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Archive for the ‘unsecured 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.

 

“General Unsecured Debts” in Chapter 7

December 11th, 2017 at 8:00 am

In a Chapter 7 case all or most “general unsecured debts” get “discharged”—legally written off. That’s one of the big benefits of Chapter 7.  

 

Last time we said 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, by treating them much better than other unsecured debts. You can find a list of all the priority debts at Section  507 of the U.S. Bankruptcy Code.
  • “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.”

We’ll get into “priority” debts later. Today’s post is about how “general unsecured” debts are dealt with in Chapter 7 “straight bankruptcy.

The Discharge of Debts

The main goals of a Chapter 7 case are 1) to stop creditors’ collection actions against you and then 2) to discharge as many of your debts as possible.

First, creditor collections are virtually all stopped by the “automatic stay.” This includes general unsecured debts. We discussed the automatic stay in our blog post of November 22, 2017. We compared how it works in Chapter 7 and 13. Also, see Section 362 of the Bankruptcy Code about it.

Second, in most Chapter 7 cases all “general unsecured debts” get discharged. See Section 727 of the Bankruptcy Code about the discharge of debts.

The discharge happens quite quickly. About 100 days after your bankruptcy lawyer files your case, the bankruptcy court enters a discharge order. Here is a very straightforward version of the Order of Discharge, consisting basically of this single short sentence: “A discharge under 11 U.S.C.  [the Bankruptcy Code] is granted to [Debtor].” Your assigned bankruptcy judge signs this order.

The Effect of Discharge

The effect of this discharge order is explained right on this form order, stating:

Creditors cannot collect discharged debts

This order means that no [creditor] may make any attempt to collect a discharged debt from the debtors personally. For example, creditors cannot sue, garnish wages, assert a deficiency, or otherwise try to collect from the debtors personally on discharged debts. Creditors cannot contact the debtors by mail, phone, or otherwise in any attempt to collect the debt personally. Creditors who violate this order can be required to pay debtors damages and attorney’s fees.

Most General Unsecured Debts Get Discharged

“Priority” debts don’t get discharged. For example, unpaid child or spousal support can never be discharged. Nor can recent income taxes.

But most general unsecured debts do get discharged. There are some exceptions. We’ll cover those next time.

 

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.

 

The Dangerous Judgment Lien

January 4th, 2017 at 8:00 am

A judgment lien effectively converts a debt that was secured by nothing into one secured by your home. 


Has a creditor sued you and gotten a judgment against you? If so, and you own a home, most likely there is now a judgment lien against your home.

The Dangerous Judgment Lien

What’s a lien? It attaches an asset you own to a debt you owe, and secures the debt with it.

judgment lien, in most states, attaches your home to the amount you owe to the judgment-holding creditor. Usually without your consent, your home then secures that debt.

A judgment lien gives the creditor huge leverage to make you to pay the entire debt. Not only pay the debt, but also the creditor’s attorney fees, its other costs for getting the judgment against you, and its constantly accumulating interest.

If you try to sell or refinance your home, the judgment lien forces you to pay the judgment.  That debt has to be paid—usually in full—out of the sale or refinancing proceeds. It comes straight out of money you would have otherwise received. A judgment lien can sometimes also prevent you from being able to do the sale or the refinance altogether.

Under some circumstances and in many states, the creditor can foreclose on the judgment lien even if you don’t sell or refinance the home. You could lose your home if you don’t come up with a way to quickly pay off the judgment amount.

Stealth Judgment Liens

Usually you know it when you’ve been sued by a creditor. You are served with papers that make that clear.

But sometimes you are not personally served and don’t know about the lawsuit. Or you may receive papers but don’t read them closely. Or you realize you’ve been sued but then nothing seems to happen and you don’t find out what did in fact happen with the lawsuit.

If you don’t respond by the deadline stated in the papers you receive, the creditor automatically wins the lawsuit. A judgment is entered against you in the amount the creditor sued you for. A judgment lien is then placed on your home in that amount plus the creditor’s often-substantial costs.

If you are not paying attention, you could easily have no idea that the court entered a judgment against you. Even if you are paying close attention, you are not necessarily informed that a judgment has been entered. And even if you do know about the judgment, you may not find out that your home now has a lien on it in the amount of the judgment.

