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Archive for the ‘vehicle cramdown’ tag

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.

 

Surrendering a Vehicle in a Chapter 13 Case

August 22nd, 2016 at 7:00 am

Chapter 13 gives you powerful ways to hold onto a vehicle, but it also lets you give up that vehicle without paying its debt.  


Our last several blog posts have been about situations in which secured debts can be turned into unsecured debts. They’ve all been about how this can happen in a Chapter 7 “straight bankruptcy.” But how about in a Chapter 13 “adjustment of debts” case?

Today we’ll start a series of blog post about secured debts turning into unsecured ones under Chapter 13.  We start with surrendering a vehicle, how that’s done, and why that might be better, or at least usually no worse, in a Chapter 13 case.

Avoiding a “Deficiency Balance” through Bankruptcy Discharge

You have a major advantage in surrendering your vehicle to the vehicle lender when filing bankruptcy. That advantage is that you get to legally and permanently write off—“discharge”—whatever balance you owe—the “deficiency balance.” Without a bankruptcy discharge you would have to pay that “deficiency balance” after giving up your vehicle.

The “deficiency balance” is the amount you owe on your vehicle loan after your lender credits to your account the proceeds of the sale of your surrendered vehicle and debits the costs of that sale. This “deficiency balance” is usually much more than you expect. That’s because your lender tends to sell the vehicle at an auto auction for much less than you’d expect. And the expenses of the sale pile up more than you’d expect—auction fees, storage fees, extra late charges, etc.

The end result is that even when you think your vehicle is worth about what you owe, you could still end owing thousands of dollars of a “deficiency balance” after surrendering your vehicle.

Disadvantages under Chapter 13

If you give your vehicle up to your lender in a Chapter 7 case, the “deficiency balance” will be discharged quickly—usually only about 3 months after you file your case. In contrast, in a Chapter 13 case the discharge only happens at the end of the payment plan. That’s almost always between 3 to 5 YEARS after you file the case. The vehicle lender can’t try to collect the debt in the meantime. But during this time while this debt is in limbo at the very least you delay getting a fresh start on your credit record.

Also, the discharge of the “deficiency balance” doesn’t occur AT ALL unless you successfully complete the Chapter 13 payment plan. For countless reasons debtors do not successfully complete a certain percentage of Chapter 13 cases. So there’s this risk to contend with.

Lastly, in a Chapter 13 case most of the time you pay the “general unsecured” debts a certain percentage of the total owed. A “deficiency balance” would be one of your “general unsecured” debts. Why pay something on that debt when you don’t pay anything in a Chapter 7 case?

If You Need Chapter 13 for Other Reasons

In spite of these seeming disadvantages, Chapter 13 would still be better for you in many circumstances.

First, you may have major reasons to file a Chapter 13 case nothing to do with your vehicle loan. It may enable you to save your home. It may give you the best way to deal with a huge amount of income taxes you owe. There are many other potential reasons to file a Chapter 13 case. Dealing with your vehicle debt may be a minor issue in the big picture.

Big Timing Advantages

Second, Chapter 13 gives you a great timing advantage that Chapter 7 simply can’t give you. It lets you try to keep your vehicle and then decide to surrender it later. Down the line you may not be able to afford to pay for the vehicle after all. Months or even a couple years after filing your case your income may go down or expenses may go up. The vehicle may turn into a “lemon,” or need too many expensive repairs. It may get into an accident. You may no longer need the vehicle as much or may be able to get a less expensive one.

Pretty much at any point in your 3-to-5-year Chapter 13 case you can decide to surrender your vehicle. At that point any “deficiency balance” becomes part of your “general unsecured” debts. It gets discharged at the end of your case.

The longer you wait more the more likely the “deficiency balance” will be less, because you will have paid off more of the vehicle debt. Still it’s a significant advantage to be able to hedge your bets somewhat by being able to surrender later.

Usually You Don’t Pay Anything More under Chapter 13 Because of the “Deficiency Balance”

We raised the question above, why pay anything on the “deficiency balance” under Chapter 13 when you can pay nothing under Chapter 7? One answer is that in practical terms you usually don’t pay anything more in your Chapter 13 case if you owe a “deficiency balance.”

How can that be when usually a Chapter 13 case pays at least some percentage of the “general unsecured” debts?

First, in SOME cases the debtor pays NONE of the “general unsecured” debts, 0% of the amount due.

