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Archive for the ‘vehicle cramdown’ tag

An Example of Money Saved through Vehicle Loan Cramdown

June 3rd, 2019 at 7:00 am

Here’s an example of vehicle loan cramdown that shows how you can reduce your vehicle payments and be free and clear after paying less. 

 

Our last 3 blog posts have been about Chapter 13 cramdown of a vehicle loan. Cramdown can reduce your loan’s monthly payments, its interest rate, and the total you pay for your vehicle. Often you end up saving a lot both monthly and on the total paid. 

The last three blog posts introduced how cramdown works, how to qualify for it, and how you don’t have to catch up on late payments. But like anything, explaining a bunch of rules only goes so far. Showing how the rules actually get applied can be the best way to make sense of a complicated concept like cramdown. A good example is like a picture: it’s worth a thousand words.

So today, how does cramdown work in real life?

The Facts of Our Example

Let’s say you are a payment behind on your vehicle loan. You’re about to miss a second payment, and you’re feeling desperate. You have made making your vehicle payments a priority but you have other debts that are putting intense pressure on you. Your vehicle is absolutely essential in your life so you know you have to do something.  

You know that to keep your vehicle you have to either get rid of or greatly reduce your other debts. Those other debts are medical bills and unsecured credit cards, all together totaling $75,000. You’re considering either Chapter 7 to write off those other debts or Chapter 13 to greatly reduce those debts.

Assume you bought your vehicle 3 years ago, it’s worth $9,000, but you still owe $15,000 on it. The contractual monthly payments are $550. Your budget, allowing for reasonable amounts for your living expenses, shows that you can afford to pay a total of $350 per month on all of your debts, including the vehicle loan.

Chapter 7 Doesn’t Help Enough Here

You understand that a Chapter 7 case would most likely write off (“discharge”) your entire $75,000 of unsecured debts. But even after that you’d really struggle to pay the $550 monthly vehicle payments. Plus you’d almost for sure have to catch up quickly on the $1,100 in late payments (2 times $550).  

How Chapter 13 Cramdown Helps More

Cramdown essentially allows you to re-write your vehicle loan based on the fair market value of your vehicle.

Cramdown helps you more financially the more that you owe on your vehicle than it’s worth. Plus it’s usually available only if your loan is more than 910 days old—about 2 and half years. (See the unnumbered “hanging paragraph” right after Section 1325(a)(9) of the U.S. Bankruptcy Code.) You qualify in our example because you bought your vehicle 3 years ago. (See exceptions to the 910-day qualification rule in our second-to-last blog post.)

Cramdown would rewrite your vehicle loan based on the $9,000 your vehicle is worth. The term of cramdown payments lasts between 36 to 60 months. Your interest rate is often reduced as well, depending on your contract interest rate. Plus, you don’t have to catch up on any missed payment.

This is contrast to Chapter 7, where almost always you have to accept all the contractual terms of the loan if you want to keep your vehicle. That includes catching up very quickly on any missed payments.  

Paying Less through Cramdown

What would be your monthly payment to pay off the $9,000 value of your car?  (That’s the secured portion of the $15,000 total vehicle debt.) Assume a 36-month Chapter 13 payment plan—the usual minimum length. Amortizing $9,000 over 36 months at 5% interest yields a monthly payment of about $270.

We said earlier that you can afford to pay all your debts $350 per month. (That includes the vehicle loan.) So your monthly Chapter 13 plan payment would be $350.  That would cover all your debts.

$350 monthly payments times 36 months equals $12,600 total paid. The vehicle lender would receive $9,000 of that, plus about $700 of interest over the 36 months. The Chapter 13 trustee gets a percentage—let’s say 4% of the total, so $504. Add up those amounts and we’ve accounted for $10,204 of the $12,600 total you’re paying. This leaves $2,396 remaining.

Assume in this example that you paid your bankruptcy lawyer up front. Otherwise part of his or her fee would be paid out of that remaining $2,396. But here all of that $2,396 would go to your pool of general unsecured debts. That includes the $75,000 of medical and credit card debts, plus the $6,000 unsecured portion of the vehicle loan. (That’s the part of the $15,000 total not covered by the vehicle’s value–$15,000 minus $9,000 = $6,000.)  $75,000 + this $6,000 = $81,000 in general unsecured debts.

