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Archive for the ‘surrendering collateral’ tag

Chapter 7 Buys Time and Money to Move from a Foreclosing Home

November 10th, 2017 at 8:00 am

Filing a Chapter 7 case stops foreclosure of your home temporarily, helping you gather funds for your transition to your next housing. 

 

Last week we went through a list of ways Chapter 7 buys you time when dealing with a home foreclosure. Included was that filing a Chapter 7 case “can give you time to surrender your home while saving up for moving expenses.”  This deserves a more thorough explanation.

 Stopping a Foreclosure

The filing of a bankruptcy case, including a Chapter 7 “straight bankruptcy” one, stops a pending home foreclosure sale. This happens through the “automatic stay,” the law which freezes most creditor collection actions the moment you file bankruptcy. In particular, the automatic stay statute says that a bankruptcy filing stops “any act to… enforce any lien” against your property. (See Section 523(a)(4) and (5) of the U.S. Bankruptcy Code.)  A mortgage lender’s foreclosure of your home is an act to enforce a lien. So your bankruptcy filing stops it from happening.

It’s crucial to time your bankruptcy filing strategically. Otherwise you will file it too soon or too late. You want to buy as much time as possible. And you don’t want to mess up and fail to stop the foreclosure. 

You absolutely need to talk with your local bankruptcy lawyer to determine the best timing. This decision requires a thorough understanding of BOTH federal bankruptcy law and state property and foreclosure law.  While bankruptcy law provides the ins and outs of the “automatic stay,” state law lays out crucial considerations like exactly when a foreclosure takes away your rights to your home. For example, filing too late would leave you with no rights to your home that your bankruptcy filing could protect.

After Your Bankruptcy Stops the Foreclosure Sale

What happens after you file the Chapter 7 case? In particular how much time will you have before you have to move away from your home?

A consumer Chapter 7 case usually takes about 3 or 4 months. The automatic stay is in effect that whole length of time, UNLESS the mortgage lender asks for “relief from stay.”

So if your lender does not file a motion asking for that “relief,” filing Chapter 7 can buy you 3 or 4 months. It could be even longer. That’s because there is usually some delay between when the foreclosure process is restarted and the new foreclosure takes place.

If your lender does file a motion for “relief from stay,” your Chapter 7 filing may only buy you an extra month or so. That’s because if you’re surrendering the home you’re presumably not making the mortgage payments. So you don’t have much defense against the lender’s motion, and it would almost certainly be granted.

However, if your mortgage lender does ask for “relief” to resume foreclosure, that often presents an opportunity for negotiation. You have something to offer in the way of surrendering the home peaceably at an appropriate time. The lender may well save attorney fees and foreclosure costs. Under some circumstances it may even pay you some money to move and sign the home to the lender.

Gathering Funds for Your Move

Usually the main benefit to delaying a foreclosure once you’ve decided to give up the home is for time to gather moving costs. By moving costs we mean everything needed for your transition, including rent, security deposit, moving truck rental—everything. Every month you are not paying your mortgage should give you the opportunity to save a chunk of money. In some states money you save for this purpose even before filing your Chapter 7 case can be protected under the homestead or some other exemption. Money saved after filing is virtually never a problem.

Conclusion

Filing Chapter 7 bankruptcy stops a foreclosure, although you have to time it right through the help of your lawyer. The point of buying time is to give you more time to cover your costs in transitioning to new housing. The amount of time you can buy depends in part on the aggressiveness of your mortgage lender. The extra time will usually be between one and four more months. You can often negotiate your leaving to make it less disruptive for you.

 

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. 

 

Escaping a Vehicle Lease in Chapter 13

February 3rd, 2017 at 8:00 am

Getting out of a vehicle lease by “rejecting” it in Chapter 13 isn’t quite as quick as in Chapter 7 but has about the same practical effect.

 

Getting out of Your Lease in Chapter 7 vs. Chapter 13

Two days ago we discussed how a Chapter 7 “straight bankruptcy” gets you out of a car or truck lease. It discharges (permanently writes off) whatever debt you’d have from surrendering that car or truck.

When you get out of a vehicle lease you often owe money to the lessor; sometimes a lot of money. That can be true whether you break the lease early or get to the end. Either way you could owe the lessor thousands of dollars in contractual fees.

Once you’ve decided that you need to file bankruptcy, and that you want to get out of the vehicle lease, as long as you qualify for Chapter 7 and it’s the best option overall, you can almost always discharge all the debts arising from the lease. A Chapter 7 case is likely the easiest and quickest option.

But for many reasons a Chapter 13 “adjustment of debts” case may be the better way to go.

