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Archive for the ‘secured debts’ tag

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.

 

Unsecured Debts in Bankruptcy

December 8th, 2017 at 8:00 am

Your debts are either secured by something you own, or they are unsecured. Unsecured debts are either “priority” or “general unsecured.”  


Unsecured Debts

Debts that are unsecured are those which are not legally tied to anything you own. The creditor has no “security” attached to the debt, no “security interest” in anything. It has no right to repossess or seize anything of yours if you don’t pay the debt.  It can only pursue the debt itself.

It’s usually easier to deal with unsecured debts than secured ones in bankruptcy. Most unsecured debts can be discharged—legally written off—through either Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts.”

An Unsecured Debt Can Sometimes Turn into a Secured One

Under some circumstances an unsecured debts can become secured if you don’t pay it.

For example, you could be sued by the creditor on a debt, resulting in a judgment against you. The creditor may be able to turn that judgment into a lien against your home and other possessions. The debt would then be secured by your home and/or other possessions. (The details of this depend on your state’s laws.)

Another example: if you get behind on income taxes the IRS can record a tax lien against your real estate and personal property. It does not need to sue you.

Filing bankruptcy can stop a lawsuit from turning into a judgment lien. It can often stop the recording of an IRS tax lien. In these and similar situations it’s much better to file bankruptcy before creditors can turn unsecured debts into secured ones.

Also, Sometimes a Secured Debts Can Turn into an Unsecured One

After a secured creditor repossesses or seizes its “security,” and sells it, any remaining debt would then be unsecured.

 A secured debt could become unsecured in various other ways. The “security” could be lost or destroyed, leaving the creditor with nothing to seize. Another secured creditor with prior rights could seize the “security,” leaving the creditor with the “junior” position no longer secured. There are various tools in bankruptcy for turning secured debts into unsecured ones.

Seemingly Secured Debts May Actually Be Unsecured

Creating a “security interest”—a creditor’s rights over its “security—takes specific legal steps. If the creditor fails to take those steps appropriately, a debt that seemed to be secured actually isn’t. Your bankruptcy lawyer may ask you (or the creditor) for documentation to find out if a certain debt is really secured.                                   

Two Kinds of Unsecured Debts

There are two kinds of unsecured debts: “priority” and “general unsecured.”

“Priority” debts are those that the law treats as special for various reasons. Past-due child support and unpaid recent income taxes are “priority” debts. The law treats them as special, mostly by putting them ahead of other unsecured debts. Generally, “priority” debts have to be paid in full in bankruptcy before other unsecured debts receive anything.

“General unsecured” debts are simply the rest of the unsecured debts, those that aren’t “priority.”  “General unsecured” debts include most unsecured ones. Examples are almost all medical and credit card debts, retail accounts, personal loans, many payday and internet loans, unpaid utilities and other similar bills, claims against you arising out accidents or other bodily injuries, damages arising from contracts and business disputes, overdrawn checking accounts, bounced checks, the remaining debt after a vehicle repossession or real estate foreclosure, and countless other kinds. If the debt is not secured, and isn’t “priority,” then its “general unsecured.”

Unsecured Debts in Bankruptcy

In the next blog posts we’ll look at how Chapter 7 and Chapter 13 treat “priority” and “general unsecured” debts. Depending on which kinds of debts you have, these will help you understand and choose between these two options.

 

Dealing with Recorded Tax Liens through Chapter 13

October 30th, 2017 at 7:00 am

A recorded tax lien gives the IRS/state a lot of leverage against you and your home. Chapter 13 can gain you back some of that leverage.  


Stopping Tax Liens by Filing Bankruptcy

In our last blog post we showed how Chapter 13 can buy you more time and flexibility than Chapter 7. We showed an example how that’s especially true if you owe more than one year of income taxes. Our example assumed that two tax years met the conditions to discharge (legally write off) that debt, while another tax year didn’t.