Judgment Liens after Settlement

You could also have a judgment lien on your home even if you closely cooperated with a creditor. Have you ever settled with a creditor, agreeing to make monthly payments on a debt? The settlement could have included the creditor’s right to enter a judgment against you. That way it doesn’t have to go through the costs and delay of suing you if you don’t make the agreed payments.

Even if a judgment was not entered at the time of the settlement, it’s standard practice that one is entered automatically if you fail to make the agreed payments on time.

These kinds of settlements can be entered into whether or not the creditor filed a lawsuit before the settlement. So, if you’ve entered into a settlement with a creditor, you could easily have a judgment lien on your home. And that could be true even if you are current on your settlement payments.

The Limitations and Benefits of Bankruptcy

Bankruptcy writes off (“discharges”) most kinds of debts, but is generally not very good at getting rid of liens. Liens are creditors’ rights against your property, rights that the bankruptcy law generally respects. For example, if you want to keep your vehicle in bankruptcy, you generally have to pay off its lienholder.

But in many situations you CAN get rid of a creditor’s judgment lien on your home. We’ll show in a couple days in our next blog post.

 

Objecting to a Proof of Claim to Prevent Dismissal

December 30th, 2016 at 8:00 am

If a creditor’s proof of claim is too large, you may need to object to it to avoid dismissal of your Chapter 13 case.


Our last blog post was about two situations when it’s worth objecting to a creditor’s proof of claim in a Chapter 13 “adjustment of debts” case. Today we present two more such situations.

Often the Creditors’ Proof of Claim Amounts Don’t Matter

Often, the amount of money you would pay under Chapter 13 towards your “general unsecured” debts is a fixed amount. It’s based on what you can afford to pay during your case, after paying off any “priority” and secured debts. Because there’s usually a fixed dollar amount that is spread among the “general unsecured” debts, shifts in the amount of such debts often do not affect how much you pay in your Chapter 13 plan.  Since it makes no monetary difference to you, in these situations you usually don’t bother disputing the debt amounts.

Our last blog post referred to two situations when the creditors’ proof of claim amounts DO matter—on “priority” and certain secured debts. These are debts in which you pay the debt in full during your Chapter 13 case. So every dollar by which a proof of claim is higher than expected is an extra dollar you’d have to pay.  

100% Chapter 13 Plan

In a relatively small portion of Chapter 13 cases, the debtor pays all creditors in full—a so-called “100% Plan.” In those cases, you’d pay the full amount of all allowed proofs of claim through your payment plan. So if a creditor files a proof of claim on a debt that isn’t valid, or for an amount that is excessive, your bankruptcy lawyer must file an objection to prevent it from being paid.

There’s an additional concern here. Chapter 13 cases are not allowed to last more than 5 years. If there is more debts than you can afford to pay off in 5 years, your case is subject to being dismissed—thrown out. That could happen if one or more creditors filed unexpectedly high proofs of claim.   

An Example

Here’s an example. Say that you have $30,000 in expected “general unsecured” debts. Your home has $50,000 in equity beyond what the homestead exemption protects. So under Chapter 13 you must pay your $30,000 in “general unsecured debts” in full to protect your home. Let’s assume that you are making Chapter 13 plan payments of $500 per month. 5 years, or 60 months, of $500 payments would total $30,000. (Assume no “priority” or secured debts, and disregard trustee and attorney fees to simplify the math.)

If a creditor files a proof of claim for $10,000 more than you expected, this would be a problem. Now you have debts totaling $40,000 instead of $30,000. At $500 per month, that extra $10,000 would take an additional 20 months to pay off, a total of 6 years and 8 months. But that would not be allowed since Chapter 13 payment plans must be completed in 60 months—five years. Your case could be dismissed unless you could afford to pay more each month—about $667—to get it done within that five years.

So, if you had valid grounds for objecting to an unexpectedly high proof of claim, you should object. If you succeed, you’d save that much money, and avoid your case from being dismissed.

Jurisdictional Limits

Here’s a second situation when unexpectedly high proofs of claim could result in the dismissal of your case, unless you successfully objected.  

Under Section 109(e) of the Bankruptcy Code you can’t be a debtor in a Chapter 13 case if you owe too much money. The maximums are $394,725 in unsecured debts and $1,184,200 in secured debts (as adjusted for inflation effective April 1, 2016). So if an alleged creditor files a questionable proof of claim which pushes you beyond these limits, that could bounce you out of your Chapter 13 case.