The $2,396 left over is spread out pro rata to the $81,000 in general unsecured debts. This means that these debts will receive about 3% of the amount due. The unsecured $6,000 portion of the vehicle loan would thus get only about $180 of it paid.

The Final Numbers

Through the Chapter 13 vehicle cramdown in this example, you would pay to your vehicle lender the $9,000 vehicle value, plus about $700 in interest, plus the above $180, a total of about $9,880. You would not have to catch up on the $1,100 in late payments. This is in contrast to paying the $15,000 loan balance, plus likely about $2,000 in interest, or about $17,000. That’s what you would have to do to keep the car outside bankruptcy or under Chapter 7.

Under Chapter 13 your monthly payments on the vehicle would be $270 instead of $550. Your monthly plan payment would be $350—which includes the $270 to your vehicle lender. After 36 months of paying $200 less than you would have paid on your vehicle alone ($350 vs. $550), you would own your vehicle free and clear and would nothing to any of your other creditors.

 

Cramdown Your Vehicle Loan if Behind on Payments

May 27th, 2019 at 7:00 am

Vehicle loan cramdown doesn’t just likely reduce your vehicle payments and the total you pay. You’d also not have to catch up on late payments.  

 

Our last two blog posts have been about lowering monthly vehicle loan payments through Chapter 13 cramdown. This also often reduces the total that you pay on the loan until your vehicle is free and clear. Cramdown often even reduces the interest rate you pay. So it usually saves you money both every month and long term.

If you’re behind on your payments there’s an even more immediate benefit. If you qualify for cramdown, you don’t have to catch up on any late payments. This frees up the money immediately for other urgent needs. This is a huge monetary benefit at a time when your cash is likely extremely tight.

On top of this financial benefit, you get the peace of mind that your vehicle won’t be repossessed. Vehicle lenders can be quick to repossess when you fall behind, especially if your payment history has been spotty. It’s great to prevent a repossession, and then not have to scramble to catch up on the missed payments.

Today we show how this works.

Qualifying for Vehicle Loan Cramdown

See our last blog post for an explanation about how to qualify for Chapter 13 vehicle loan cramdown. Basically, the loan has to be more than 910 days (about 2 and a half years) old at the time you file your Chapter 13 “adjustment of debts” case. And the value of your car or truck needs to be less than the amount you owe on it. The more your vehicle is worth less than you owe the more cramdown can help you.

(There are some exceptions to the 910-day rule. For example, if the vehicle was purchased for business use, or if the loan was not for the purchase of the vehicle, there’s no time limit. Again, see our last blog post for the details. Also, see the “hanging paragraph” following Section 506(a)(9) of the federal Bankruptcy Code.)

The Missed Payments Are Unsecured

So now assuming that your vehicle loan qualifies for cramdown, see our second-to-last blog post about how cramdown works. Basically, your Chapter 13 payment plan divides your loan debt into secured and unsecured portions. The secured portion is in the amount that your vehicle is worth. The unsecured portion of the debt is the rest of its balance.

For example, assume you owe $18,000 on a vehicle that is worth $12,000. The secured portion of the loan balance is $12,000 and the unsecured portion is the remaining $6,000.

Your bankruptcy lawyer essentially recalculates the monthly payments based on the $12,000 secured portion. Besides being based on this lower amount to be paid, the monthly payments are often stretched beyond the number of months left on the contract, and the interest rate is often reduced (depending on how high the contract interest rate is). All this usually results in a lower monthly payment, often significantly lower.

The reason you don’t have to catch up on your missed loan payment(s) is that that part of the debt is unsecured. Using the example above, assume your monthly payments are $400, and that you just fell behind on a second month. So you’re behind $800. (And there’s a big risk that the repo man is looking for your vehicle.)

That $800 you’re behind does not affect the value of the vehicle. It’s worth $12,000 whether or not you’re current on the loan or not. That $800 (or whatever amount you’re behind) is part of the unsecured portion of the loan balance. It’s part of the unsecured portion of the debt. It does not affect how much you’re going to be paying each month under the cramdown.

What Does Happen to the Unsecured Missed Payment(s)?