First, you may not qualify for Chapter 7 based on your income and expenses under the “means” test.

Second, more likely you’re filing under Chapter 13 because it’s simply be the better option. It gives you tools to meet important financial goals, tools unavailable under Chapter 7.  You can often protect an asset that would be at risk of being taken by a Chapter 7 trustee. Chapter 13 provides numerous ways to preserve precious collateral on your secured debts, such as your home or vehicle (beyond the leased one). Sometimes you can keep your home/vehicle while paying less than you’d pay under Chapter 7. Chapter 13 can also protect you while you catch up on child or spousal support arrearage, or on income taxes. You pay or catch up on these special debts while making payments based on your realistic budget.  These are just some of the good reasons to file a Chapter 13 case, unrelated to your vehicle lease.

The Chapter 13 Option

Whether you’re filing a Chapter 13 case because you don’t qualify under Chapter 7 or because Chapter 13 is better all around, you can surrender your leased vehicle and discharge the debt. Discharging—legally writing off—that debt is not as straightforward as under Chapter 7. But it almost always leaves you with the same result. You would owe nothing at all on the vehicle lease once your bankruptcy case is finished.

“Rejecting” Your Vehicle Lease

Under Chapter 13 you can either “assume” (continue with) the lease or “reject” it and return the vehicle. Two blog posts we explained how to “assume” your lease and keep your leased vehicle.

But to instead get out of your lease through your bankruptcy lawyer you simply state in your Chapter 13 that you are “rejecting” the lease. Arrangements are made to return the vehicle to the lessor.  You don’t make any more monthly lease payments, and if you’re behind you don’t have to catch up.

Whatever you owe on the contract—which may be a substantial amount—is then treated as a “general unsecured” debt.

Treatment of “General Unsecured” Debts

Debts are either “secured,” “priority,” or “general unsecured.” Your remaining lease debt fits in the third category. It is “unsecured” in that it’s no long secured by anything since you’ve surrendered the vehicle. It’s “general” in that it’s not a “priority” debt, which are favored ones (like child support and certain income taxes).

Your lessor would likely file a “proof of claim” with the bankruptcy court. That’s a statement asserting how much you contractually owe on the lease. Assuming it’s accurate and you don’t object to it, its amount is lumped in with all your other “general unsecured” debts.

In your Chapter 13 plan, usually you pay all or most of your secured and “priority” debts. But that’s very seldom true for the “general unsecured” ones. How much, if any, you pay on this category of debts depends on a lot of factors. Mostly it depends on your income and expenses, how much you have in secured and “priority” debts, and what, if anything, is left over for “general unsecured” debts in the period of time you’re in the Chapter 13 case.

Often the Lease Debt Has No Financial Effect

In many situations the existence of the lease surrender debt does not increase what you pay into your Chapter 13 payment plan.

How could that be? It happens in two circumstances, one less common, the other much more so.

1. You may be allowed to pay nothing at all to your “general unsecured” debts, a “0% plan.” This happens when all of your available “disposable income” during your 3-to-5-year Chapter 13 case get paid on secured debts (such as a home mortgage, or vehicle or furniture loans) and/or “priority” debts (such as income taxes and child or spousal support arrearage). If you pay 0% of your “general unsecured” debts, that means that you’re paying 0% of your vehicle lease debt.

2. The more common Chapter 13 plans are those in which you pay the “general unsecured” debts something instead of nothing, Still, the existence of the leased vehicle debt very often does not increase how much you pay into your plan. That’s because most of the time you pay a fixed amount on all of your “general unsecured” debts. That amount is essentially what your budget says you can afford to pay over the life of your case. So, as a result, adding more debt to that pool—the debt from the surrendered leased vehicle—simply reduces the money that would otherwise have gone to other “general unsecured” debts. You pay no more; the money going to the “general unsecured” debts just gets divided differently.

 

Escaping a Vehicle Lease in Chapter 7

February 1st, 2017 at 8:00 am

Vehicle leases are often not such a good deal. If you find out your isn’t, you can almost certainly “reject” that lease and pay no more. 

 

Our last two blog posts have been about how to keep your leased vehicle in a Chapter 7 or 13 bankruptcy case. But what if you don’t want to keep your lease? Vehicle leases are often not as good of a deal as you might have thought at the beginning. Bankruptcy gives you the rare and often valuable opportunity of getting out of your lease.

Today we talk about leaving your vehicle lease behind without owing anything on it through Chapter 7 “straight bankruptcy.” Our next blog post will be about how that works through Chapter 13 “adjustment of debts.”

