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Archive for the ‘vehicle loans’ tag

Chapter 7 vs. 13 When Your Vehicle is Worth Too Much

January 19th, 2018 at 8:00 am

Usually your car or truck is protected in bankruptcy with a vehicle exemption. Or if the vehicle is worth too much Chapter 13 can protect it.  

 

How Chapter 7 and Chapter 13 affect your vehicle and vehicle loan can determine which of these options you choose. That’s why we’ve focused the last several blog posts on the differences between these options. We’ve especially looked at reaffirming a vehicle loan in Chapter 7 vs. cramming it down in Chapter 13. Depending on your circumstances one of these is likely a safer and/or less expensive way to keep your vehicle.

But there is another consideration we don’t want to lose sight of. What if you have too much value in your car or truck? What if you either own it free and clear or else it has lots of equity? What if you’re not worried about your lender but rather with the bankruptcy trustee taking your car or truck?

Exemption for Your Vehicle

Why would a bankruptcy trustee be interested taking your vehicle?

Actually, most of the time the trustee wouldn’t be. You are allowed to keep a certain amounts of value or equity in your possessions when filing bankruptcy. These allowances are called “exemptions.” Each state has different exemption amounts for different possession or asset categories. Often their exemption systems are quite different, not just in the amounts protected but also in how they work otherwise. 

With vehicles, often you are allowed a certain exempt dollar amount per vehicle. But in some states there’s a larger catch-all exemption category that your vehicle(s) can fit into along with other assets. Sometimes that catch-all amount changes depending on whether you are exempting your home. The bottom line is usually there’s no problem because your vehicle(s) is (are) fully exempt.

A bankruptcy trustee is only interested in taking your vehicle if it’s worth more than the allowed exempt amount. Or sometimes a vehicle will not qualify for the exemption so it’s not protected at all—such as if you have more than one vehicle.

Vehicle Value or Equity

To be practical, if you owe on your vehicle most likely you don’t have too much equity in it. The part you owe on the vehicle doesn’t count. It’s subtracted from the value. If you owe $10,000 on a vehicle worth $13,500, and you have a $4,000 exemption, you’re fine. Subtract the $10,000 you owe, which leaves $3,500 of equity, which is more than covered by the allowed $4,000 exemption.

Be careful if you are close to paying off your car or truck. You’re then more likely to have too much equity.

Also make sure the debt against your vehicle is a legally valid one. Your creditor must have a “perfected security interest” on your vehicle. This means that it went through all the necessary legal steps to put a legally enforceable lien on your vehicle. Otherwise the debt does not count against the value of your vehicle. That puts it at greater risk that it’s not fully exempt.

Similarly, you need to be careful if the lien was placed on your vehicle too recently. Problems can also arise if the lien was placed too long after you incurred the loan. Under certain such circumstances the bankruptcy trustee can remove a lien from the vehicle. That could mean that the vehicle has more equity than the exemption can protect.

Chapter 7 vs. 13 If Too Much Value or Equity

Whenever your vehicle(s) has (have) too much value or equity, you can protect that otherwise non-exempt portion through Chapter 13. Sometimes you can protect it in a Chapter 7 case, too, but it’s riskier.

Here’s how these work.

Starting with Chapter 7, let’s assume your vehicle is worth $1,500 too much. Say it’s worth $5,500 and the applicable exemption is $4,000, leaving $1,500 unprotected. In a Chapter 7 case the trustee could take that vehicle, sell it, pay you the $4,000 exempt portion and use the remaining $1,500 to pay your creditors. 

But in many situations a Chapter 7 trustee would consider not taking such a vehicle but instead negotiating with you. If you agreed to pay that same $1,500 that the trustee would get, you could keep the vehicle.  You’re saving the trustee the hassle of selling your vehicle while he or she distributes the same amount of money to your creditors. It’s not unusual for trustees to even accept monthly payments. The agreed amount does need to be paid off relatively quickly, usually within several months.

If the unprotected amount is too large for you to pay quickly, then Chapter 13 gives you much more time. Let’s now assume that the vehicle is worth $5,000 too much. Say it’s worth $9,000, the applicable exemption is $4,000, leaving the difference, $5,000, unprotected. (Remember again that your state’s vehicle exemption amount will likely be different.)