As part of the unsecured portion of the loan balance, it’s put into the pool of your “general unsecured” debts. You pay these in your Chapter 13 plan only to the extent you can during the life of the plan. Other kinds of debts—secured ones and special “priority” ones (like child support and recent income taxes)—get paid before general unsecured debts get paid anything. As a result you often don’t pay the unsecured portion of your vehicle loan much, and sometimes nothing.

When DO You Have to Pay on the Vehicle Loan?

To the extent the general unsecured debts—including the missed payments—get paid, this happens later in your case. Depending on the amount of your secured and priority debts, the unsecured debts often don’t get paid until the final year or even final months of your case.

However, you start paying the secured portion, with the new crammed-down amount—the first month of your plan payments. It’s usually part of the amount that you pay to the Chapter 13 trustee. It’s part of the single plan payment that covers all your debts, based on what you can afford to pay. It’s usually due a month after your bankruptcy lawyer files your proposed plan, and must be paid on time.

Summary

Vehicle loan cramdown doesn’t just save you money, immediately and long-term.  If you’re behind on the monthly payments, cramdown enables you to avoid catching up on those payments. For example, if your vehicle insurance lapsed you could use that money instead to pay to reinstate the insurance. Or, not having to catch up could give you the financial break you need to start paying your Chapter 13 plan payments after filing your case. There are many such circumstances where not having to catch up on missed payments would enable you to keep your vehicle.

 

Keep Your Vehicle through Cramdown

May 13th, 2019 at 7:00 am

If you can’t afford to pay your vehicle payments even after writing off your other debts under Chapter 7, consider a Chapter 13 loan cramdown. 

 

The last two blog posts have been about keeping your vehicle in a Chapter 7 case. Two weeks ago was about the benefits of reaffirming the vehicle’s loan. Last week was about possible ways of keeping the vehicle by making the loan payments but not reaffirming. These all assumed that you would keep on making the full monthly payments in order to keep the vehicle.

But what if you can’t afford the full monthly payments? Are there any other options if, even after getting rid of your other debt, you can’t pay the vehicle payments?

The answer: you may be able to reduce the vehicle payments through Chapter 13 cramdown. In fact, you may be able to significantly reduce the payments. And cramdown may give you some other huge financial benefits.

Reducing Monthly Payments through Cramdown

Chapter 13 “adjustment of debts” is very different from Chapter 7 “straight bankruptcy.” It takes much longer but Chapter 13 comes with some significant advantages. This includes the possible cramdown of your vehicle loan.

Under Chapter 13 you and your bankruptcy lawyer come up with a court-approved payment plan. That plan just about always significantly reduces what you pay monthly towards your debts. And if you successfully complete the plan you usually pay significantly less overall towards your debts.

Similarly, under cramdown you can often reduce both your monthly payment and the total you pay on your vehicle loan.

How Does Cramdown Work?

Your Chapter 13 payment plan treats secured debts and unsecured debts very differently. In general, secured debts need to be paid in full if you want to keep whatever the debt is securing. Unsecured debts usually only need to be paid as much as there’s money available to pay them.

So what if a secured debt—such as a vehicle loan—is only partially secured? That happens if the vehicle is worth less than the balance owed on the loan. The secured part of the loan is the amount equal to the value of the vehicle. The unsecured part is the rest of the loan balance—the part that effectively has nothing securing it.

Here’s a simple example. Let’s say you’d been paying for 3 years on a vehicle loan, you now still owe $15,000 but the vehicle is worth only $9,000. The secured portion of that vehicle loan is $9,000 and the unsecured portion is $6,000.

Recalculating the Payment Amount

Cramdown re-writes your vehicle loan so that your monthly payment gets calculated on only the secured part of the loan. In our example, your monthly payment now pays down only the $9,000 secured debt instead of the full $15,000 balance. Since the secured amount is less than the full loan balance, the new monthly payments are usually less.

The monthly payment is also reduced when those payments are stretched out over a longer period. They can extend as long as your Chapter 13 payment plan lasts, which is usually 3 to 5 years.

In addition, cramdown sometimes lowers the vehicle loan’s interest rate. That helps if your contract interest rate is high.

Combining all this, cramdown reduces your monthly payment by reducing the total amount it is paying off (the secured part of the loan), sometimes stretching the payment term out over a longer period, and often reducing the interest rate.