Second, in MOST cases the debtor ends up paying a fixed amount into the pool of “general unsecured” debts. That fixed amount is a based on how much the debtor can afford to pay all of his or her debts during the period of time the case lasts. Some of the money usually goes first to other legally more important debts. The amount left over is divided pro rata among all the “general unsecured” debts, including the “deficiency balance.” The existence of the “deficiency balance” does not change the amount the debtor pays towards the “general unsecured” debts. It only changes who gets paid how much within that pool.

Conclusion

For all these reasons, it makes sense to surrender a vehicle to its lender in a Chapter 13 case.


Keeping Your Leased Vehicle through Chapter 13

May 6th, 2016 at 7:00 am

Want to keep your leased vehicle but aren’t current on the payments? File a Chapter 13 case if you can’t get current right away.

 

Lease “Assumption” under Chapter 7

Our last blog post was about keeping a leased vehicle by “assuming” the lease in a Chapter 7 “straight bankruptcy” case. “Assuming” a lease means formally committing to keep making the lease payments. You also commit to be legally bound by all the other terms of the lease contract. You want the lease to continue as if you had not filed bankruptcy.

Problems with “Assumption”

However, “assuming” a vehicle lease in a Chapter 7 case doesn’t work if you’re behind on lease payments and don’t have the means to catch up right away. The lease creditor (the “lessor”) may well be unwilling to let you “assume” the lease. Or it will condition your ability to do so on your immediate payment of all the arrearage. You’d be setting yourself up to being unable to “assume” the lease and losing the vehicle.  

The Chapter 13 “Adjustment of Debts” Solution

The Chapter 13 option gives you much more time to catch up on any missed payments. So it can enable you to keep your vehicle when Chapter 7 would not do so.

Chapter 13 is a completely different kind of procedure, with a whole set of advantages and disadvantages. For one, it takes a whole lot longer—usually 3 to 5 years instead of Chapter 7’s 3 to 4 months. Nevertheless saving your leased vehicle may be reason enough to choose to do Chapter 13, once you understand all of its pluses and minus.

Lease “Assumption” under Chapter 13

If you were to keep your leased vehicle through Chapter 13, here’s how it would work.

You would “assume” the lease by formally proposing to do so within your Chapter 13 payment plan. See Section 1322(b)(7) of the Bankruptcy Code. Your attorney puts that plan together with you. You review, approve and sign it, and it’s filed electronically with your other documents at the bankruptcy court.

If you are current on the lease payments, your Chapter 13 payment plan will say so. If you are not current, your plan will state how much you are behind. It will propose the terms by which you would catch up, as you also keep making the regular monthly lease payments.

Paying these should be much easier than before filing the Chapter 13 case because usually you would be paying much less each month to your creditors overall. It’s often much less than what you would otherwise be obligated. The amount you pay to all creditors each month is based on what you can afford to pay.

After you propose your Chapter 13 plan, the lessor, the Chapter 13 trustee, and your other creditors will have the opportunity to review your proposed plan’s terms. They can raise objections. If the plan is put together well, there may well be no objections. Or if there is an objection, it can usually be resolved—for example, by adjusting the terms for curing the late payments. Assuming that things go as they should and any objections are taken care of, the bankruptcy judge reviews the payment plan and issues an order stating that the plan is “confirmed,” or officially approved.

The Lease Terms Remain in Effect

With a vehicle loan, under some circumstances you may be able to lower your monthly payment through “cramdown.” There is NO such possibility with a vehicle lease. Other than being given more time to catch up on any back lease payments, you must either “assume” or “reject” a vehicle lease and all of its terms, even in Chapter 13.

This means that once your proposed lease assumption is approved in your Chapter 13 plan, the lease continues in force. So, just like normal, at the end of the lease you could owe money for high mileage, for example.

And if you couldn’t keep up the monthly lease, you could lose the vehicle and owe additional penalties for early termination of the lease. You and your vehicle ARE given additional protections from repossession during the Chapter 13 procedure. You are also given the opportunity to adjust your Chapter 13 plan if your financial circumstances change. But “assumption” of your lease means that you are accepting it, with terms that must be complied with if you want to keep the vehicle.

 

Getting Out of Your Vehicle Loan through Bankruptcy

May 2nd, 2016 at 7:00 am

Keeping a vehicle and its debt is sometimes not the best option. Chapter 7 and Chapter 13 can both give you a safe way out.

 

The last two blog posts have been about ways of dealing with your vehicle loan that enable you to keep the vehicle. Chapter 7 “straight bankruptcy” usually allows you to enter into a “reaffirmation agreement,” making you continue to be liable on your vehicle loan in return for being able to keep the vehicle. Chapter 13 “adjustment of debts” can give you more time to catch up if you’re behind and, if you qualify for “cramdown,” may reduce your monthly payments and reduce the total amount you would pay for your vehicle.

