Timing Condition

If you meet all the above conditions you still don’t get cramdown without one more timing condition.  You must have entered into your vehicle loan more than 910 days before your Chapter 13 case is filed. (That’s slightly less than two and a half years.)

What’s the point of this timing condition? It wasn’t always part of the law. It was added in 2005 to give a bit more advantage to auto loan creditors. Vehicles, especially new ones, depreciate quickly, especially during their first several years. This 910 –day rule prevents a debtor from financing a vehicle and then doing a cramdown on it quickly.


So be aware of this timing rule when you first go in to see your bankruptcy lawyer. Bring your loan vehicle paperwork (or whatever you have available) to see if and when you qualify for cramdown. You’ll find out how much you can lower your vehicle payment, and how much you can save overall.


Keeping Your Vehicle in Chapter 7 through Redemption

July 17th, 2017 at 7:00 am

If your vehicle is worth less than you owe on it, under Chapter 7 you can keep it by “redeeming” it—paying its present value in full.

If you want to keep your vehicle in a Chapter 7 “straight bankruptcy,” your main options are “reaffirmation” and “redemption.”

Reaffirmation is much more common. It involves entering into a formal agreement to repay the loan as if you had not filed bankruptcy. You’re recommitting to pay the loan, “reaffirming” that you want to pay it. We covered reaffirmation a couple blog posts ago.

Redemption is much less common, especially in certain areas of the country. But in the right circumstances it can save you lots of money.

What is Redemption?

In a couple respects redemption is the opposite of reaffirmation.

Instead of-promising to pay the vehicle loan in spite of your bankruptcy, with redemption you are getting rid of that loan.

Instead of agreeing to pay the full amount of the loan, with redemption you pay only the current fair market value of the vehicle.  

Instead of paying the debt in regular payments, with redemption you must pay off the vehicle’s value “in full at time of redemption.” That means that 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 one-sentence Section 722 of the Bankruptcy Code about redemption.

Paying Off the Redemption Amount

Even if a vehicle is worth much less than its loan balance, that’s likely still a lot of money for a person to come up with in the middle of bankruptcy. Where does that money come from? Here are three ideas:

1. Consider some creative ways to come up with the necessary cash out of your own assets. You generally should protect any retirement money you may have, and especially not use it to pay for a depreciating asset. But if your vehicle is worth much less than you owe, using this source might possibly be worthwhile. Generally, be creative. Don’t immediately assume you don’t have any way to find the money.

2. Consider asking relatives or friends to lend (or give!) you the money you need for redemption. Explain to them that this will allow you to hang onto your necessary transportation for much less money. The friend or relative can become the lienholder on the vehicle (replacing your original lender). This provides more assurance that you’ll pay the loan.

3. Get a redemption loan from a bank, credit union, or other financial resources. Some are set up to do this specialized kind of financing. Because there will be little or no equity cushion with this type of loan, you will likely pay a high interest rate. So you and your bankruptcy lawyer need to carefully review the terms. Calculate whether the decreased loan balance significantly reduces how much you pay overall in spite of a likely higher interest rate. Under the right circumstances you may reduce your monthly payment or the term of payments, or possibly both.


Depending on the difference between your loan balance and the vehicle’s value, redemption can save you a lot of money. Wiping out the entire balance and paying only what the vehicle is worth may save you thousands of dollars.

Reaffirmation usually involves paying off the vehicle loan on its original terms. That makes more sense when the vehicle is worth as much or more than the loan balance. Redemption, in contrast, makes all the more sense when the vehicle’s value is less than the loan balance.


Surrendering Your Vehicle in a Chapter 7 Case

July 14th, 2017 at 7:00 am

If you’re buying a vehicle, sometimes getting out of the contract is your best option. Chapter 7 lets you do that, owing nothing. 


“Reaffirming” Your Vehicle Loan

Our last blog post was about keeping your vehicle in a Chapter 7 “straight bankruptcy” by reaffirming the vehicle loan. If you are current on the loan/lease and can afford the payments after bankruptcy, reaffirming may make sense.

But sometimes it isn’t your best option. Bankruptcy also gives you an extraordinary opportunity to get out of your vehicle contract and its debt.

Even if you think you should keep your vehicle, consider the advantages of surrendering your vehicle during a Chapter 7 case.