As a result, it’s not unusual for monthly payments to be chopped in half, or even better. It all depends on the details of your vehicle loan and on your finances going forward.  

What Happens to the Unsecured Part?

In our example, what happens under Chapter 13 cramdown to the remaining $6,000 unsecured part of the vehicle loan?

It’s lumped in with and treated just like your other “general unsecured” debts. Most of the time a Chapter 13 payment plan pays these low-priority debts only as much as you can pay them, if anything. That is, you pay “general unsecured” debts only AFTER paying the “priority” and secured debts.

There are exceptions, but this usually means you pay the unsecured part of your vehicle loan only if and to the extent you have money left over after paying other debts during the course of your payment plan. At your case’s completion any remaining amount gets “discharged,” permanently written off, along with your other “general unsecured” debts.

Qualifying for Cramdown, Other Considerations

Next week we’ll get into timing and other considerations in qualifying for a Chapter 13 vehicle loan cramdown.

 

Keep Your Vehicle without Reaffirmation

May 6th, 2019 at 7:00 am

Can you keep your vehicle without reaffirming its loan? Can you make the payments without reaffirming?  What if you can’t afford the payments? 

 

Last week we discussed keeping your vehicle in Chapter 7 by entering into a reaffirmation agreement with your vehicle lender. Through this agreement you exclude your vehicle loan from the discharge of debts. In return you get to keep your vehicle. You also get an early start on rebuilding your credit by making payments on and eventually paying off this loan.

We ended last week with two unanswered questions:

  • Would you be able to keep your vehicle in a Chapter 7 case if you DIDN’T sign a reaffirmation agreement but just kept current on your payments and insurance?
  • Are there any other options if you couldn’t afford the vehicle payments even after discharging your other debts?

We cover the first question today, the second one next time.

Risks to Avoid If You Can

Think long and hard before entering into a reaffirmation agreement. If you sign the agreement you’re passing up on this one-time opportunity to get out from under the debt. Be sure you understand the risk that you might not be able to make the loan payments at some point. Then you’d have to surrender the vehicle. At that point you would likely be left owing the lender a “deficiency balance.” This is the amount remaining on your debt after applying the lender’s proceeds from selling your vehicle after repossession.  The “deficiency balance” you’d owe would likely be much more than you expect because of the costs the lender is allowed to add to the debt, and the relatively small amount it would likely get from auctioning off your vehicle.

A “Ride-Through” Option?

One possible way to avoid this risk of a deficiency balance debt is to make the payments without reaffirming the debt.

The idea is that your lender shouldn’t be able to repossess your vehicle if you’re complying with all your contractual obligations. This mostly includes being perfect on your monthly payments and keeping the vehicle insurance current.

And if you don’t sign a reaffirmation agreement you won’t be liable for any remaining debt on the loan. The vehicle loan debt would be discharged along with your other debts.

So you’re trying to keep the vehicle without the risk of owing a big balance if you ever have to surrender it.

“Ride-Through” Problems

There’s one huge problem with this attractive-sounding option. In most (if not all) of the country, a vehicle lender DOES have the right to repossess a vehicle once the Chapter 7 case is over if there’s no signed reaffirmation agreement. This is true even if the loan payments and the vehicle insurance are current.

So, most lenders insist on a reaffirmation agreement if you want to keep the vehicle. They have good reason to do so. They want you to pay off the entire loan. You’ll more likely do that if you have the risk of owing a deficiency balance hanging over you throughout the remaining life of the loan.  The lender doesn’t want to leave you with the option of surrendering the vehicle whenever you want without financial penalty.

Your Remaining Options

You may nevertheless have some options.