But it’s very important to recognize that bankruptcy also gives you an extraordinary opportunity to get out of your vehicle contract and its debt. Even if at first you really believe that you should keep your vehicle, it’s often worth reconsidering this.

Your Opportunity to Escape the Debt on the Vehicle Loan or Lease

Sometimes a bad vehicle purchase or lease is one of the main things dragging you down financially. The Chapter 7 or Chapter 13 options give you a unique opportunity to undo the deal.

You may regret having made the purchase or lease. Maybe you were talked into it by a pushy salesperson. You may have been surprised when you qualified for the credit and figured that if they thought you could afford it, you should grab the opportunity. You may have had second thoughts about being able to afford the car or truck from the beginning. Bankruptcy is your chance to get out from under the pressure of the payments.

Or maybe instead the purchase really did make sense at the time but doesn’t so much anymore. The vehicle may have turned out to be untrustworthy and not a good value. Your financial situation may have changed so you can no longer afford its monthly payments and other costs. Because of the vehicle’s fast depreciation, you may also owe way more than it’s worth. You wish you could just get out of the obligation.

The “Deficiency Balance”

You may not realize how difficult it is to just get out of a car or truck purchase or lease. You probably know that you can’t just take the vehicle back, give them the key, and call it good. You know it’ll cost you something. What you may not know is how much it’ll cost you.

Usually when you surrender your vehicle to the creditor you are left owing money—the “deficiency balance”—the difference between what you owe on the contract and what your creditor would get for your vehicle as a credit on your account. Returned and repossessed vehicles are usually sold at auto auctions, where the purchasers are mostly used car dealers. They need to make a profit when re-selling the vehicle so they aren’t willing or able to pay much for it. Plus the potential buyers don’t have much opportunity or desire to check out the condition of the vehicle. Since it’s surrendered or repossessed, you can understand that they assume it hasn’t been particularly well cared for. So the amount your vehicle is sold for and the amount credited to your account is often pathetically small.

On the other side of the ledger, the amount you owe is often much more than you expected. Your contract almost always allows the lender or lessor to tack onto your account ALL kinds of s additional costs. All of its costs of surrender or repossession, and of the re-sale process are piled on, item after item, each one adding to the amount you owe.

In the end the amount you still owe after giving back your vehicle–the “deficiency balance”—is often shockingly high.

You Will Be Sued

Most of the time your lender/lessor will waste little time going to court to make you pay off that deficiency balance. It no longer has any collateral backing up the debt. It knows that paying this debt is not likely your highest priority. Sometimes the law gives it a relatively short time to sue or lose out on the chance to make you liable on the remaining debt. You will be forced to deal with the debt one way or the other.

Chapter 7

Almost always, Chapter 7 “straight bankruptcy” gives you the ability to “discharge”—permanently get rid of that debt—without paying anything.

The vast majority of the time you don’t lose any of your assets to your creditors when you file a Chapter 7 case. That’s because everything you own is “exempt”—protected from the bankruptcy trustee and your creditors. So you keep what you own and nothing goes to your creditors, including to your vehicle loan lender or lessor.

The deficiency balance is discharged virtually always. The very rare exceptions are if you somehow purposely cheated this creditor by intentionally lying on the credit application, or through some other kind of direct misrepresentation. Even then the creditor would have to formally accuse you of this within about 3 months after your Chapter 7 case was filed or else the debt would be forever discharged anyway.

Bottom line: a Chapter 7 case would almost always get rid of whatever you owe on your surrendered car or truck. Filing the case would stop any collection efforts or lawsuit, and within 3 or 4 months the debt would be gone.  

Chapter 13

The Chapter 13 “adjustment of debts” isn’t as quick but in the end should have the same result of giving you the opportunity to give your vehicle back and discharge the remaining debt.

Because Chapter 13 takes much longer—usually 3 to 5 years—you would be filing one for benefits not related to your vehicle. But it’s good to know what does happen to your deficiency balance under this option.

Filing a Chapter 13 case would stop any collection efforts and lawsuit the same as a Chapter 7 filing. Then the debt would be lumped in with the rest of your “general unsecured” debts—those at the “bottom of the barrel” that are generally paid only as much as you can afford to pay after paying your other more important debts.

What’s important to realize is that in most cases the deficiency balance does NOT add to what you would pay under your Chapter 13 payment plan. You may think Chapter 13 doesn’t make sense as far as what you continue owing on your vehicle because you’re paying something on that debt instead of paying nothing in a Chapter 7 case.