Your Opportunity to Escape the Debt on the Vehicle Loan

Consider 3 scenarios:

  1. You may regret having made the purchase. You might have been talked into it by a pushy salesperson. You may have been surprised when you qualified for the credit and figured that you should grab the opportunity. But you’ve known for a while that it was a mistake. Bankruptcy is your chance to undo the mistake.
  2. Maybe instead the purchase really did make sense at the time but doesn’t anymore. The vehicle may have turned out to be unreliable and costs too much to repair and maintain. Your financial situation may have changed so you can no longer afford its monthly payments and other costs. Because of the vehicle’s fast depreciation, you may also owe well more than it’s worth. You wish you could turn back the clock and get out of the deal.
  3. Or you think you will be able to afford to pay your vehicle loan payments after filing bankruptcy, but it’s going to be tight. You need transportation but have a way of getting another less expensive vehicle or can do without. You want to know your options under bankruptcy.

The “Deficiency Balance”

It’s normally very expensive and dangerous getting out of a car or truck purchase. You can’t just give the vehicle back, give them the key, and call it even. Usually it’ll cost you, and a lot.

Usually when you surrender your vehicle to the creditor you end up owing a “deficiency balance.” This is the difference between what you owe on the contract and what your creditor would get if it sold your vehicle. Returned and repossessed vehicles are usually sold at auto auctions, where the purchasers are mostly used car dealers. They need to make a profit when re-selling the vehicles so they don’t pay much for them. So the amount your vehicle is sold for and credited to your account is usually shocking small.

At the same time the amount you owe is often much more than you expected. Your contract almost always lets the lender add onto your account a variety of additional costs. Besides late fees, all of the lender’s costs of surrender or repossession and the auction are piled on. Each one adds to the amount you owe.

As a result, in the end the amount of the “deficiency balance” that you owe is often amazingly high.

Lenders Usually Chase Deficiency Balances Fast

Usually your lender will file a lawsuit pretty quickly to try to make you pay off that deficiency balance.

It’s now a debt not secured by any collateral. The lender recognizes that paying this debt is not likely your highest priority. Sometimes the law gives the lender a relatively short time to sue or forever lose its ability to do so. So the lender has multiple reasons to sue you on the deficiency balance.  Very likely you’ll be forced to deal with the debt sooner rather than later.

The Results of Chapter 7

Almost always, Chapter 7 results in the “discharge” of a deficiency balance. That is, the debt is permanently, legally written off, without you having to pay anything.

This is true whether the vehicle has been surrendered or repossessed before you file bankruptcy, or after.

There are very rare exceptions. If you purposely cheated this creditor in getting the loan, the creditor could object to the discharge of the debt. Examples include intentionally lying on the loan application, or some other kind of fraud. Even then, the creditor would have to formally accuse you of this within about 3 months after your Chapter 7 case was filed or else the debt would be discharged anyway.

So, a Chapter 7 bankruptcy would almost always discharge whatever you owed on your surrendered car or truck. Within 3 or 4 months after filing the case this debt would be gone.  


Keeping Your Vehicle by Reaffirming the Vehicle Loan

July 12th, 2017 at 7:00 am

In a Chapter 7 case you “reaffirm” your vehicle loan if you want to keep your vehicle. This means you keep paying it.


Most debts that you owe are discharged in a Chapter 7 “straight bankruptcy.” That means that they are legally, permanently written off.

That includes your vehicle loan. But with a vehicle loan the lender has a lien on your vehicle. So if you don’t pay on it the lender has a right to take your vehicle. A Chapter 7 filing would usually just delay that by a few weeks.

So if you want to keep your vehicle, you have to voluntarily exclude the vehicle loan from the discharge of debts. You have to agree to reaffirm the debt.

The term makes sense. You originally agreed to pay the vehicle loan when you bought the vehicle. Then you file the bankruptcy case in which that loan would be discharged. But instead you reaffirm the loan obligation, saying you want to owe it after all, by excluding it from the discharge.

The Reaffirmation Agreement

A reaffirmation agreement is the document through which you exclude your vehicle loan from the debt discharge. It’s generally prepared by your vehicle lender and sent to your bankruptcy lawyer. You review it with him or her, if you agree you sign it, and then it’s filed at the bankruptcy court. The reaffirmation agreement must be filed at court before the court grants the discharge of debts, and it must meet some other conditions. See Section 524(c) of the U.S. Bankruptcy Code.

You Are Not Required to Reaffirm the Vehicle Loan

It’s crucial to understand that you do not have to reaffirm the debt. Bankruptcy gives you a one-time opportunity to get out of a bad vehicle purchase. It gives you the opportunity to owe nothing on the contract, if you so choose, for whatever reason. The vehicle may have turned out not be reliable. You may not be able to afford its monthly payments and other costs. You may owe more than the vehicle is worth.