You and your bankruptcy lawyer simply have to structure your Chapter 13 plan to pay an extra $5,000 over its 3-to-5-year span. Paying for that unprotected value or equity in your vehicle is spread out over that multi-year period. Also, sometimes you’re not actually paying more than you would have otherwise. That’s if some or all of that $5,000 is going to pay special debts like income taxes that you had to pay anyway.

So, with Chapter 13 you can spread your protection payments over a much longer period of time. And sometimes the extra protection money you pay goes to pay debts you’d have to pay anyway.

 

Cramdown on Vehicle Not Bought for Personal Use

January 17th, 2018 at 8:00 am

The 910-day condition for doing a vehicle debt cramdown don’t apply if the vehicle was not “acquired for the personal use of the debtor.”  

The Cramdown Advantage

The last several blog posts have been about the advantages of Chapter 13 cramdown, especially the cramdown of vehicle loans. Cramdown can be an excellent way to keep your vehicle. It usually allows you to reduce the monthly payment as well as the total you pay on the debt. Often the payment reduction is significant. You can often save thousands of dollars compared to what you’d usually pay on the debt overall.  Through cramdown you may be able to keep a car or truck that you couldn’t afford to otherwise.

Because of these advantages vehicle loan cramdown may be a reason to file a Chapter 13 case. It’s not available under Chapter 7 “straight bankruptcy.”

The 910-Day Condition on “Personal Use” Purchases

As we said in a blog post last week, there is usually a timing condition you need to meet to do a vehicle loan cramdown. In most consumer bankruptcy situations you must have entered into the contract more than 910 days (about two and half years) before filing the Chapter 13 case. So if you bought and financed a vehicle more recently you wouldn’t be able to do a cramdown.

But that only applies when “the collateral for that debt consists of a motor vehicle… acquired for the personal use of the debtor.” (See the unnumbered “hanging paragraph” right after Section 1325(a)(9) of the U.S. Bankruptcy Code.)  So if your vehicle was acquired for business use, or some other non-personal use, the 910-day condition does not apply. You could do a cramdown on the loan in a Chapter 13 case filed at any time.

An Example

Imagine that eighteen months ago you bought a truck for a business that’s in your name. You financed the entire $50,000 purchase. The truck is now worth $32,500.

Your business has just failed and you need to file bankruptcy. You need to keep the truck because you sold your other vehicle to try to keep the business going.

On the advice of your bankruptcy lawyer you are filing a Chapter 13 “adjustment of debts” case.  There are other reasons to do so having to do with income tax debts. But you also learn you can do a cramdown on this truck loan and save money. You can do so even though you’re still a year short of the 910 days (about two and half years) since getting the loan.

Again, that’s because that 910-day condition would only apply if the truck was bought for “personal use.” If it was clearly bought for the business, you can do a cramdown without waiting the 910 day from the purchase to the Chapter 13 filing. (Your lawyer will review the loan documents to make sure they don’t indicate the purchase was for personal use.)

As a result your truck loan would effectively be rewritten based on the $32,500 current truck value. You would very likely be able to reduce the monthly payment on the loan. You would also very likely be able to pay thousands of dollars less overall before you owned the truck free and clear. Finally, besides saving you money immediately and long-term, it may enable you to keep the vehicle when you could not afford to do so otherwise.

 

Chapter 7 Buys Time to Change to Another Vehicle

November 8th, 2017 at 8:00 am

Filing a Chapter 7 case stops repossession of your vehicle temporarily. If you are getting another vehicle, that can be valuable time. 

 

A week ago we went through a list of ways Chapter 7 buys you time with your vehicle lender. Included was that it “gains you some time to get another vehicle before surrendering your present one.” We’ll show you how this works.

Transitioning to Another Vehicle

The two different types of consumer bankruptcy give you a number of ways to keep a vehicle that you’re having a hard time making the payment on.