That example assumed that the IRS/state had not yet recorded a tax lien on your home for either tax year. A bankruptcy filing stops a tax lien’s recording. Then if the tax debt is discharged, the debt is gone so there’s no further basis for a tax lien. Or if the tax debt is paid in full (usually through a Chapter 13 payment plan) again there’s no further debt on which to impose a tax lien.

Dealing with Tax Liens under Chapter 13

But what if the IRS/state HAS already recorded a tax lien on your home?

That can cause all kinds of problems. Two weeks ago we wrote about how a tax lien can turn a completely dischargeable tax debt into one you have to pay in full. Beyond that, any tax lien is terrible on your credit report. It can make refinancing your home much harder. It may even add a problematic hurdle in the selling of your home. Even if you have little or no equity in your home, the tax lien can sit on your title until there’s enough equity to pay it in full.

So if you get a tax lien recorded against your home you need to consider your options. Assuming you want to keep your home, filing a Chapter 13 “adjustment of debts” is one option worth understanding.

Let’s take the same example we used in our last blog post, with a few more facts.

Our Example

Assume again that you owe income taxes of $24,000—$8,000 for the each of the 2012, 2013, and 2014 tax years. The 2012 and 2013 taxes meet all the conditions for discharge. The 2014 one doesn’t, mostly because it hasn’t yet been 3 years (as of when this is being written) since the date its tax return was due on April 15, 2015.

The IRS/state has just recorded tax liens on all three tax years against your home. Your home is worth $250,000, and has a $245,000 first mortgage owed on it. So, before the tax liens’ recordings you had $5,000 of equity in the home. Now you have NEGATIVE $19,000 of equity. And you are under the financial risks outlined above from the tax liens.

So on advice of your bankruptcy lawyer you file a Chapter 13 case. You do so because you:

  • can’t afford to pay nearly as much as the IRS/state are demanding each month in monthly installment payments
  • are afraid of the actions the IRS/state can take against you and your home on the tax liens
  • are afraid of the other collection actions they can take on the $24,000 in taxes
  • need a plan for taking care of these taxes in a way that you can reasonably manage

The Example’s Chapter 13 Plan

In this example the $16,000 of 2012 and 2013 tax debts would be treated as “general unsecured” debts. That is, they would but for the tax liens. Now those two tax debt are “secured” against your home because of their tax liens.

However, under Chapter 13 you have the power to establish that they are secured only to the extent of your home’s equity. So, the 2012 debt of $8,000 is secured by the $5,000 equity in the home. The remaining $3,000 is not secured. The 2013 debt of $8,000 has no remaining equity in the home for it to be secured by. So both that and the remaining $3,000 of the 2012 tax it is treated as a “general unsecured” debt.

This means that this $11,000 ($3,000 + $8,000) would be paid—if at all—to the same extent as your other ordinary debts with no collateral. In most Chapter 13 cases there’s only a set amount available to pay to the entire pool of “general unsecured” debts. This means that usually that $11,000 would just go into the pot with those other debts, and you’d pay no more than if there was no such $11,000 tax debt. That $11,000 tax debt just reduces how much other “general unsecured” debts get paid, without increasing how much you pay. In fact, in many bankruptcy courts you’re even allowed to pay nothing to the “general unsecured” debts. That happens if all your money during the life of the plan goes elsewhere.

The “Priority” Tax Debt

And how about the third tax year—2014—which doesn’t meet the conditions for discharge? What affect does its tax lien have on it?

It has no effect because all of the home’s equity has already been absorbed by the 2012 tax year.  This 2014 tax already has to be paid in full through the Chapter 13 payment plan. It’s a “priority” debt.  Had there been equity in the home to cover this lien then you’d also pay interest on this tax. Without any equity this 2014 tax is effectively unsecured. So it’s treated like any other “priority” debt. You have to pay it in full during your 3-to-5-year Chapter 13 payment plan.

So you have up to 5 years to pay the $5,000 secured portion of the 2012 tax and the $8,000 2014 tax. Throughout that payment period you’d be protected from the IRS/state by the “automatic stay.” This usually protects you throughout the years of the case (not for just 3-4 months like Chapter 7). That means no further IRS/state or other creditor actions against your or your house throughout your case.