Popular but Risky Vehicle Leases

We mentioned a couple blog posts ago that vehicle leases are getting more and more popular. In a recent 5-year span they increased from 17% to 27% of vehicle transactions. People clearly like the low money down and lower monthly payments that often come with leases.

But vehicle leases also often come with significant downsides.

Disadvantages

1. Unlike a vehicle loan, at the end of the lease term you OWN nothing. Once you pay off a vehicle loan and you have a free and clear car or truck. With that as a goal it’s more likely you’ll take better care of your vehicle. So you’ll then likely have it for years more while you pay no monthly payments. Instead, at the end of a lease you return the vehicle and have nothing. What seemed less inexpensive short-term usually ends up being much more expensive long-term.

2. You own no vehicle at the end of the lease so there’s no trade-in vehicle for your next vehicle purchase. You’d usually have to come up with a cash down payment, making a purchase more challenging. It’s unlikely that you’ve saved the money from the lower monthly lease payments to put into your next vehicle. As a result you may be stuck with getting into another vehicle lease, continuing the expensive cycle.  

3. If you put on more mileage than the contract allows you could owe substantial penalties at lease end. This can happen with more-than-normal interior or exterior wear and tear. Or you may have to pay extra if the vehicle simply depreciates more than the lessor anticipated.

4. Getting out of the lease before the end of the lease term is usually very expensive. It could easily cost several thousands of dollars. The amount you would owe would be based on the “realized value.” That’s the relatively low amount the lessor would get from selling the vehicle at an auto auction. The amount wouldn’t even be known until after you surrendered the vehicle.

Buying Your Leased Vehicle at the End of the Term

You might be able to finance the purchase of your leased vehicle at the end of the lease term. But you simply can’t count on it. You are stuck with the terms the creditor is willing to extend to you. If your credit isn’t the greatest, you could easily be denied. If you owe extra because of the contractual penalties referred to above, you’d be paying too much for that vehicle. Plus you’d be paying interest on that higher amount, further increasing your cost for the vehicle.

The Bottom Line

The reality is that leasing is usually the most expensive and risky way of “owning” a car or truck. You have possession of the car while it’s depreciating the most. Then you have to surrender it, potentially paying extra to just to get out of the lease. Then without a trade-in vehicle this is often repeated with the next lease. So you’re continuously making payments, never owning a vehicle outright. It’s a continuously expensive cycle.

The Chapter 7 Discharge Solution

A Chapter 7 “discharge” can write off almost all vehicle lease obligations. Except in the unlikely event that you got the lease by through a serious misrepresentation or fraud, you will get out of whatever you owe on the lease.

You may need to get out of the lease early because your circumstances have changed. You may no longer be able to afford the monthly lease payments. You may have fallen behind on those payments. You may just not need the vehicle any more or may need your money for more crucial expenses.

Or you may instead be at or near the end of your lease and owe or expect to owe high mileage or excessive wear and tear charges on the lease.

In all these situations you can get out of your vehicle lease and owe nothing to the lessor.

“Rejecting” the Lease

When your bankruptcy lawyer files your Chapter 7 case, you can either “assume” or “reject” the vehicle lease. “Assuming” the lease means keeping the vehicle and being bound by all the terms of the lease. “Rejecting” the lease means surrendering the vehicle and writing off all your financial obligations under the lease.

To “reject” the lease, you simply state your intention to do so when filing your Chapter 7 case, on a document called the “Statement of Intention for Individuals.” Your lessor then has the right to accept back the vehicle. (Section 365(p)(1) of the U.S. Bankruptcy Code.) So you or your lawyer would make arrangements to make the timing convenient for you.

Then you wouldn’t be legally liable for any further installment payments, early termination fees, or end-of-lease penalties. Those obligations would all be discharged, along with all or most of your other debts.

 

The Financial Effect of Surrendering Collateral in Chapter 13

November 25th, 2016 at 8:00 am

If you are concerned that in a Chapter 13 case a debt resulting from surrendered collateral will cost you more, often it won’t.

 

Secured Debts in Chapter 13

In a Chapter 13 “adjustment of debts” case you have the option of keeping or surrendering collateral.

Whether it’s your home, your vehicle, or any other collateral, Chapter 13 gives you powerful tools for keeping that collateral.

But in spite of that, sometimes the best option is still to surrender that collateral. You may have overextended yourself buying a vehicle whose payments and insurance you can no longer afford. Or you’ve learned that it’s a lemon and not worth the constant repair costs. Or you bought a home that you’re so far behind on that it’s not worth the cost and effort to catch up, even if Chapter 13 gives you a lot of time to do so.