Chapter 7 stops a repossession if you’re behind on payments or insurance. It discharges all or most of your other debts so that you can better afford your vehicle payments. This can also help you afford insurance, vehicle repairs and maintenance, and the other costs of ownership. If you’re a little behind on payments it gives you a month or two to catch up.

Chapter 13 does most of these and more. If you’re behind on payments you get many months to catch up. You can fit that in with other urgent debts—such as child/spousal support and income taxes—on  a flexible schedule. If you qualify for “cramdown” you can even lower your monthly payment and significantly reduce the total you pay for the vehicle before it’s yours free and clear.

But what if AFTER getting well informed about these options you still want to surrender your vehicle and get another one? Real life situations in which this might happen include:

  • You’ve learned that the vehicle you’re paying for is a lemon, unreliable, and will cost too much to keep repaired.
  • Your life circumstances have changed and you don’t want or need a vehicle that’s so expensive.
  • You simply have a way to get another cheaper vehicle, and need to get out of your vehicle loan obligation.

Buying Time by Stopping a Repossession

If you behind on your vehicle loan at all, your vehicle is at risk of repossession. How fast your lender will repossess depends on its policies and on the history of your relationship. Usually you have to be a full month late, sometimes even two months. But you can’t assume this—it can happen whenever you are behind.

If you let the vehicle’s insurance lapse—even without being late on loan payments—that’s separate grounds for repossession. Lenders can be very aggressive about this, because they risk losing their entire collateral. And you are showing yourself to be irresponsible in their eyes.

In these situations your Chapter 7 bankruptcy filing will not buy you much time, but the time it buys could be extremely helpful. A repossession is often very, very disruptive. One minute you have your car or truck and the next it’s gone. You have no transportation to work and to everywhere else you need to go. Preventing that huge disruptive surprise is a big benefit.

Buying Time Even If You’re Current

Even if you’re not behind on vehicle loan payments or insurance, Chapter 7 gives you an orderly process for surrendering your vehicle.

It also gives you a chance to calmly consider whether you should or shouldn’t keep your vehicle and its debt. You sit down with a bankruptcy lawyer who has only one job: to help you decide what is best for you and your future. You look at what your budget will look like after filing the Chapter 7 case. You think about whether there’s room for that vehicle payment. You have a bit of time to figure out whether and how you could get ahold of replacement transportation.

Procedure and Timing

Whether you’re current or behind, how much time will filing Chapter 7 buy? Partly it depends on the aggressiveness of your lender, especially if you’re behind.

In every Chapter 7 case you have to specifically state what you intend to do with collateral on all secured debts. You do so with a document called a “Statement of Intention.” This is usually filed at the bankruptcy court along with the rest of your Chapter 7 documents. But for tactical or other reasons it can be filed later. The document itself states:

You must file this form with the court within 30 days after you file your bankruptcy petition or by the date set for the meeting of creditors, whichever is earlier, unless the court extends the time for cause. You must also send copies to the creditors and lessors you list on the form.

(See also Section 521(a)(2) of the U.S. Bankruptcy Code about this.)

On the Statement of Intention you declare, under penalty of perjury, your “intention about any property… that secures a debt…  .” You declare whether you want surrender or retain the vehicle. If you want to retain it you say whether you want to redeem the vehicle or reaffirm the debt. (These two options are discussed in recent blog posts.)

Practically speaking you usually have to surrender your vehicle between about 30 and 45 days after your Chapter 7 filing. If your lender is unusually lax you may get a little more time than that.

The Surrender Itself

Arrangements for the surrender itself are made between your lawyer and the lender or its lawyer. The surrender is almost always done in a way that’s convenient to you. Usually you either drive the vehicle to an agreed location or give the keys to the lender whose representative picks up the vehicle from wherever you agree to leave it.  This in infinitely better than a repossession. 

 

Chapter 7 Buys Very Short Amount of Time to Get Vehicle Insurance

November 3rd, 2017 at 7:00 am

Chapter 7 stops a repossession of your vehicle for lapsed insurance, but almost always the amount of time it buys you is very short. 

 

Our last blog post went through a list of ways Chapter 7 buys you time with your vehicle lender. Included in that list was that it gives you “a very limited time to reinstate required vehicle insurance.” This deserves more attention.