  • Some vehicle lenders may still allow you to just keep current without reaffirming, and keep the vehicle. These would more likely be smaller lenders. This may work especially with a vehicle that’s already worth less than what you owe. In this situation the lender may prefer getting your monthly payments instead of having to take a loss on the loan. This may be better on their books now and the lender has a good chance of getting more money in the long run. So ask your bankruptcy lawyer if your lender may be amenable to this.        
  • In some situations the bankruptcy court may not approve a reaffirmation agreement.                                                                                                                                                                    This can happen if your lawyer will (strategically or otherwise) not sign off on the agreement. This then triggers the court’s review and necessary approval (which is not needed if your lawyer signs off). The court would likely not approve the agreement if your budget shows that you can’t afford the loan payments. If the court doesn’t approve the agreement, you may be able to keep the vehicle by just keeping current on the payments (by scrimping on the rest of your expenses). This option is tricky and should only be done with the advice and close assistance of your lawyer.
  • Some lenders might let you adjust the contract terms in your reaffirmation agreement, such as by lowering the monthly payments. Since then you’ll more likely be able to make the payments, it’s less likely the vehicle will get repossessed. So reaffirming in this situation is less risky. Frankly, most vehicle lenders aren’t this flexible, but talk with your lawyer about whether yours might be.
  • Chapter 13 “cram down” could force your lender to accept lower monthly payments, and even money overall. This is an important option if you must keep your car and can’t afford to do so without lower payments. This is the topic of next week’s blog post.

 

The Surprising Benefits: Saving Your Vehicle through Bankruptcy

September 17th, 2018 at 7:00 am

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


Here’s the Problem

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

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

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

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

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

Chapter 7 Regular Bankruptcy Gives Limited Help

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

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

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

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

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

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

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

Chapter 13 Can Solve These Problems

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

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

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

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

 

A Handy Guide to Chapter 7 vs. 13 for Your Secured Debts

January 22nd, 2018 at 8:00 am

When is it better to reaffirm your secured debt—such as a vehicle loan—in a Chapter 7 case or instead cram it down under Chapter 13?  

 

The last 4 weeks of blog posts have been about options for keeping collateral through Chapter 7 and Chapter 13. Mostly these options have involved reaffirming a secured debt in Chapter 7 or cramming it down in Chapter 13. Here is a handy summary and guide.

Reaffirmation in Chapter 7

You can only reaffirm a debt in a “straight bankruptcy” Chapter 7 case. Here’s what you need to know about reaffirmation:

  • By reaffirming a debt you legally exclude it from the discharge (write-off) of your debts that bankruptcy otherwise provides you. This means that you are volunteering to continue owing that particular debt. In return you can keep the collateral (such as a vehicle), and start rebuilding your credit.
  • For many debts secured by collateral, if you want to keep the collateral you have to reaffirm the debt. But sometimes you can just continue making payments and not going through a formal reaffirmation. It depends on the creditor. Talk with your bankruptcy lawyer.
  • Reaffirmations are risky because you are stuck with the debt if your circumstances change. This can especially be problem if you can’t make the payments, the collateral is repossessed, and you still owe the remaining “deficiency balance.”  
  • With most vehicle loan reaffirmations you have to accept ALL the terms of the loan. In particular you can’t lower the payments or the total amount you owe. But sometimes, more often with smaller creditors, the payment terms can be changed. Find out from your bankruptcy lawyer about your creditor’s policies.
  • If you’re behind on your payments often you have to catch up quickly if you want to keep the collateral. This is especially true with vehicle loans. By quickly we mean bringing the account current within about 2 months of filing the Chapter 7 case.
  • The reason there’s often not much flexibility in the timing is because reaffirmation agreements must be signed and filed at the bankruptcy court before the discharge of debts. The discharge happens about 3 months after you file your case.
  • If you don’t have a bankruptcy lawyer, or if he or she doesn’t sign the reaffirmation agreement, you must attend a reaffirmation hearing. At this hearing the bankruptcy judge asks you questions about the reaffirmation and decides whether to approve it. Avoid this by being on the same page with your lawyer so both of you sign the reaffirmation agreement.
  • You can change your mind about and cancel—or rescind—a reaffirmation agreement after filing it at court. But the rescission must be within a very short time—within 60 days of the reaffirmation’s filing or before the entry of the discharge order, whichever is later.