If so, you may instead have to file a Chapter 7 case and do without the benefits of Chapter 13. Or you may have to do a Chapter 11 “reorganization,” a much more expensive procedure than Chapter 13. Or finally, you may have to deal with your debts without the benefit of any bankruptcy alternative. 

So instead you’d object to the proof of claim so that you can stay in the Chapter 13 case.

 

Objecting to a Creditor’s Proof of Claim in Chapter 13

December 26th, 2016 at 8:00 am

If you object to a creditor’s proof of claim in your Chapter 13 case, and prevail in that dispute, you pay nothing on that debt.

 

Our last blog post was about what happens to creditors who fail to file a proof of claim on time in a Chapter 13 “adjustment of debts” case. The creditor’s debt receives no payment through your Chapter 13 plan, and the debt is discharged—written off.

There’s another way to achieve this same result. Your bankruptcy lawyer can object to a creditor’s proof of claim if you don’t owe the debt as stated.

If the Creditor Does Not Respond to the Objection

Creditors sometimes file proofs of claim that are clearly not legally valid. Your debt may no longer be collectable because the statute of limitation has expired. An ex-spouse may owe the debt on which you’re not liable. Someone with the same name as you may owe the debt instead of you.

In these and similar situations your lawyer would likely file an objection to the proof of claim. Otherwise the legally invalid debt would be treated as a legitimate one. That illegitimate claim could share in whatever you are paying other similar debts under your Chapter 13 payment plan.

When there’s a clearly invalid proof of claim, the creditor would likely not even respond to your lawyer’s formal objection. Or if the creditor does respond, there’s a good chance it can be convinced to withdraw its proof of claim. Creditors can be penalized for legally pursuing a clearly invalid debt.

So the creditor may not respond to your lawyer’s objection or may respond but be quickly convinced that the debt’s not valid. Either way, the objection prevails and the bankruptcy judge throws out the proof of claim. You pay nothing on that debt through your Chapter 13 plan.

Even if a creditor believes that you owe the debt, it may still not respond to the objection. Depending on the terms of your Chapter 13 plan, the creditor may decide that the cost of fighting the objection is not worth what you would pay it under the plan. Or the creditor may just mess up and not get around to responding by the deadline. For whatever reason, if a creditor fails to respond timely to your objection, its proof of claim is thrown out. Again, you pay nothing on that alleged debt.

If the Creditor Responds to the Objection

However, if you and your lawyer file an objection to a creditor’s proof of claim, and the creditor responds and appears committed to fighting this fight, then you and your lawyer need to decide whether the fight is worth fighting.

It may not be worth fighting if allowing that proof of claim won’t make any practical difference in your case. Or it may not be worth fighting if the likely practical difference is less than the costs of fighting it.

When Liability on a Debt is a Big Deal

This whole discussion makes more sense if we explain the following. With most debts it’s clear whether or not you owe the debt, and its amount. But with some debts either your liability or the amount you owe, or both, can be very unclear. Indeed, people are often pushed into bankruptcy because of a contentious legal dispute about an alleged debt. Examples include:

  • liability disputes in a multi-vehicle accident with insufficient insurance
  • family fights about a deceased relative’s assets
  • litigation among or between a business’ owners and investors about the operation or closure of the business

So, a complicated dispute or litigation that was raging before the bankruptcy was filed could well just continue on in the bankruptcy court. Both sides’ decisions about whether to continue that fight turns on financial practicalities of the Chapter 13 case.

If you’re in this situation, assume the creditor files a proof of claim showing what it thinks it’s owed.  Presumably you disagree either as to owing anything, or the amount claimed, or both. But you need to decide whether it’s worth objecting to it and bringing that fight to the bankruptcy court. If it doesn’t make any or enough financial difference in your Chapter 13 case, it’s probably not worth objecting. Or it may be worth objecting just to see if the creditor responds. But then if it does, letting the creditor win on its claim.