Vehicle Insurance Required

According to Minimum Car Insurance Requirements by State, a recent article in nerdwallet.com, almost every state’s laws require vehicle owners to have at least a certain dollar amount of liability insurance coverage. That covers damages that you cause in an accident. The one state that doesn’t require liability coverage is New Hampshire. There are other exceptions. In Virginia drivers with a clean driving record can drive without liability insurance by simply paying an annual fee. In Arizona and some other states you can avoid liability insurance by providing a bond, certificate of deposit, or cash to the DMV.

According to this wallethub.com article 15 states also require personal injury protection (PIP) insurance. That covers medical expenses from an accident, for you, household members, and your passengers, regardless of fault. Also, 21 states require uninsured and underinsured motorist coverage. This covers you when you’re harmed by someone with no insurance or an insufficient amount.   

Your vehicle lender or lessor requires two other kinds of insurance to protect your vehicle, its collateral.  Collision insurance covers your vehicle in an accident. Comprehensive insurance covers it in events other than an accident, such as theft and fire.

The Urgency of Vehicle Insurance Coverage

Vehicle lenders and lessors get extremely concerned if your insurance coverage lapses. That’s because then at any moment their collateral could be totaled and turn worthless.

If you miss a payment deadline, the lender/lessor is only out a few dollars. But if you have no insurance it’s potentially out the entire loan/lease balance.

This is why as part of your loan or lease agreement:

  • you must maintain insurance throughout the term of your loan or lease
  • your lender/lessor must be named in your insurance as a loss payee (it gets paid if your vehicle is damaged)
  • the collision and comprehensive coverages must be enough to cover the vehicle’s full value, with limited dollar amount deductibles
  • if your insurance ever lapses the lender/lessor can “force-place” insurance and make you pay for it.

 (For example, see this Wells Fargo Dealer Services “agreement to furnish insurance; also this webpage from the federal Consumer Financial Protection Bureau about force-placed insurance.)

As a result of such contractual requirements your lender/lessor can legally repossess your vehicle whenever your insurance coverage lapses.  

Buying You Time in Chapter 7

The moment you file a Chapter 7 “straight bankruptcy” case through your bankruptcy lawyer your vehicle is protected by the “automatic stay.” See Section 362 of the U.S. Bankruptcy Code. This prevents your lender/lessor from repossessing your vehicle. That’s true whether you’re behind on monthly payments or your insurance has lapsed.

So if your vehicle insurance has lapsed before filing your Chapter 7 case, that filing buys you some time to get the insurance reinstated. But, as the title to this blog post says, it usually only buys you a very short amount of time.

Why’s that? It’s because the lender/lessor’s concern about losing its collateral is a legitimate one. The bankruptcy court respects that concern.  Lapsed insurance will encourage the lender/lessor to quickly file a motion with the court for “relief from the automatic stay.” That is a formal request to be able to repossess the vehicle, in this case for lack of insurance. The court will grant that motion unless you’ve reinstated insurance by the time the court hears the motion. So filing bankruptcy may only buy you a few more days or a couple weeks to get insurance.

Also, in the meantime the lender/lessor can force-place its own insurance on your vehicle. It adds the cost of this insurance to your balance, and it’s astoundingly expensive. Furthermore, force-placed insurance only protects the lender. You’re still violating state law by driving uninsured. And of course driving without insurance is extremely risky. Plus this cost will significantly increase the amount you need to pay to get current.

Conclusion

Filing a Chapter 7 bankruptcy will prevent your vehicle from being repossessed for lapsed insurance. But the amount of time the filing buys before you need to reinstate the insurance is quite short. Plus the force-placed insurance will make catching up on your loan/lease cost you much more. So, stopping a repossession for lapsed insurance can be great, but the amount of time it buys you for this violation of your vehicle loan/lease is very limited.

 

Many Ways to Buy Time for Your Vehicle and Home through Chapter 7

November 1st, 2017 at 7:00 am

Chapter 7 buys you the crucial time you need in many situations when falling behind in your obligations related to your vehicle or your home.