Your payment plan may or may not include some money to pay towards your “general unsecured” debts. This includes the unsecured part of the 2012 tax and all of the 2013 tax. How much, if any, you’d pay on these would mostly depends on what you could afford to do so, after paying the other taxes. The secured part of the 2012 tax and the 2014 “priority” tax debts would usually get paid in full before the “general unsecured” debts would receive anything.

The End of the Chapter 13 Case

At the end of your successful Chapter 13 case the following would happen:  

  • Having by that point paid off the $5,000 secured part of the 2012 tax debt, the unpaid portion of the remaining $3,000 would be forever discharged.
  • The unpaid portion of the 2013 tax debt would also be discharged.
  • Having by that point paid off the $8,000 “priority” tax debt, any interest and penalties that would have accumulated on that tax would be forever waived.
  • With all your tax debts either paid or discharged, there’d be no further risk of a lien against your home from that tax.
  • You’d be tax-debt-free, and altogether debt-free (except for long-term debt like your home mortgage).

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. 

 

Cramdown on Debts Secured by Personal Property

July 31st, 2017 at 7:00 am

How Chapter 13 helps you keep personal property collateral on a debt (such as furniture bought on credit) for less money through cramdown. 

 

Last time we explained how you may be able to reduce the monthly payments, interest, and overall cost of a vehicle loan through Chapter 13 cramdown. The debt must be at least 910 days (two and a half years) old. Plus the more the vehicle is worth less than the amount owed the greater the likely savings. (See the “hanging paragraph” after the end of Section 1325(a)(9) of the U.S. Bankruptcy Code.)

This cramdown—the re-writing of loan terms—also applies to debts secured by personal property collateral other than vehicles. The debt must be at least 1 year old when you file the Chapter 13 case to do the cramdown. Here’s an example to show how this works.

Creditor Leverage under Chapter 7

Jason and Mary bought a set of bedroom furniture for their 13 and 16 year old daughters 18 months ago. They bought it on credit, and owe $3,800 on the debt. They owe so much because they could make no payments for the first year. With the wear and tear on the furniture it now has a fair market value of about $1,200.

They are now considering bankruptcy because Mary lost her job a year ago, is now working for less pay, they owe $75,000 in other unsecured debts, and are 2-3 months behind on all of their monthly payments. Some debts are with collection agencies; some have threatened to sue.

On the furniture debt they are two months behind on the $100 payments. The creditor is threatening to repossesses the furniture.

If Jason and Mary file a Chapter 7 case they could surrender the furniture, and the debt would be discharged—forever written off. But their girls really need the beds, desks, and chests of drawers. Given their age and the tension the family has undergone it would be rather traumatic for them to lose their stuff. Jason and Mary don’t have the money or credit to replace it.

So they would likely have to “reaffirm” the debt to keep the furniture—legally recommit to pay it. They could well be stuck with the original payment terms, including the full balance of $3,800, a high interest rate, the $100 monthly payments, and the risk that down the line they wouldn’t be able to make the payments. Then the furniture would still be repossessed, and they’d almost certainly still owe a lot on the debt.

So Mary and Jason understandably would rather not recommit to paying $3,800 plus interest for furniture now worth only $1,200.

Chapter 13 “Cramdown”

Since they bought the furniture more than a year ago, through Chapter 13 Mary and Jason can do much better. Through cramdown they can in effect rewrite the terms of the debt based on the value of the furniture.

Through cramdown the $3,800 debt is divided into two parts. One $1,200 part is based on the value of the collateral, and the other part based on the remaining $2,600 debt amount. Their Chapter 13 plan treats the first part as secured, and the other part as unsecured.

So over the course of their 3-to-5-year Chapter 13 plan Jason and Mary would pay the creditor $1,200, plus a modest amount of interest. The payments would receive $40 per month, paying off the $1,200 plus interest in a little less than 3 years. That would pay off the secured portion of the debt. The remaining $2,600 would be lumped in with the other $75,000 in unsecured debts. Jason and Mary would pay only a portion of this $77,600 based on what they could afford to pay. The amount they’d pay would be based on the extent to which they had any remaining “disposable income” during their Chapter 13 case, after accounting for reasonable living expenses. In many Chapter 13 cases the general unsecured debts receive only a few pennies on the dollar. Sometime they receive nothing.