May Not Be Worth Objecting

There are Chapter 13 payment plans—maybe the majority of them in most jurisdictions—in which most creditors’ proofs of claim makes no difference in what the debtor pays. These are cases in which the debtor basically pays what the debtor can afford during a set period of time. That stream of payments pays certain amounts to any secured and “priority” debts, then whatever’s left over goes to the “general unsecured” debts. Assuming that the disputed debt is a “general unsecured” one—as is usually the case—its amount likely won’t matter.

That’s because the total amount of all “general unsecured” proofs of claim often has no effect on the dollar amount the debtor pays. The pool of “general unsecured” debts gets paid the same amount regardless. The larger total amount of debt in that pools simply shifts around who shares in that amount. The percentage of the debts paid is just reduced to account for more debt in that pool.

Consider This Example

Assume that, as is often the case, you are paying much of your Chapter 13 plan payments to secured and/or “priority” debts. You are catching up on and then paying a vehicle loan, catching up on child support arrearage, and/or paying an income tax debt. Let’s say that over the life of your Chapter 13 case you are paying a total of $15,000 to all your “general unsecured” debts. This is based on what you can afford to pay over your case’s 3-to-5-year life. (The required length is based mostly on your pre-filing income.)

Assume further that you have 10 undisputed “general unsecured” debts totaling $75,000. There’s one more disputed debt, one you don’t believe you owe but the alleged creditor asserts you owe $30,000, on top of the $75,000 you don’t dispute. Without that $30,000 debt, you’d be paying 20% of your “general unsecured” debts—$15,000 paid out of $75,000 owed. With that additional $30,000 claim allowed, you’d be paying about 14% of your “general unsecured” debts–$15,000 of $105,000.

But in most situations, the amount you are paying into your Chapter 13 plan to your “general unsecured” debts—the $15,000 here—would not change. Your other “general unsecured” debts would simply receive somewhat less to make up for the amount the disputed debt receives. In most situations like this you wouldn’t invest the time and attorney fees to dispute that proof of claim. It simply wouldn’t affect you financially.

Sometimes Very Worth Objecting

But there are definitely situations where allowing a disputable proof of claim to stand unopposed would cost you.  It could dramatically increase how much you would have to pay into your Chapter 13 plan before completing it. Such a proof of claim could even jeopardize your ability to complete your Chapter 13 case successfully.

In our next blog post will get into situations when you’d want to object strenuously to an objectionable proof of claim.

 

Unsecured Creditors’ Proofs of Claim in Chapter 13

November 18th, 2016 at 8:00 am

Often creditors’ proofs of claim do not affect the amount you have to pay in a Chapter 13 case. But sometimes they make a huge difference.

 

In our last blog post we introduced “proofs of claim.” A creditor files a proof of claim in your bankruptcy case to say how much it thinks you owe. The proof of claim says why you owe the money, often backed up with some documentation.

In that blog post we got into some practical sides to proofs of claim in Chapter 7 “straight bankruptcy” cases. Today we start the same with Chapter 13 “adjustment of debts” cases. Because there’s a lot more to this in Chapter 13, we’ll start today on proofs of claim for just one kind of debts, “general unsecured” ones.

General Unsecured Debts

An unsecured debt is simply one that is not backed up, or secured, by a lien on something you own.

There are two kinds of unsecured debts: “priority unsecured” and “general unsecured.” “Priority” debts are special categories of debts that are treated better—much better—in bankruptcy. For example, generally they get paid in full through the bankruptcy process before general unsecured debts get anything at all.

Examples of priority debts are unpaid child and spousal support, and recent income taxes. General unsecured debts are all the remaining unsecured debts that don’t fit within the different priority debt categories.

Proofs of Claim in Chapter 13 Cases

Filing a Chapter 13 case helps an overextended person reorganize, and often greatly reduce, their debts. You keep your assets while you use your present and future income to repay some portion of your debts (or rarely, all of your debts) over the course of a three-to-five-year plan.

For a creditor to get paid it has to file a valid proof of claim with the bankruptcy court. Then it can receive whatever the court-approved payment plan has earmarked for it. If a creditor doesn’t file a proof of claim, either you or the Chapter 13 trustee can do so on its behalf. That tends to happen when that debt is important to pay.

There is a strict deadline for creditors to file proofs of claim. And that deadline is quite short, within 90 days after the “meeting of creditors, which is usually about a month after the Chapter 13 case is filed. As long as the creditor was mailed notice of the case, a late proof of claim gets rejected—as if it was never filed.