 

In the last several weeks of blog posts we’ve given many examples of how bankruptcy can buy you time for your vehicle and for your home. Here’s a summary how a Chapter 7 “straight bankruptcy” can do so.

1. Chapter 7 Buys Time for Your Vehicle

  • Stops your vehicle from being repossessed, at least temporarily
  • Gives you a some limited amount of time to catch up if you’re behind on payments
  • Gives a very limited time to reinstate required vehicle insurance
  • Gains you some time to get another vehicle before surrendering your present one
  • Buys time to gather funds to redeem your vehicle for less than you owe on it
  • Buys time to enter into a redemption loan to lower your debt on the vehicle

2. Chapter 7 Buys Time for Your Home

  • Stops your immediate home foreclosure sale, at least temporarily
  • Gives you limited time to catch up on your mortgage through a lump sum payment or in monthly “forbearance” payments
  • A delay in foreclosure usually gives you a few more months to sell your home
  • This delay can give you time to surrender your home while saving up for moving expenses
  • Stops  a lawsuit from turning into a judgment lien, creating a debt that can’t be discharged written off in bankruptcy
  • Stops an income tax lien recording on your home’s title, potentially turning that tax into one that can’t be written off

 

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.

 

Surrendering Your Vehicle in a Chapter 7 Case

July 14th, 2017 at 7:00 am

If you’re buying a vehicle, sometimes getting out of the contract is your best option. Chapter 7 lets you do that, owing nothing. 

 

“Reaffirming” Your Vehicle Loan

Our last blog post was about keeping your vehicle in a Chapter 7 “straight bankruptcy” by reaffirming the vehicle loan. If you are current on the loan/lease and can afford the payments after bankruptcy, reaffirming may make sense.

But sometimes it isn’t your best option. Bankruptcy also gives you an extraordinary opportunity to get out of your vehicle contract and its debt.

Even if you think you should keep your vehicle, consider the advantages of surrendering your vehicle during a Chapter 7 case.

Your Opportunity to Escape the Debt on the Vehicle Loan

Consider 3 scenarios:

  1. You may regret having made the purchase. You might have been talked into it by a pushy salesperson. You may have been surprised when you qualified for the credit and figured that you should grab the opportunity. But you’ve known for a while that it was a mistake. Bankruptcy is your chance to undo the mistake.
  2. Maybe instead the purchase really did make sense at the time but doesn’t anymore. The vehicle may have turned out to be unreliable and costs too much to repair and maintain. Your financial situation may have changed so you can no longer afford its monthly payments and other costs. Because of the vehicle’s fast depreciation, you may also owe well more than it’s worth. You wish you could turn back the clock and get out of the deal.
  3. Or you think you will be able to afford to pay your vehicle loan payments after filing bankruptcy, but it’s going to be tight. You need transportation but have a way of getting another less expensive vehicle or can do without. You want to know your options under bankruptcy.

The “Deficiency Balance”

It’s normally very expensive and dangerous getting out of a car or truck purchase. You can’t just give the vehicle back, give them the key, and call it even. Usually it’ll cost you, and a lot.

Usually when you surrender your vehicle to the creditor you end up owing a “deficiency balance.” This is the difference between what you owe on the contract and what your creditor would get if it sold your vehicle. Returned and repossessed vehicles are usually sold at auto auctions, where the purchasers are mostly used car dealers. They need to make a profit when re-selling the vehicles so they don’t pay much for them. So the amount your vehicle is sold for and credited to your account is usually shocking small.

At the same time the amount you owe is often much more than you expected. Your contract almost always lets the lender add onto your account a variety of additional costs. Besides late fees, all of the lender’s costs of surrender or repossession and the auction are piled on. Each one adds to the amount you owe.

As a result, in the end the amount of the “deficiency balance” that you owe is often amazingly high.

Lenders Usually Chase Deficiency Balances Fast

Usually your lender will file a lawsuit pretty quickly to try to make you pay off that deficiency balance.