So the end result in a Chapter 13 case would be that Mary and Jason would:

  • avoid the repossession of their daughters’ furniture
  • not have to catch up on their late payments on the furniture debt
  • reduce the monthly payment from $100 to $40 on this debt
  • reduce the total paid for the furniture from $3,800 plus interest to as low as $1,200 plus interest
  • be protected from future repossession of the furniture
  • receive, at the end of their Chapter 13 case, a discharge of the remaining unsecured debt

 

Qualifying to File a Chapter 13 Case

July 19th, 2017 at 7:00 am

You can file a Chapter 13 case if you are an “individual,” have “regular income,” and don’t owe too much.  


If you qualify, a Chapter 13 case is an extraordinarily powerful tool for dealing with certain kinds of debts. For example:

  • vehicle loan cramdown may allow you to significantly lower your monthly vehicle loan payments, not have to catch up on any late payments, and reduce how much you pay overall for your vehicle
  • catch up on child and spousal support arrearage based on what you can afford, stopping support enforcement against your wages and accounts and against your driver’s or occupational licenses
  • pay newer income tax debts over time—as long as 5 years—usually without any accruing interest and penalties
  • strip your second mortgage from your home’s title in some situations, permanently ending those monthly payments, reducing the debt against your home
  • write off non-support debts owed to an ex-spouse after paying little or nothing on those debts

Must be an “Individual”

Only “individuals”—human beings—can file a Chapter 13 case. See Section 109(e) of the U.S. Bankruptcy Code.

You as an individual, and “such individual’s spouse,” may file a joint Chapter 13 case together.

A business—a corporation, limited liability company (LLC), or business partnership—cannot file under Chapter 13 in its own name. This is unlike a Chapter 7 “liquation” or Chapter 11 “reorganization,” which businesses can file in their own name.

If you own such a business, you can file a personal Chapter 13 case. It would deal with the debts—personal and business—for which you are personally liable.  But the business itself cannot file under Chapter 13.

If you own a business that’s a “sole proprietorship,” you can file bankruptcy in your name, including under Chapter 13. That’s because your personal and business assets and debts are all legally in your name. The business is not its own legal entity.

Have “Regular Income”

To qualify under Chapter 13 you must be an “individual with regular income.” That phrase is defined as one “whose income is sufficiently stable and regular to enable such individual to make payments under a plan under Chapter 13.” Section 109(e) of the Bankruptcy Code.

This definition is quite ambiguous. So bankruptcy judges have lots of flexibility about how they apply this requirement. Usually they give you the opportunity to make the monthly Chapter 13 plan payments to see if you can establish that your income is indeed “stable and regular” enough. But if your income has truly been inconsistent, you and your bankruptcy lawyer may have to persuade the judge that your income is steady enough to qualify.

Secured and Unsecured Debt Limits

If you file a Chapter 13 case there are legal limits on how much debt you can have. There are separate maximums for your combined secured debts and your combined unsecured debts. This is unlike Chapter 7 for which there are no debt maximums.

Why does Chapter 13 have debt limits when Chapter 7 doesn’t? These debt limits were established in the late 1970s when the modern Chapter 13 procedure was created.  Congress wanted to restrict this comparatively streamlined procedure to relatively simple situations. For people with very large debts, the more complicated Chapter 11 “reorganization” is supposed to be more appropriate.  

The debt limits were originally $350,000 for secured debts and $100,000 of unsecured debts, but have been raised significantly. They are now adjusted every 3 years automatically with inflation. The most recent adjustments apply to cases filed from April 1, 2016 through March 31, 2019. The secured debt limit is $1,184,200 and the unsecured debt limit is $394,725.