What Difference Do General Unsecured Proofs of Claim Make in Chapter 13 Cases?

You and your bankruptcy lawyer should review all proofs of claim filed in your case, including the general unsecured ones. But be aware that often who files proofs of claim and the amounts on them make no practical difference.  Sometimes they make a big difference. Sometimes that difference is in your favor. Sometimes it’s not.

When the General Unsecured Proofs of Claim Make No Difference

The amount of money you pay to all your creditors in a Chapter 13 case does not change by one penny in the following circumstance:

  • 0% payment plans on your general unsecured debts: Many bankruptcy courts allow you, in the right circumstances, to pay nothing on these debts. That’s usually because all of your available income going into your payment plan is going to secured and/or priority debts. There’s no money available to go towards the debts that are lowest on the totem pole—the general unsecured debts. Since those debts are being paid 0%–nothing—it doesn’t matter how much money those proofs of claim represent.
  • Payment plans that pay whatever money is left over to your general unsecured debts: Most Chapter 13 cases pay a certain amount of money to the secured and priority debts. Then whatever amount is left over throughout the life of the plan goes to the general unsecured debts. The amount of money owed in that pool of debts does not change the amount that gets paid to them. They’re just getting the leftovers. So the total amount of money in the general unsecured proofs of claims makes no difference.
  • Plans that require you to pay a certain set amount to the general unsecured debts: For various reasons, you may need to pay a specific amount to these creditors before you can complete the case. For example, you may be required to do so to be allowed to keep an asset that you would otherwise lose in a Chapter 7 case. Again, the amount of total general unsecured debts doesn’t matter—you must just pay that specified amount regardless.

When the General Unsecured Proofs of Claim Can Make a Lot of Difference

The amount of money you pay to your creditors in a Chapter 13 case can change a lot in the following situation:

  • 100% payment plans on your general unsecured debts: Not often, but sometimes, you are required to pay your general unsecured debts in full.  That may be because you have relatively high income compared to your debt. So, during the period of time you are in the Chapter 13 case you have enough disposable income to pay off all the unsecured debts. In this situation, every dollar more among the general unsecured proofs of claim adds a dollar to the amount you must pay. But in the same way, every dollar less among those proofs of claim is a dollar less that you need to pay before finishing the case.

You and your bankruptcy lawyer need to review all proofs of claim particularly carefully in this situation. Creditors’ proofs of claim are by no means always accurate. Proofs of claim are sometimes even filed in the wrong cases! They can be invalid for being filed late. The claim may be legally stale and uncollectable. Your lawyer needs to object to those proofs of claim, which often gets rid of them without much of a fight.

Occasionally a major creditor or two fails to file an expected proof of claim. Or they do not file one until after the legal deadline. With a 100% plan, that could reduce the amount you have to pay in your Chapter 13 plan. That would let you finish your case sooner—sometimes much, much sooner—than originally expected.

 

When a Creditor Has a Disputed Lien in Chapter 13

August 31st, 2016 at 7:00 am


When a creditor may not have a valid lien, Chapter 13 gives you a good way to defeat that disputed lien and the claim against your property.

Our last blog post dug into what happens when a creditor does not assert its rights in the lien it has against your property. Or it does so only after your Chapter 7 case is completed. We showed the advantages of dealing with this situation under Chapter 13.

But what if there’s a dispute about whether there is a valid lien? Today we’ll show how, again, Chapter 7 leaves you with some practical problems, while Chapter 13 provides a good solution.

The Creation of Liens on Your Property

There’s a big difference between a debt in which the creditor has a lien on your property and one in which it doesn’t.  It’s the difference between the creditor having rights against that property and having none. It’s usually the difference between the creditor being able to take or repossess your property or not. In a Chapter 7 “straight bankruptcy” it’s the difference between having to pay part or all of the debt to keep your property vs. paying nothing.

Whether or not a creditor has a legally enforceable lien is not always clear. The laws about creating a lien differ radically for different kinds of property. For example, creating a lien on an appliance is very different from creating one on a motor vehicle. Plus the laws often differ in the details even for the same kinds of property from state to state.

And speaking of details, the laws about creating liens tend to be quite specific and strict. If the creditor does not precisely follow the procedures for creating a lien, no lien gets created.