Cramdown in Chapter 13

You can only cram down a debt in an “adjustment of debts” Chapter 13 case. Here’s what you need to know about cramdown:

  • Cramdown can often reduce your monthly payment and the total amount you pay on a secured debt. With a vehicle loan, under the right circumstances you can significantly reduce both the monthly payment and the total paid.
  • Cramdown only makes sense if the collateral is worth less than you owe on the debt. The more that the collateral is worth less than the debt amount the more cramdown could help. That’s because you pay the full amount of that portion of the debt equal to the value of the collateral. On a loan with a $15,000 balance secured by a truck worth $9,000, you would definitely pay $9,000 of that loan.
  • The remaining unsecured portion you would usually only pay to the extent you could afford to do so. It would be lumped in with the rest of your “general unsecured debts.” In the above example, the remaining $6,000 unsecured portion would be lumped in with your credit cards, medical bills, etc. Often you pay only a small percent of these unsecured debts, and sometimes 0%.
  • Because you usually pay only a certain set amount of your “general unsecured debts,” adding the unsecured portion of your secured debt to those debts usually does not increase the dollar amount you pay on this group of debts. So that usually does not increase the total you have to pay during your 3-to-5-year payment plan. In the example, assume you owe $50,000 in other “general unsecured debts.” Adding the $6,000 unsecured portion would make it $56,000. But if your plan had you paying only $3,000 towards this pool, whether the total in that pool was $50,000 or $56,000 would increase the $3,000 you’d pay.
  • At the end of your Chapter 13 case the unpaid portion of your “general unsecured debts” are discharged. This means the debts are permanently written off. That includes the unsecured portion of the crammed down vehicle or other secured debt.
  • With cramdown, you don’t need to catch up on any unpaid payments.
  • You can’t do a cramdown on most vehicle loans until the loan is more than 910 days old. That’s about two and half years old. Before that you could get more time to catch up on any late payments. But you don’t get the advantage of paying only the secured portion of the vehicle debt.
  • Similarly you can’t do a cramdown on debts secured by other than vehicles until the debt is more than a year old.
  • These two timing thresholds (910 days and 1-year) do not apply if the collateral was not purchased with the debt. So if you already owned the collateral but then offered it to secured a subsequent loan, there are no 910-day and 1-year timing thresholds. You can do a cramdown at any time.
  • Similarly, these two timing thresholds don’t apply if the vehicle or other collateral was not acquired for “personal use.” So purchases for business or other possibly uses can be crammed down without waiting for these time periods to pass.   

Other Considerations

  • A creditor has much more leverage over you when its debt is legally secured against something you own that you want to keep. So make sure that a debt you believe is secured actually is. Creditors occasionally mess up on the procedures to create a secured debt, which can be complicated. Your lawyer can determine whether your creditor took the necessary steps to create an enforceable “perfected security interest” on your asset.
  • Besides your creditor, you also need to consider the interests of the bankruptcy trustee if you have equity in the collateral. Usually that equity is protected by “exemptions.” Your lawyer will determine if anything you own is covered by the available exemptions. If not both Chapter 7 and 13 have ways of protecting a non-exempt asset.

 

Example of Reaffirmation Agreement vs. Cramdown of Vehicle Loan

January 8th, 2018 at 8:00 am

Here’s an example of the reaffirmation of a vehicle loan in a Chapter 7 case vs. “cramdown” of the debt in a Chapter 13 case.

 

We’re in a series of blog posts about choosing between Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.”  Along these lines two blog posts ago we outlined when to reaffirm a secured debt (focusing on a vehicle loan) under Chapter 7 vs. handling it under Chapter 13 instead. Then last time we gave some examples showing which option works better in different situations.  That focused on situations in which someone had fallen behind on the payments, and/or had a rough payment history. But we didn’t cover the special situation of Chapter 13 “cramdown.”

Today we’ll give an example when cramdown on a vehicle loan may be a good reason to file a Chapter 13 case.

The Background Facts

Let’s say Christina is current on her vehicle loan. She got far behind on all her other debts because of a serious illness for which she was underinsured. She’s healthy now but being so sick hit her hard financially. She has way more debt than she could ever pay off, and she’s being sued by two of her creditors.

She absolutely has to keep her vehicle to be able to get to work and take her son to school. So Christina knows she has to file a bankruptcy case to be able to make payments on her vehicle. She has to act soon because the lawsuits will turn into judgments and then into garnishments of her paycheck.

The Chapter 7 Reaffirmation Option

Her bankruptcy lawyer informs her that a Chapter 7 bankruptcy filing would discharge all her non-vehicle debts. This means she would no longer owe anything on them.