Note:

  • Reaching EITHER of the two limits disqualifies you from Chapter 13.
  • These limits apply whether the Chapter 13 case is filed individually or with “such individual’s spouse.” They are NOT doubled for a joint case.

 

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.

Advantages

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.

 

Leases that Are Actually Secured Purchases

February 20th, 2017 at 8:00 am

A “lease” of furniture or other consumer goods may actually be a disguised purchase. If so, through “cramdown” you can pay much less on it. 


Our last blog post was about your bankruptcy options on leases of personal property—such as furniture or electronics. Your basic options are either to “accept” the lease or else “reject” it. When “accepting” the lease you keep possession of the property and must accept ALL of the lease’s terms and obligations. When “rejecting” the lease, you surrender the property and ALL of the remaining lease debt is discharged—legally written off. It’s all or nothing.

But what if that lease is really just a disguised purchase over time, with the “leased” property as collateral? If so, that may give you some major advantages. There can be a big difference in the bankruptcy consequences leasing something instead of buying it on time.

An Example—Assuming a Furniture Lease

Let’s say that a year ago, after a period of unemployment, you got a new job that required you to move to a new area. Your family rented an unfurnished home and then rented a bunch of furniture for it. You got two sets of bedroom furniture, as well as for the family room and dining room.

Your credit record was terrible so you used a “rent-to-own” contract, having been told you “didn’t need credit.” You pay $350 per month for furniture which you heard would have cost about $7,000 to buy new. Under the terms of the contract, after paying 36 monthly payments you would own the furniture. But until then you were renting it.

Your income from the new job has not turned out to be as high as you’d hoped. Plus huge debts from when you were not employed are putting unbearable financial pressure on you. So you talk with a bankruptcy lawyer about your options.

You learn that if you file bankruptcy and the rent-to-buy contract is treated as a lease, your options are limited. You can “assume” the lease by continuing to pay the $350 monthly payments and keep the furniture. Or you can “reject” the lease, give back the furniture, and any resulting debt would be discharged in bankruptcy. That would leave your family with an empty house so that’s not really an option.

But by this time the furniture has depreciated to being worth no more than about $3,000. Furniture depreciates very quickly. Paying $350 for the remaining 24 months would mean you’d be paying $8,400 more on furniture now worth barely a third of that. So you are very hesitant to “assume” such a bad deal.

If the “Rent-to-Own” Is Treated as a Secured Purchase

In contrast, if the contract is treated as a purchase over time, you would likely pay much less for the furniture. If you filed a Chapter 13 “adjustment of debts” you could do a “cramdown” of that obligation. (You qualify to do this on personal property other than a motor vehicle, as long as at least one year has passed since entering into the transaction. See Section 1325(a)(final paragraph after subsection (9).)

Under “cramdown,” the secured creditor’s debt is only treated as secured to the extent of the value of the collateral. In our situation, the $8,400 remaining debt is secured only to the extent of $3,000. That is the portion that you would have to pay for sure to keep the furniture. The remaining $5,400 would be treated as unsecured.

You would pay the $3,000 secured portion through your Chapter 13 payment plan. You could reduce the $350 monthly payments usually to any amount that would pay the $3,000 plus interest within the 3-to-5-year length of the case. So the monthly payment could be $100 per month, or maybe even less.

The remaining $5,400 unsecured portion would almost never be paid in full. You may not have to pay any of it. It is lumped in with the rest of your “general unsecured” debts. In most Chapter 13 cases, you wouldn’t pay any more into your plan because of that $5,400 unsecured debt. That’s because in these case you pay a certain amount towards the pool of all of your “general unsecured” debts. That amount is based on your “disposable income” during the period of your plan, minus other secured and “priority” debts that you must pay first.

So, for practical purposes “cramdown” usually significantly reduces your monthly payments and the total amount you pay.

Distinguishing Personal Property Leases from Secured Purchases

Because of the potentially huge difference in the treatment of leases and secured purchases, disputes arise about whether a transaction is a true lease or a disguised secured purchase. Our next blog post will be about the factors that the bankruptcy court looks at to decide.

 

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