The consequence of all this is that whether a creditor has a valid lien isn’t always clear. Yet whether or not the lien is valid makes a big difference.

A Questionable or Disputed Lien under Chapter 7

If you and your bankruptcy attorney believe that a creditor’s claim to a lien is not legally enforceable, you are in an awkward position if you file a Chapter 7 case.

You would treat the debt as an unsecured debt in your bankruptcy documents. Then one of two things would happen. The creditor could assert its lien in your property either during the Chapter 7 case, or do so only afterwards.

The Creditor Asserting a Lien during the Chapter 7 Case

First, the creditor may contact you or your lawyer during the Chapter 7 case asserting its lien on your property. To dispute that lien you’d essentially have to file a lawsuit against the creditor in the bankruptcy court. At least you have a lawyer representing you who can give you advice about the lien’s legal enforceability. And you are already in the midst of a legal proceeding, with a court familiar with such matters readily available

Nevertheless such a lawsuit is not a normal part of a Chapter 7 case. It would significantly increase the cost of your case. If the property with the disputed lien is not worth a lot, it could be cheaper to just settle with the creditor and pay part or even all of the debt. That’s not a good solution if the creditor really doesn’t have a valid lien.

The Creditor Asserting a Lien Only after the Chapter 7 Case

Second, the creditor might not contact you or your lawyer during the Chapter 7 case asserting a lien. Instead it may do so only after the case is over. That’s even worse for three practical reasons.

1) You don’t have an attorney then currently representing you to advise you about the legal validity of the creditor’s claims.

2) As expensive as litigating a disputed lien may be in bankruptcy court, it would be likely significantly more so in regular state court.

3) Perhaps most important, after a Chapter 7 case is completed you no longer have the “automatic stay” protection against repossession. The creditor could potentially just repossess the property in which it claims a lien. Depending on the type of property, that’s often not likely. But still it’s a risk in certain circumstances.

The Chapter 13 “Adjustment of Debts” Solution

Filing a Chapter 13 case fixes these problems.

At the beginning of your case you and your bankruptcy lawyer put together a formal payment plan which clearly states how you intend to treat each of your secured debts—those with liens on anything you own. You also list all your secured creditors in Schedule D and all unsecured creditors in Schedules E and F.

Your plan either explicitly or implicitly asserts that a creditor’s potential lien is not valid. In some jurisdictions the plan language may include an explicit statement along those lines. Or else that creditor would be listed in Schedule F as an unsecured creditor, with no reference to it in the Chapter 13 plan, clearly implying that there is no valid lien.

Either way, all your creditors have the opportunity to object to how you propose to treat them in the plan. If a creditor with a questionable lien does not object on time, to some extent it is bound by that.

Most likely the creditor would be stuck with the debt being treated as unsecured during the course of the case. That means that the creditor could not assert a lien during the 3-to-5-years that the case would likely last. It could not ask the bankruptcy court for permission to repossess the property. The debt would be paid like all other “general unsecured” debts—only to the extent you have leftover money after paying living expenses and other higher priority debts. “General unsecured” debts are often paid only a small percentage of the debt, sometimes nothing at all.

After Completion of the Chapter 13 Case

Once you finish the Chapter 13 case successfully, the creditor may or may not be allowed to assert its lien at that point. Whether or not it would still have that right depends on:

  • exactly how your payment plan and other court documents referred to the debt (that is, what notice you gave the creditor of your assertion that it did not have a valid lien);
  • whether the creditor addressed this issue with the bankruptcy court during the case, and if so how it did so;
  • other facts specific to your case; and
  • the attitude of your local bankruptcy court and of your specific judge about this.

Even if the creditor still does have the right to assert that it has a lien against your property after your Chapter 13 case is over, at that point in most cases the property will have depreciated so much that the creditor would be wasting its time if it pursues its rights.  

Conclusion

Chapter 13 enables you to treat a disputed lien as invalid during the life of the case. Then, depending on the facts of the case and on local laws and practices, the creditor may or may not assert the lien after the case is over. It’s not likely to if the property with the alleged lien is no longer worth the trouble.

 

When a Creditor Does Not Have an Enforceable Lien

August 19th, 2016 at 7:00 am

For a debt to be secured, the creditor has to go through the right legal steps. Otherwise you don’t have to pay the debt.