Secured Debts Turned into Unsecured Ones

So Chapter 13 gives you the option of just surrendering the vehicle or home or other collateral to the creditor. That has the effect of turning that debt from a secured debt into an unsecured one. The creditor usually accepts possession of the vehicle or home, sells it, and, if the sale proceeds do not satisfy the debt, you may owe the remaining balance.

Outside of bankruptcy, if you are liable on that “deficiency balance,” you’d have to pay it. You’d be sued for payment if you didn’t pay. In a Chapter 7 “straight bankruptcy,” that remaining unsecured debt would usually simply be discharged—legally written off. But what happens to that remaining debt under Chapter 13?

Dealing with the Remaining Unsecured Debt under Chapter 13

A Chapter 13 case usually involves a 3-to-5-year payment plan. At the end of the payment period, there’s a discharge of all or virtually all of your remaining debts.

In many Chapter 13 plans, much of the money paid out to creditors goes to special debts. Those special debts are either secured and priority debts. Secured debts are payments to creditors with liens on collateral you want to keep, as mentioned above. Priority debts are ones—usually unpaid income taxes and/or child or spousal support—that would not be discharged in bankruptcy and so need to be paid. In many Chapter 13 cases, most of the debtors’ disposable income goes to pay these secured and priority debts.

This often leaves relatively little money for the rest of the debts—the unsecured, non-priority ones. Sometimes, it leaves no money at all for these other debts—0% of the amounts owed.

But there are also some Chapter 13 cases—usually ones with relatively little secured and priority debts—in which the plan provides for paying a large percentage of the other debts. There are even cases which require paying 100% of the unsecured debts.

But these are rare. Much more common are plans paying a low percentage of the unsecured debts. Chapter 13 requires payment of all disposable income to creditors during the course of the 3-to-5-year case. Often that simply doesn’t leave much left for the unsecured debts.

Surrendering Collateral Seldom a Financial Disadvantage

Without understanding how Chapter 13 really works, it may seem like a disadvantageous way to surrender collateral. Why pay even just part of the remaining unsecured debt after surrendering collateral when you can just discharge that debt in a Chapter 7 case without paying anything?

There are in fact good reasons not to mind surrendering collateral in a Chapter 13 case:

  • You wouldn’t be in a Chapter 13 case unless it gave you a big advantage for other reasons. For example, you may be willing to surrender a vehicle you really didn’t need if Chapter 13 gave you great way to save your home. There are many, many reasons that Chapter 13 is better than Chapter 7. Paying a small part of the unsecured debt on the surrendered collateral may be well worth the other benefits.  
  • But in probably the majority of cases you would NOT be paying ANY more into your Chapter 13 plan because of a surrendered vehicle, home or other collateral. Why not?
    • If you have a 0% plan as mentioned above, you’re not paying anything to any general unsecured debts. So adding the debt from the surrendered vehicle, home, etc. makes no difference. Paying nothing on a somewhat larger pile of debt is still nothing.
    • Even if your plan IS scheduled to pay a certain percent of your general unsecured debts, it STILL doesn’t usually cost you more. That’s because in most cases you only have a certain amount of money available for the pool of all these debts. Adding another debt to that pool only spreads that same available money out among more debts. When you add the debt from the surrendered collateral, the other debts are just paid less.

Conclusion

Before you shy away from surrendering collateral in a Chapter 13, ask you bankruptcy lawyer if it will cost you any more to do so. In most cases it does not.

 

When a Creditor Does Not Enforce its Lien

August 17th, 2016 at 7:00 am

Sometimes, even if what you bought is legally collateral on a debt, you can just write off and not pay the debt yet keep what you bought.  


For the last 3 blog posts we’ve been talking about those relatively rare situations when in bankruptcy you can treat a secured debt as an unsecured one. This is rare because generally liens are NOT discharged—written off—in bankruptcy. A secured creditor’s right to enforce the lien normally survives bankruptcy.

As a result most of the time you have only two choices with a secured debt in bankruptcy. First, you can keep whatever asset of yours upon which the creditor has the lien. But then you have to pay the debt. Or second, you can surrender the asset with the lien to the creditor. Then you can discharge the debt.

But sometimes you can have your cake and eat it too—keep the asset and pay nothing.

This happens in two situations that we haven’t covered before:

  • There is a legally valid lien but the creditor chooses not to enforce it.
  • You, or the creditor, or both, believe that the debt is secured by a lien on the asset, but you learn the creditor actually does not have a legally valid lien.

We’ll cover the first of these today, and the second one in an upcoming post.