So instead of reaffirming the vehicle loan, you have the unique opportunity to surrender the vehicle and discharge whatever remaining debt there would be.

Most of the time when you surrendered a vehicle you would still owe the creditor thousands of dollars. This is called the deficiency balance—the amount of debt you owe, plus usually substantial fees, minus a credit for the proceeds of the sale of your sold vehicle. Think seriously about taking advantage of the option of surrendering your vehicle and then owing nothing.

The Risk of Repossession if You Reaffirm

If you reaffirm a vehicle loan and then later can’t make the payments, your vehicle will get repossessed. And then you’ll likely owe a deficiency balance. That’s because the reaffirmation agreement reinstates all of the lender’s rights. That’s another reason to consider very seriously, and discuss with your lawyer, about whether it’s truly wise to keep the vehicle and reaffirm the loan.


“Assuming” a Vehicle Lease in Chapter 7

January 27th, 2017 at 8:00 am

You can most likely “assume” your vehicle lease and keep that vehicle under Chapter 7. But you need to be current or able to be quickly. 


We’ve talked about unexpired leases and how they’re treated in a Chapter 7 “straight bankruptcy” case. Today we get into the most common big one—the vehicle lease.

More and More Vehicle Leases

In the five years from 2009 to 2014, the percentage of vehicle transactions that were actually leases went from about 17% to 27%.

Why this strong trend? No doubt there are lots of reasons. But people seem to fixate more on the monthly payment amount than anything else, which usually favors leases. Vehicle manufacturers have capitalized on this in their advertising. That month-to-month advantage often comes with the disadvantage of higher overall costs.

In any event, when money’s tight and you need reliable transportation, leasing may really be your only feasible option.   

Keeping Your Vehicle in Bankruptcy

If you do have a lease and need to keep your leased vehicle, you likely can do so in bankruptcy. Today blog post describes how this can happen in a Chapter 7 case. Tomorrow’s will be about Chapter 13 “adjustment of debts.”

The Trustee’s Role

As described in our last post two days ago, the Chapter 7 trustee has a possible but unlikely say here. In very rare situations a vehicle lease can be sold for money. But it’s simply not likely that you got such a sweet deal that somebody would pay you to take over your lease. However, if you did your trustee could possibly sell off the lease and pay the proceeds to your creditors. Talk with your bankruptcy lawyer to make sure this highly unlikely situation does not apply to your lease.

“Assuming” a Vehicle Lease

In the very likely event that your trustee would have no interest in your lease, you can usually “assume” it. You start by formally informing your lessor of your intention. Through your lawyer you complete a “Statement of Intention,” checking the box that you want to “assume” the lease.

By doing this you say that you want to be bound by all the terms of the lease contract. That of course includes your obligation to pay the monthly lease payments. But it also includes all the other terms, including various potential extra fees for high mileage and such.

Your lawyer files the Statement of Intention at the bankruptcy court and mails a copy to your lessor.

Your Lessor’s Acceptance

Your lessor has to consent to you “assuming” the lease. (Section 365(p)(2) of the Bankruptcy Code.) It will likely consent, especially if you are current on the lease, or can get current quickly. Vehicle leases are usually profitable for lessors, and they’d rather keep making money instead of ending the lease.

But again, the lessor is not legally obligated to allow you to assume the lease. Be sure to talk to your lawyer about your particular lessor’s practices so you know what to expect.


Make sure you are clear about the risks of “assuming” the lease.

If you ever can’t make the monthly lease payments after “assuming” the lease, the lessor can take back the vehicle.

If you continue to owe anything under the lease, which is very likely, the lessor would almost certainly sue you for it. The amount owed would likely be large, including various penalties and charges added to your account.

Even if you paid off the required lease payments, you could still owe a bunch of money. At the end of the lease term, the lessor could well charge you for excess mileage or vehicle “damage.” You could owe thousands of dollars, and be sued if you did not quickly pay it.


For sure sometimes keeping a leased vehicle in bankruptcy makes sense. But make sure it really does. Don’t give up the opportunity to get out of a dangerous deal without being well informed.

Review the lease contract carefully with your lawyer if any of it isn’t clear. Figure out as much as you can whether you would owe anything at the completion of the lease term. For example, compare your current mileage with the amount allowed in the contract, projecting out your likely mileage amount at the end of the lease, and see if that results in a likely penalty.

Last thing: if you aren’t current or close to current on your payments, consider Chapter 13 as potentially better option. Again, that’ll be the topic of our next blog post.


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