Plus Christina could enter into a reaffirmation agreement with her vehicle lender, and continue paying on that debt. She does not mind continuing to be legally liable on this debt because keeping her car is her highest priority. Plus continuing to pay on the vehicle loan consistent with her original contract would help resuscitate her post-bankruptcy credit record.  

The Chapter 13 Vehicle Loan Cramdown

But now let’s add a few more facts. When Christina bought her car 3 years ago she had a much higher paying job than she has now. The car she bought reflected her relatively high pay. Then, through a combination of bad choices and bad luck she lost her job, became a single mom, and had the car accident.

The result of all this is that vehicle loan’s monthly payments are quite high. They are more than she can afford to pay even without her other debts. This is in part because of her costly childcare and other expenses related to her baby.

Christina’s lawyer informs her that in a Chapter 7 reaffirmation she’d have to pay the vehicle loan’s full monthly payments. But Chapter 13 “cramdown” of that vehicle loan could reduce that monthly payment amount. In fact, cramdown could save her money both short-term and long-term.

IF she qualifies, cramdown essentially allows her to re-write her car loan based on the fair market value of her vehicle.

Qualifying for Vehicle Loan Cramdown

First, cramdown doesn’t do any good for Christina unless her vehicle is worth less than she owes on it. Otherwise no reduction in her monthly payment or in the amount she owes is possible. The less her car is worth compared to what she owes the more cramdown helps her.

Second, cramdown on a consumer vehicle loan only applies if the loan is more than 910 days old at filing. (See the unnumbered “hanging paragraph” right after Section 1325(a)(9) of the U.S. Bankruptcy Code.) 910 days is about 2 and half years. Since Christina bought her car 3 years ago, she meets this 910-day requirement.

Cramdown Applied

Adding some final facts, assume that Christina’s car is worth $8,000 but she still owes $15,500 on it. The monthly payments were $600 on a 5-year contract. She can realistically afford to pay $275 per month into her Chapter 13 plan payment. Based on her present income, she would have to pay that for 3 years.

Cramdown for Christina would mean that she could pay only $8,000 for her car, plus interest. That interest would often be at a reduced rate. That covers the secured part of her debts—the $8,000 of the $15,500 that she owes.

She would pay the remaining unsecured portion—the remaining $7,500—if and only to the extent that she could afford to do so. That $7,500 would be put into the pool of all her other unsecured debts. That pool would receive any leftover money she pays into her Chapter 13 plan. That means whatever money—IF ANY—after the $8,000 secured debt portion of the vehicle loan, plus interest, plus Chapter 13 administrative expenses (the trustee fees and any remaining attorney fees).

In this case Christina is paying $275 for 36 months, or $9,900. Of that $8,000 plus about $750 in interest would go to her vehicle lender. Virtually all of the remaining $1,150 ($9,900 minus $8,750) would go to her trustee and attorney fees.

So, Christina would end up paying Chapter 13 monthly plan payments of less than HALF her present monthly car payments. ($275 vs. $600). Although the plan payments would extend longer than her car loan would have (3 years instead of 2), the total she’d pay on ALL of her debts would much less than how much she would have paid on just her car if she had filed a Chapter 7 case and reaffirmed on the vehicle loan.  ($9,900 in her Chapter 13 plan vs about $16,500 to reaffirm her vehicle loan.)

Conclusion

So here it looks like Christina could save both monthly and in the long run under Chapter 13 cramdown.  Most importantly, the lower monthly payments would enable her to keep her car when she otherwise couldn’t.

Note that usually there are other considerations affecting the choice between Chapter 7 and 13. Sometimes there are many considerations that need to be weighed against each other. For example, if Christina had a way to get another vehicle—through a relative, perhaps—going through a Chapter 13 just to keep her car may well not be worthwhile. However, if she was behind on a mortgage or taxes, these could be additional reasons to file under Chapter 13. Choosing your best option truly does require looking at your complete financial life with the help of your experienced bankruptcy lawyer.

 

Timing: Qualifying for Vehicle Loan Cramdown

September 27th, 2017 at 7:00 am

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


Vehicle Loan Cramdown

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

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

Secured and Unsecured Parts of a Vehicle Loan

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

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

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

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

See Section 1325(a)(5) of the Bankruptcy Code, and the odd “hanging paragraph” referring to that subsection, found right below Section 1325(a)(9).