A Lien Not Enforced

Why would a creditor not pursue an asset in which it has a lien? It wouldn’t do so out of the goodness of its heart. If a creditor can get back some of the money it lost in a debt discharged in bankruptcy by enforcing its lien in your asset, generally it will.

A secured creditor would not enforce its lien generally when the time and expense in doing so is not worthwhile. Often it’s not worthwhile because the asset in which it has a lien has a low market value. That may be the case even though that asset may have a comparatively high value to you.

Here’s an example of this.

Low Market Value

Certain consumer goods by their nature have a very fast rate of depreciation. If you buy a laptop computer or tablet for $500, within a month it’s worth close to nothing. Why? First, people don’t want to buy a used computer/laptop because it’s almost impossible to verify that it doesn’t have a hidden virus or malware. Second, technology advances so fast that these kinds of electronics become obsolete very quickly. Third, as a result there is not much of a market for used electronics.  A creditor would not be able to get hardly anything for it once it goes through the time and expense of taking possession of it.  

So a creditor with a valid lien on your laptop/tablet may very well do nothing if you file a Chapter 7 “straight bankruptcy” case. In that case you would have to acknowledge that the debt was secured by the item if indeed it is. But you may simply not hear from the creditor asking for surrender of the laptop/tablet. And you may never hear from the creditor ever again after its debt is discharged a few months later.

The creditor is just being practical. Why should it waste its employees’ time to get ahold of the laptop/tablet and sell it if virtually no money can be gotten out of it?

Creditor Using Its Leverage

However, a pushy creditor could see this all differently. Although this kind of asset has such low fair market value, it may be worth very, very much to you. You’ve put software that you like on the devise. You’ve got it configured the way you want it. It has data in its memory that’s important to you. You could transfer all that to another devise, but you now likely don’t have the money or credit to buy another one. And even if you could buy another one, getting the new devise up to speed would involve hours and weeks of your effort.  A creditor could use that as leverage to make you pay the debt, or at least part of it.

How can you tell the difference between these two kinds of creditors? How do you know whether you’d have to pay for a debt in order to keep an asset like this? And if you’d have to pay something, how could you minimize how much you have to pay?

Creditors tend to have policies one way or the other. Your bankruptcy lawyer deals with these creditors every day and is very likely familiar with the policies of your creditors. He or she will advise you about appropriate tactics to meet your goals.

Also, creditors candidly understandably take advantage of people who file bankruptcy and don’t have a lawyer representing them. They can use their leverage much more effectively against someone who isn’t fully informed about the pertinent legal issues, and doesn’t know when or how to push back.

 

Secured Debt Treated Like Unsecured Debt after Collateral Surrender

August 12th, 2016 at 7:00 am

A secured debt effectively turns into an unsecured debt if you surrender the collateral, which may make sense to do more than you think.

 
“General Unsecured” Debts and Secured Debts

Our last blog posts described the huge difference in the treatment of “general unsecured” and secured debts in bankruptcy. “General unsecured” debts are discharged—legally and permanently written off. But with secured debts, the lien that the creditor has in something you own is not usually affected in bankruptcy. The lien continues in effect, giving the creditor continued rights to your asset after the bankruptcy case is completed, including usually the right to repossess or foreclose. So if you want to keep that asset, usually you have to pay the debt.

However, last time we listed 3 situations in which bankruptcy effectively turns a secured debt into an unsecured one. We focus on the first of those situations today.

Surrendering the Asset

Simply giving the asset in which a creditor has a lien to that creditor essentially turns the debt into an unsecured one. As far as you’re concerned the debt’s no longer secured. The creditor no longer has a lien in anything you own, and so has no leverage over you.

You can now discharge the debt and pay nothing on it.

When to Surrender the Asset to the Creditor

There are more circumstances than you might think when your best option is to give the asset to the creditor.

1. You can’t afford the payments.

It’s worth taking a very honest look at how much filing bankruptcy is going to help your monthly cash flow. You may absolutely need bankruptcy relief to deal with unbearable debt pressures. And the minute you file your case, you most likely will be able to stop paying a lot of monthly debts. That may free up money so you can then comfortably pay your vehicle loan or home mortgage payment.

But be careful. Especially if you’ve not been paying many of your debts for a while, filing bankruptcy may not free up as much disposable income as you think. Pay close attention when your bankruptcy lawyer helps you put together a formal budget. (See Schedule I & Schedule J.) Be very honest with yourself about whether you will really be able to afford to make the secured debt payments. If it’s iffy, seriously consider whether surrendering the vehicle or home and owing nothing might be your better choice.