It’s now a debt not secured by any collateral. The lender recognizes that paying this debt is not likely your highest priority. Sometimes the law gives the lender a relatively short time to sue or forever lose its ability to do so. So the lender has multiple reasons to sue you on the deficiency balance.  Very likely you’ll be forced to deal with the debt sooner rather than later.

The Results of Chapter 7

Almost always, Chapter 7 results in the “discharge” of a deficiency balance. That is, the debt is permanently, legally written off, without you having to pay anything.

This is true whether the vehicle has been surrendered or repossessed before you file bankruptcy, or after.

There are very rare exceptions. If you purposely cheated this creditor in getting the loan, the creditor could object to the discharge of the debt. Examples include intentionally lying on the loan application, or some other kind of fraud. Even then, the creditor would have to formally accuse you of this within about 3 months after your Chapter 7 case was filed or else the debt would be discharged anyway.

So, a Chapter 7 bankruptcy would almost always discharge whatever you owed on your surrendered car or truck. Within 3 or 4 months after filing the case this debt would be gone.  

 

Secured Creditors’ Proofs of Claim in Chapter 13

November 23rd, 2016 at 8:00 am

If you want secured creditors to be paid in your Chapter 13 plan, they must file proofs of claim. Let’s use the example of a vehicle loan. 

 

Secured Debts

A debt is secured if the creditor has a lien on something you own. The lien gives the creditor rights against that thing you own. That usually includes the right to repossess it if you don’t pay the debt.

Let’s focus on what’s probably the most common kind of secured debt: a vehicle loan. When you finance your purchase of a car or truck, your lender becomes its lienholder. To secure the loan the lender requires you to give it a lien on the vehicle. That lien is a “charge against or interest in [your] property to secure payment of a debt or performance of an obligation.” (Section 101(37) of the Bankruptcy Code)

Bankruptcy discharges—legally writes off—most debts, including secured debts. But that just discharges the personal liability on the debt itself. The lien—the lender’s right to repossess—is not erased by bankruptcy. If you want to keep a vehicle when you go through bankruptcy, you have to deal with the lien.  Generally, unless you’re surrendering the vehicle, the way to deal with the lien is to pay the debt owed.

(With “cramdown” you can pay less than the full debt, based on the value of the vehicle. But you still have to satisfy the lien. “Cramdown” only applies to loans at least 2 and a half years old,)

Chapter 13 Plan

Let’s say you bought a used vehicle two years ago (so no “cramdown”). Because of other financial pressures you’d recently fallen two payments behind, totaling $850. Part of the reason you filed a Chapter 13 case is to stop the vehicle from being repossessed. Keeping it is a huge priority for you. You definitely need the vehicle to commute to work and to get your kids everywhere—to keep your life together.  

Assume your Chapter 13 payment plan says that you’ll resume regular monthly payments and will catch up on the $850 through 10 monthly payments of $85. Almost for sure your lender would not allow you that much time to catch up otherwise. Chapter 13 law usually requires them to give you this amount of time. As a result you have more money to live on and maybe to pay other urgent creditors.

The Crucial Role of the “Proof of Claim”

Your Chapter 13 plan could explicitly state that your vehicle lender is going to be paid. The bankruptcy judge could formally order that the plan is approved (“confirmed”). You could pay the plan payments perfectly to the Chapter 13 trustee. But your lender still would not receive anything from the trustee without one more step. The lender must file a “proof of claim” with the bankruptcy court.

A “proof of claim” is a rather simple form on which your lender states how much you owe and usually provides some documentation showing the basis for the debt. (Section 501 of the Bankruptcy Code)

Lenders want to be paid and so would normally file proofs of claim to have that happen. But they sometimes mess up. They usually have 90 days from the date of your “meeting of creditors” to file proofs of claim. Since that “meeting” is about a month after your bankruptcy lawyer files your case, the deadline is a specified date about four months into your case.

You get a formal notice—as do your creditors—giving that exact deadline. Your lawyer should review the filed proofs of claim right after that deadline. Be in touch with the lawyer to find out if your auto lender filed an appropriate proof of claim. (At the same time you can discuss the proofs of claim filed or not filed by other important creditors.)