Non-Timing Conditions for Cramdown

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

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

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

The Timing Condition

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

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

Conclusion

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

 

Reducing the Cost of Your Vehicle Loan through Cramdown

July 28th, 2017 at 7:00 am

Chapter 13 vehicle loan cramdown solves a number of serious practical problems that even Chapter 7 “straight bankruptcy” can’t.

 

Chapter 13 REALLY Helps with Vehicle Loans

If you want to keep a vehicle with a debt against it, Chapter 13 can really help.

It’s almost as if the more worse off you are with this kind of debt, the more Chapter 13 can help:

  • If you’re behind on payments, you’ll be given a long time to catch up, and may not even need to
  • If the car or truck is not worth as much as you owe, “cramdown” can lower your monthly payments, the interest rate, and reduce the total amount you pay for it
  • If you fall behind later, you’re protected from repossession

Chapter 13 also generally allows you to favor your vehicle loan above most other debts.

Today we’ll show you how this works with a hypothetical example.

The Facts

Emily got laid off and it took her a couple months to find another job, which she just started. She’s now a few days away from being 2 months late on her vehicle loan. She absolutely needs her vehicle to get to and from her new job. She has no way to get a reliable replacement vehicle.

Her first paycheck doesn’t arrive for 2 weeks, and she has to use it to pay rent, utilities, and groceries. Her car payments are $450 per month, so she’s about to be $900 behind. Emily has absolutely no savings, nothing worth selling to raise money, and no one to borrow from. She knows her car’s on the brink of being repossessed, but sees no way to catch up. She’s really scared.

She owes $13,500 on her car, which is worth only $8,000. It’s a relatively high interest loan, because her credit was not great when she bought the car. She wishes the monthly payments weren’t so large.

Emily also owes $80,000 in a combination of credit cards and medical bills, most of which are past due.

So she goes to see a bankruptcy lawyer to see if she has any sensible options.

Chapter 7’s Shortcomings Here

The lawyer tells Emily that a Chapter 7 case would very likely discharge—permanently write off—her $80,000 in other debts. But it wouldn’t provide much concrete help with the vehicle loan.

She could surrender the car to her lender, and she’d owe nothing. But she’s committed to keeping the car. To do so in a Chapter 7 case she’d have to “reaffirm” the debt—agree to remain liable on it.

The immediate problem with that is that Emily would have to catch up on the late payments. And do so pretty fast—within a month or two after filing her bankruptcy case. Even after not having to pay her other debts, she just doesn’t have the cash flow to scrape together the money that fast.

The other problem is that reaffirming the car loan would be risky for Emily. The payments are too high for her. She owes substantially more than it’s worth. If a year or two down the line she couldn’t make the payments and the car would get repossessed, she would almost for sure still owe a lot to the vehicle lender. She’d owe the balance owed at the time minus whatever the lender would sell the car for at an auto auction. So Emily would have no car but would still owe a substantial debt.

The Chapter 13 Solution

Emily’s lawyer advises her to file a Chapter 13 case instead. Because the car is worth less than its debt, she can do a “cramdown” on the loan. As a result:

  • She doesn’t have to catch up on the missed payments at all.
  • The loan is effectively rewritten based on the value of the car at the time, $8,000.
  • Her monthly payment is reduced from $450 to $295.
  • The interest rate is reduced.
  • The unsecured part of the debt—$13,500 minus the $8,000 car value, or $5,500—is lumped in with the $80,000 of credit card and medical debts, and Emily pays these “general unsecured” debts only to the extent that her budget allows. Whatever remains unpaid at the end of the Chapter 13 case is discharged, written off.

So, Chapter 13 solved all of Emily’s concerns: she avoids repossession, gets to keep her car without having to come up with the missed payments, and reduces both the monthly payments and the total paid for the vehicle before it’s hers free and clear.

 

“Assuming” a Vehicle Lease in Chapter 7

January 27th, 2017 at 8:00 am

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

 

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

More and More Vehicle Leases

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

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

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

Keeping Your Vehicle in Bankruptcy

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

The Trustee’s Role

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

“Assuming” a Vehicle Lease

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

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

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

Your Lessor’s Acceptance

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

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

Warning

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

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

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

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

Conclusion

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

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

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

 

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