2. You are behind on the payments and filing a Chapter 13 case is not worthwhile.

If you’ve fallen behind on your vehicle loan or home mortgage, you usually have very little time to catch up in a Chapter 7 “straight bankruptcy” case. Chapter 13 “adjustment of debts” gives you much more time, often as much as 5 years. But consider carefully whether keeping the vehicle or home is worth the downsides of a Chapter 13 case.

For various reasons Chapter 13 cases have a much lower successful completion rate than Chapter 7 ones. You can struggle to fulfill the obligations of your Chapter 13 payment plan for several years, only to end up not succeeding. At that point you may have to surrender your home or vehicle after all. And/or you may need to convert your case into a Chapter 7 one, after a lot of wasted effort. In the meantime you’ve made little or no progress on improving your credit score. More importantly, you’ve delayed the emotional fresh financial start that you really need.

So use the strong medicine of Chapter 13 to cure your financial ills. But avoid it when it’s likely to instead bring you these kinds of adverse side effects.

3. Even if you are not behind or can catch up fast, it’s just not economically worth keeping the asset.

There’s more to life than economic calculations. Sometimes there are valid intangible reasons making it worth fighting hard to keep a vehicle or a home even if it has no equity. Your vehicle may well be worth much more to you than some generic “blue book” dollar amount. The stability of a home, either for yourself, your marriage, or your kids, can have huge genuine value.

On the other hand be very careful about putting too much weight on these kinds of intangibles. A sensible rule of thumb to think about is whether you can honestly and dispassionately consider the option of surrender. If you refuse to even consider other alternatives, that’s a warning sign that you maybe you’re not being realistic. If it’s very clearly a financially bad idea to sink more money and time into something, you need to at least seriously consider other options.  

4. It’s risky down the line to keep the asset, so take advantage of your right to discharge the debt now.

Especially with vehicles, you often have a virtual once-in –a-lifetime opportunity to get out of a bad loan when you file a Chapter 7 bankruptcy case. Almost always you have to “reaffirm” the debt if you want to keep the vehicle. That means that you legally exclude the vehicle loan from the discharge of your other debts. You have to choose one or the other: surrender the vehicle and discharge the debt, or keep it and not discharge the debt.

If you keep the vehicle and reaffirm the loan, and then months or even years later you can’t make the payments and the vehicle is repossessed, you could easily end up owing a lot of money. You’d have no vehicle and you’d owe the money. Months or years after your Chapter 7 case you’d be in financial trouble again. So carefully consider whether you will be able to keep up payments on a secured debt in the long run. Think about whether it’s wiser to surrender the vehicle/home (or other collateral) and get a fuller fresh start now.  


Secured Debts Treated Like Unsecured Debts in Chapter 7

August 10th, 2016 at 7:00 am

A secured debt can be handled like an unsecured debt if you surrender the collateral, “avoid” a judgment lien, or just keep the collateral.

 

The “Discharge” of “General Unsecured” Debts

In our last few blog posts we have shown how “general unsecured” debts are handled under Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.” Most of the time those debts are simply discharged—legally written off—under Chapter 7. They are also discharged at the successful completion of a Chapter 13 case, usually but not always after partial payment.

Secured Debts

Debts that are secured by a lien on something you own are usually treated quite differently. The debt itself may well be discharged in the bankruptcy case just like an unsecured debt. But you also have a lien to contend with.

A lien is a creditor’s “interest in [your] property to secure payment of a debt.” (See Section 101(37) of the Bankruptcy Code.)  A lien is not discharged in bankruptcy. It’s a property right that you have to deal with separately from the debt itself.

This actually makes common sense. If you finance the purchase of a vehicle, the lender is naturally a lienholder on the vehicle’s title. When you file a bankruptcy case, you can discharge the balance owed on the vehicle loan. But the lender will still have a lien on the vehicle, and so can repossess it if you don’t pay. Usually you have to agree to pay the balance in order to keep the vehicle.

As you can see secured debts are very different than unsecured ones.

But there are a few narrow exceptions, when you can act to turn a secured debt into an unsecured one. As we said in the introductory sentence, a secured debt can be handled like an unsecured debt if you

1.  surrender the collateral,

2.  “avoid” a judgment lien, or

3.  sometimes, just keep the collateral.

1. Surrender the Collateral

Whether you have a vehicle loan, a home mortgage, or a store credit card with liens on everything you purchased, you can effectively turn the debt into an unsecured one by giving the collateral to the creditor.

Admittedly that’s not helpful if want to keep the collateral. But there are many situations where surrendering the collateral is well worth the benefit of not paying the debt.