 

Expressing Your Intentions with Your Secured Debts

When you file a Chapter 7 “straight bankruptcy” case you list all your debts on the bankruptcy court documents. You separately list secured and unsecured ones. A secured debts is one in which the creditor has a lien on an asset you own. For example, a vehicle loan is a secured debt in which the lender is a lienholder on your vehicle’s title.

As to each of your secured debts, you inform the creditor whether you intend to keep the asset or not. If you intend to keep it, you also state what you intend to do with the debt. For example, with a vehicle loan, if you state that you intend to keep the vehicle you would likely also state that you intend to “reaffirm” the debt—that is, pay the debt under its usual terms in order to be able to keep the vehicle.

These disclosures are done through the “Chapter 7 Individual Debtor’s Statement of Intention” form. Your lawyer will help you complete it; after you sign it copies are mailed to your creditors and it’s filed at the bankruptcy court.

What It Takes for a Debt to Be Legally Secured

Creditors must take certain legal steps to create a legally enforceable lien in something you purchase or in something you already owed. Those legal steps are determined by state laws, which tend to be similar from state to state. But they can differ a lot in the details.

Those legal steps vary a lot among different kinds of collateral. Let’s go back to our example of a lender’s lien on a vehicle. The paperwork and procedure to create a lien on a vehicle title is completely different from the paperwork and procedure that your home mortgage lender used to create a lien on your home. And those are completely different from how a furniture store creates a lien on what you buy there.

If a Creditor Doesn’t Go Through the Legal Steps

It’s usually the creditor’s job to do what is necessary to create a lien on what you are buying or on what you are providing as collateral. After all, the creditor is the one who wants the extra leverage against you. You’ll more likely pay a debt it it’s backed up by a lien on something you need or want. And if you don’t pay, the creditor will at least be able to repossess or foreclose on the collateral to get back some of the money it lent.

For countless reasons creditors don’t always go through the legally necessary steps. If not, what happens to that debt in a Chapter 7 case?  

Debts Unexpectedly Not Secured

As mentioned above, there are different procedures for creating liens for different kinds of collateral. Those procedures differ in sometimes crucial details from state to state, and those state laws change over time. Notwithstanding these challenges, you’d think creditors would keep on top of this given how important it would be for them. But they don’t always know the laws as well as you’d think. Or even if their official procedures are appropriate, their employees don’t always follow those procedures perfectly. Creditors can mess up.

As a result when you file a bankruptcy case it’s smart to find out whether debts that you think are secured really are. The difference can be huge. Simply put, it can make the difference between having to pay a debt in full vs. paying nothing at all.

We’ll illustrate this with an example.

The Example

Assume that you bought your stove, refrigerator, clothes washer and drier at a local appliance store 18 months ago.  You and your family had moved into a rental home which didn’t have these appliances. You bought them all on credit for $3,000, financed on a contract through the store. You thought you remember hearing or reading somewhere that the store had a right to repossess what you bought if you didn’t pay off the contract. That would’ve meant that the store had a legally enforceable lien on the appliances to secure the debt you owed.

You didn’t have to make payments on the contract for the first 3 months (“90 days same as cash”). Then a high interest rate kicked in, and you made most of the relatively small payments. But then you didn’t pay the last couple payments, and now still owe $2,600.

You and your spouse have now filed a Chapter 7 bankruptcy case to get a fresh financial start.

Your family really needs these appliances. You have no spare cash with which to replace them, and no credit with which to do so. So you figure you’ll have to keep paying on the high interest contract until it’s paid off. With the low payments and high interest you’d probably end up paying close to $4,000 more on appliances that currently likely have a fair market value of no more than a combined $1,500. But you figure you really don’t have a choice.

The Store Contract Didn’t Actually Create a Secured Debt

However, your bankruptcy lawyer looks through the purchase contract and finds out that the store did not create a lien in the appliances. To create a lien, the contract needed to clearly state that it was doing so. But it did not. As a result, the debt is not legally secured by those appliances or by anything else you own. It’s an unsecured debt, one that can almost certainly be discharged—legally written off—without paying for the appliances.

So, instead of having to pay anything more on the appliances, much less the $4,000 or so that you thought you would, you pay nothing. And the appliances are yours to keep free and clear.

 

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.  


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