You have 30 days after the creditors’ deadline to file a proof of claim on behalf of any creditor that messed up and did not file one on time. Your Chapter 13 trustee has the same right. Different trustees have different practices about whether not they file proofs of claim for creditors, and if so when, so talk with your lawyer about this.

Conclusion

To keep a vehicle, you have to satisfy the vehicle lender’s lien on that vehicle. That means you have to arrange to pay that lien. Your Chapter 13 trustee cannot pay the lender under the terms of your court-approved payment plan without a proof of claim. If the lender neglected to file one on time, make sure that either you or the trustee files a proof of claim for the lender.

 

Chapter 7 and Chapter 13–More Vehicle Loans

October 5th, 2015 at 7:00 am

The second scenario, the Chapter 13 solution for keeping a vehicle if you’re behind on payments.

 

In our last blog posts we showed how Chapter 7 “straight bankruptcy” can make it possible to keep your vehicle even if you were behind on your payments. We showed how this can work in practice through an example.

But hanging onto a car through Chapter 7 when you’re behind only works in limited circumstances.

In a Chapter 7 case you would very likely need to get current on the loan quite quickly—within about 30 to 60 days—or there’s a good chance your lender wouldn’t let you keep the vehicle. Also, you would very likely have to “reaffirm” the debt—continue being legally liable on it. That means that the vehicle loan would be excluded from the “discharge”—the legal write-off—of your debts. So if your vehicle was worth less than the debt amount, you could be left owing a large debt after you case was over if you would be unable to make loan payments and the vehicle was repossessed.

The following scenario describes how Chapter 13 can solve these and related shortcomings.

The Scenario

Danielle owns a 2009 Ford F-150 STX pickup that she bought used 32 months ago. She owes $12,000 on it, with monthly payments of $389. It’s in decent condition, worth about $9,000. She absolutely needs it to get herself to and from work.

She’s nearly 3 months behind on this truck loan because she got injured in a vehicle accident while a passenger in a friend’s car. She couldn’t work for several months and so she lost her job. The friend was driving uninsured, so Danielle got very little money for her medical expenses and lost income.  She was out of work for 8 months until she got another job two months ago. She’s still way behind on her credit cards, her medical bills, and on her other debts, partly because she first had to catch up on her apartment rent to avoid being evicted.

Danielle has been advised that with the amount of debt she owes, she needs to file bankruptcy. She’s trying to choose between Chapter 7 and Chapter 13.

The Chapter 13 Solution

Although Danielle has been at her new job only 2 months and doesn’t make quite as much as at her prior job, it’s with a very reliable employer. But she has absolutely no way to come up with the now nearly three months of $389 in vehicle payments– $1,167—in the next couple months after filing bankruptcy. And even if she didn’t have to pay most of her debt payments each month, she’d have trouble coming up with the $389 monthly payment. Also, she owes $6,000 in income taxes for 2013 and 2014 and has no idea how she’s going to pay that.

She’s advised by her attorney that through Chapter 13 she could do a “cramdown” on her truck loan, in effect re-writing that loan so that she would not have to catch up on the missed payments. It would also lower her interest rate, stretch out and reduce her payments from $389 to $195 per month, and reduce how much she would have to pay on the loan overall by almost $3,000.

She also learns that instead of paying that $195 to the vehicle lender directly she would pay that as part of a single Chapter 13 monthly payment plan amount that would take care of ALL of her creditors, including her income taxes. She would not have to pay any more ongoing interest or penalties to the IRS and her state tax agency on the $6,000 she owes them, and they would be prevented from taking any action against her, such as garnishing her wages or checking account.

Her monthly plan payment amount would be $400 per month—to take care of her truck loan, the income taxes, all her other creditors, and even her attorney fees—over the course of about 4 and a half years. Her budget shows that she can very reasonably afford that single payment. At the end of that time she would have paid everything she needs to pay on her truck “cramdown,” paid off her income taxes, and a small portion of the rest of her debts. Danielle would receive her title to her free and clear pickup truck, would be free of her tax debt, and would be altogether debt-free.

Danielle, not surprisingly, decides to file a Chapter 13 case.

 

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