With vehicle loans you would often owe a substantial amount of money even after surrendering the vehicle outside bankruptcy. Surrendering the vehicle in bankruptcy lets you get out of a bad deal without having to pay a small fortune.

We’ll talk about this more and give a couple practical examples in our next blog post.

2. “Avoid” the Judgment Lien

If you own a home just about any unsecured creditor can turn the debt into one secured by the home. Suing you and getting a judgment against you in most states gives the creditor a judgment lien on your home.

Bankruptcy can in many cases empower you to “avoid”—permanently get rid of—a judgment lien on your home. This “avoidance” can be done under either Chapter 7 or 13. It requires the right combination of several numbers—the amounts of the judgment lien, the equity in your home, and your allowed homestead exemption.

We’ll dig into when this works and give examples a couple blog posts from now.

3. Keep the Collateral Without Paying

Sometimes a secured creditor just doesn’t care enough about the collateral to bother making you surrender it. Or sometimes it’s not clear whether the creditor even has a valid lien. It may not want to risk repossessing something that it does not have the legal right to repossess.

In these situations the best option may simply be to file bankruptcy and act as if the debt is unsecured. That is, don’t pay it and see whether the creditor asserts any rights in the collateral.

This option comes with some risks, which we’ll explain and make clear with some examples in an upcoming blog post.

 

Chapter 13 Benefits Directly Related to Real Estate Other than Your Home

June 17th, 2016 at 7:00 am

Chapter 13 can be an effective way to keep or unload business and investment real estate.

 

Our last blog was about selling real estate that is not your home within a Chapter 13 “adjustment of debts” case. We showed how this would give you more control over the timing and other important circumstances of the sale than if you just surrendered the real estate through a Chapter 7 “straight bankruptcy.”

But Chapter 13 may provide other benefits to consider.

Some of those benefits are related to the real estate itself. We’ll cover those today and in our next blog post.

Benefits under Chapter 13 Related to the Real Estate
—Control over Keeping or Selling

When you file a Chapter 7 case you hand over total discretion about that decision to the bankruptcy trustee. He or she chooses whether to take possession and control over the property, whether to sell it, and all the circumstances of that sale. The guiding principle for the trustee’s decision is whether your creditors will benefit, with essentially no consideration for your interests.  

Under Chapter 13 you have at least some say about what to do with the real estate. For example, if you believe that with some “sweat equity”—repairs done through your efforts plus a modest amount of money—you could increase the equity in the property and thereby pay more than you would otherwise to your most important creditors, you’d have to opportunity to make your case about this.

You do have to justify what you propose to do with the real estate, and so your discretion is definitely limited. For example, if want to keep your real estate but it has no equity, requires monthly payments on a mortgage, and produces no financial benefit, you’re going to have a tough time justifying keeping that real estate. Keeping the real estate has to be part of a sensible financial plan.

—Surrendering Undesirable Property

This loss of decision-making includes your likely inability to get rid of real estate that you want to be rid of. It’s not unusual to have real estate that is a significant burden to you. For example, you may very much want to get out from under a rental home where the last tenants manufactured “meth,” with the result that the clean-up costs are prohibitively expensive. Your mortgage holder is not foreclosing, so you file a Chapter 7 case thinking that the bankruptcy trustee gets the property out of your hands. Not necessarily.

The Chapter 7 case may well discharge (legally write off) your mortgage debt, along with all or most of your other debts. But the Chapter 7 trustee would very likely choose to “abandon” the real estate back to you on the grounds that it is “burdensome” or “of inconsequential value and benefit” to your creditors. See Section 554(a) of the Bankruptcy Code.

So you’d still be saddled with the real estate after your Chapter 7 would be over, probably continuing to incur new debts for property taxes, potentially for homeowner association dues and assessments, city fines, and such.

Under Chapter 13 you may be able to be more proactive with such property. You may be in a stronger negotiating posture with the mortgage lender to induce it to accept its losses and foreclose on the property. The bankruptcy court may help with this since that one creditor is potentially harming your ability to pay the other creditors. At the very least you would have the power to convert the Chapter 13 case into a Chapter 7 one once the foreclosure occurred, allowing you to discharge the debts on the property that accrued in the meantime.

 

(Our next blog post in a couple days will have more about how Chapter 13 can help you temporarily or permanently retain and build your equity in business and investment real estate, and your income from it.)

 

Getting Out of Your Vehicle Lease through Chapter 13

May 11th, 2016 at 7:00 am

If you are filing a Chapter 13 case for other reasons, it’s also a good opportunity to get rid of your vehicle lease if you want to do so.

 

Our last blog post was about how a Chapter 7 “straight bankruptcy” allows you to get out of a car or truck lease by discharging (permanently writing off) whatever liability would arise from surrendering that car or truck.