True, your remaining vehicle debt itself is better handled most of the time under Chapter 7. But if you have other reasons to be doing a Chapter 13 case, don’t sweat about the deficiency balance getting paid something instead of nothing. That’s because usually you end up having to pay a certain amount to ALL of your “general unsecured” creditors, and having the deficiency balance debt usually does not increase that amount. What your former vehicle lender/lessor receives just subtracts from what the other “general unsecured” creditors receive, leaving you paying the same—whatever you can afford to pay over the life of your Chapter 13 payment plan.

Then at the end of your successful Chapter 13 case, regardless how much your deficiency balance was paid or not, the remaining amount is forever discharged.

 

Lowering Your Vehicle Loan Payments through Chapter 13 Bankruptcy

April 29th, 2016 at 7:00 am

“Cramdown” of your vehicle loan can solve the problems of a reaffirmation agreement by lowering payments and protecting you much better. 

 

Our last blog post a couple days ago was about keeping your vehicle by “reaffirming” the vehicle loan under a Chapter 7 “straight bankruptcy.” We ended by stating that reaffirming a vehicle loan can lead to problems. This is especially true if you owe more on the vehicle than it’s worth. We said that a Chapter 13 case “would likely give you more flexibility…  . You may even be able to do a “cramdown,” reducing your monthly payment and potentially saving you thousands of dollars on the balance.”

That’s the topic of today’s blog post.

The Problems with Chapter 7 “Reaffirmation”

If you are current on your vehicle loan, and could comfortably afford to make the payments after you got rid of all or most of your other debts, reaffirming your vehicle loan in a Chapter 7 case may be the best way to go for you. But here are some very common problems that arise.

1. A potential large debt if your vehicle is repossessed in the future:  In a Chapter 7 case, if you own on your vehicle you almost always have to sign a “reaffirmation agreement” to keep that vehicle. That agreement makes you continuably liable for the full balance on your vehicle loan. That’s true even if that balance is more than the vehicle is worth. That puts you at risk for owing a substantial amount of money months or even years after your bankruptcy case is finished if you are ever not able to make the payments.

2. High monthly payment:  A “reaffirmation agreement” in a Chapter 7 case almost always requires you to maintain your full contractual monthly payment on the vehicle loan regardless whether or not you can afford it. You have to choose between right away surrendering the vehicle and writing off any debt, or else reaffirming the debt and having the challenge of making payments you can’t afford.

3. The challenge of catching up quickly on late payments:  If you are behind on your vehicle payments, with a Chapter 7 reaffirmation you have very little time to catch up—usually within just a month or two after your bankruptcy case is filed. If you want to keep your vehicle under Chapter 7, you must bring it current very quickly so that your lender will let you keep it and reaffirm the loan.

4. No protection from repossession:  After a Chapter 7 case is completed—usually only about 3-4 months after it is filed—the “automatic stay” protection against your creditors expires. So if you have a financial setback later and are late on your monthly payment or you let your vehicle insurance lapse—even for a matter of days—your vehicle could get repossessed. That would leave you with no vehicle but likely still owing on the vehicle loan.

“Reaffirmation” Problems Solved by Chapter 13 “Cramdown”

If you owe more on your vehicle than it is worth, AND IF you got your vehicle loan more than 910 days (about 2 and a half years) before your Chapter 13 case is filed, you can do a “cramdown” on that loan. This means that you will:

1. usually pay less for your vehicle than your contract would have required, often thousands of dollars less;

2. usually lower your monthly vehicle loan payments, sometimes significantly;

3. avoid needing to catch up on any late monthly payments; and

4.  be protected from vehicle repossession during the 3-to-5-year Chapter 13 payment plan, if you do what that plan requires.

How “Cramdown” Works

“Cramdown” is the informal name for a procedure for legally rewriting a vehicle loan, lowering how much you pay for your vehicle based on its fair market value.

Your new payment is based on the amount of the secured portion of the loan—the value of the vehicle. That portion of the full balance is often paid at a lower interest rate than the contractual rate, and the payments can often be stretched out over a longer period. Paying less, at a lower interest rate, and often over a longer period, results in a lower monthly payment, often much lower.

The remaining unsecured portion of the vehicle loan balance, the part that exceeds the value of the vehicle, almost never has to be paid in full. Often you pay only little of that portion, and you may even pay none of it. You pay it at whatever percentage your other unsecured debts are being paid, based on what you can afford. Often this unsecured portion of the vehicle debt does not increase what you would otherwise pay to all your creditors.

Again, “cramdown” is only available under Chapter 13.

 

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