Whether you end a vehicle lease early or at the end of its term, you could still owe the lessor thousands of dollars in a combination of contractual fees. If you decide that you need to file bankruptcy, Chapter 7 is likely the cleanest and quickest option.

But you may instead need to file a Chapter 13 “adjustment of debts” case for reasons nothing to do with the vehicle lease. You may want to save your home, catch up on child or spousal support arrearage, pay income taxes while being protected from the IRS or the state, or do a “cramdown” on a separate vehicle loan, for example. These could all be good reasons, along with many others, to file a Chapter 13 case.

You can surrender your leased vehicle and discharge the debt through Chapter 13 at the same time. Discharging that debt is not as straightforward as under Chapter 7, but would leave you with the same result: you would owe nothing at all on the vehicle once your bankruptcy case is finished.

Debts from Returning Your Leased Vehicle

Without bankruptcy, you could owe a variety of kinds of debts after giving back a leased vehicle.  

If you surrendered it before the end of the lease, you could be liable for early termination penalties and any monthly lease payments you are behind on at the time.

If you surrendered the vehicle at the end of the lease, you could be liable for high mileage, excessive wear and tear, or a difference between the vehicle’s anticipated value at the end of the contract and the actual “realized value.”

Either way the amount you would owe could be thousands of dollars. 

“Rejecting” Your Vehicle Lease in Chapter 13

Under Chapter 13 you have the options of either “assuming” (continuing with) the lease or “rejecting” it and returning the vehicle.  In a blog post last week we explained how to “assume” your lease.

If instead you no longer want to keep and pay for the vehicle you include a statement in your Chapter 13 plan that you are “rejecting” the lease. You return the vehicle to the lessor and no longer need to make the monthly lease payments. If you are behind on those payments, you don’t have to catch up.

 “General Unsecured” Debts in Chapter 13

However, your creditor can file a “proof of claim” with the bankruptcy court to try to get paid a portion of whatever you would owe for surrendering the vehicle—the kinds of contractual fees and charges mentioned above. That claim would be included in the list of your “general unsecured” debts owed to your creditors.

In a Chapter 13 case your “general unsecured” debts are one of several categories of debts. They are “unsecured” in that they are no long secured by any property, since you are surrendering the vehicle. They are “general” in that they are not designated as a “priority” debt, which are favored ones (such as certain income tax debts).

Often you must pay all or most of your secured and “priority” debts, but that’s seldom the case with “general unsecured” ones. How much you must pay on these kinds of debt—including on the debts related to your surrendered leased vehicle—depends on a lot of factors.

The Remaining Lease Debt Often Does Not Increase What You Pay

Without getting into all those factors here, in most Chapter 13 cases the amount you owe from surrendering your leased vehicle does not add ANYTHING to the amount you pay in your Chapter 13 payment plan.

How does that happen? It happens in two circumstances:

1. In many parts of the country you are allowed to pay nothing to ANY of your “general unsecured” debts. That’s referred to as a “0% plan.” This happens because all of your available “disposable income” during your 3-to-5-year Chapter 13 case instead goes to secured creditors (such as a home mortgage, or vehicle or furniture loans) and/or “priority” creditors instead (such as income taxes and child or spousal support arrearage). Since you are paying 0% on all your “general unsecured” debts, that means that you’re paying 0%—nothing—on your remaining vehicle lease debt as well.

2. Even in those more common Chapter 13 plans in which the “general unsecured” debts ARE being something instead of nothing, the existence of the leased vehicle debt usually does not increase how much you pay over the life of your case. That’s because most of the time you end up paying a fixed amount into the pool of your “general unsecured” creditors. That amount is essentially what your budget shows that you can afford to pay over the life of your case, minus whatever is going to the secured and priority creditors. So as a result adding more debt to that pool—the debt from the surrendered leased vehicle—simply reduces the money that would otherwise have gone to other “general unsecured” debts.  

Conclusion

In a Chapter 13 case you don’t quickly discharge the “general unsecured” debt arising from your surrendered vehicle lease as you would in a Chapter 7 case. You would likely have to pay part of that debt, at the same percentage as your other “general unsecured” debts.

But sometimes you pay 0% on those “general unsecured” debts, including on the remaining vehicle lease debt. More often you pay some percentage of this pool of debts. But usually that doesn’t actually cost you any additional month, because it just reduces how much other “general unsecured” debts are paid.

Then at the successful completion of your Chapter 13 case, whatever would be left owing on the vehicle lease debt is forever discharged, and you owe nothing.

 

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