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Archive for the ‘vehicle repossession’ 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.

 

Qualifying for a Vehicle Loan Cramdown

May 20th, 2019 at 7:00 am

To qualify for a Chapter 13 vehicle loan cramdown, mostly your loan must be at least two and a half years old. There are exceptions to this. 

 

Last week’s blog post was about lowering monthly vehicle loan payments through Chapter 13 cramdown. This also often reduces how much you end up paying on the loan, and often even reduces its interest rate. Cramdown usually saves you money both immediately and long term. And you end up owning your vehicle free and clear at the end of your Chapter 13 case.  

Today we get into how to qualify for cramdown.

Qualifying for Cramdown—Timing

You can only do a cramdown if your vehicle loan is more than 910 days old when you file your Chapter 13 case. 910 day is about two and a half years. If you entered into the vehicle loan less than 910 days earlier, you can’t do a cramdown. You can’t reduce the monthly payments or the total amount paid on the loan.

The Bankruptcy Code says that you can’t do a cramdown if “the debt was incurred within the 910-day [period] preceding the date of the filing of the [Chapter 13] petition.” See the “hanging paragraph” following Section 506(a)(9) of the U.S. Bankruptcy Code.

What’s the reason for this 910-day timing condition? It’s a benefit to vehicle lenders. New cars and trucks depreciate fast. You can’t buy a vehicle, have it depreciate quickly for a year or two, and then take advantage of the fact that the vehicle isn’t worth as much as you owe on it. You have to wait two and a half years before you can do this.

Qualifying for Cramdown—910-day Rule Doesn’t Apply

The 910-day rule applies only to vehicle loans that are for the purchase of the vehicle. Under the language of the Bankruptcy Code, the 910-day waiting period only applies when “the creditor has a purchase money security interest securing the debt.” See the same paragraph” following Section 506(a)(9) referred to above.

So a loan used to refinance a vehicle CAN be crammed down without waiting the 910 days. Also, if you borrowed money for some purpose and gave your vehicle as collateral for the loan, you can do a cramdown without waiting.  

This same 910-day waiting period also does not apply to vehicles purchased for business use. The Bankruptcy Code says the 910-day rule only applies if “the collateral for that debt consists of a motor vehicle… acquired for the personal use of the debtor.” See the same paragraph in the Bankruptcy we keep referring to.

There are open questions about both these “purchase money” and “personal use” conditions. For example, “personal use of the debtor” is not defined in the Bankruptcy Code. What about a pickup truck mostly used for operating a business but also used for personal transportation? Or how about a vehicle bought by a parent for the exclusive personal us of an adult child? Is that not the “personal use of the debtor” so that the 910-day rule does not apply?

The answers to these questions may turn on interpretations of the Code language by your local bankruptcy court. Talk with your bankruptcy lawyer about your own particular situation.

Qualifying for Cramdown—Undersecured Vehicle Loan

In case it’s not obvious, cramdown only works if your vehicle is worth less than the balance on your loan. You’re “cramming” the loan amount down to the secured amount of the debt. The more your loan is upside down the more cramdown can help.

If your vehicle is worth the same or more than you owe, there is no opportunity for cramdown. You might gain some other benefits on your vehicle loan from filing a Chapter 13 case, but no cramdown.

And how do you determine what your vehicle is worth for this purpose? For example, do you use “retail value” or “wholesale” or “trade-in” values? Should you use the Kelley or NADA Blue Book values or some other source? Again, these are questions for your bankruptcy lawyer, based on local law and practice.

Qualifying for Cramdown—Only in Chapter 13

Cramdown is not available under Chapter 7 “straight bankruptcy.” You must file a Chapter 13 “adjustment of debts” case. The payment and payoff terms of your cramdown are part of your 3-to-5-year Chapter 13 payment plan. In it you present the value of your vehicle, which indicates the secured part of your loan balance and the remaining unsecured part, and how much you intend to pay on each part.

(Cramdown is also available under Chapter 11 “reorganization,” which is generally used for corporate and other business bankruptcies. Section 1129(b)(2)(A). This blog post focuses instead on consumer oriented Chapter 13. But if you are operating a business or have unusually large debts, Chapter 11 may be an option to consider.)

 

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.

 

Keep Your Vehicle by Reaffirming its Loan

April 29th, 2019 at 7:00 am

If you want to keep your vehicle and still pay on its loan, file a Chapter 7 case to write off other debts and reaffirm the vehicle loan.  

A Vehicle Loan is a Secured Debts

We started this series of blog posts on debts by introducing secured debts as follows:

Each of your debts is either secured by something you own or it is not. A secured debt is backed up by a lien, a legal interest of the creditor in some kind of property of yours. See Section 101(37) of the U.S. Bankruptcy Code.

Usually you know whether a debt is secured. For example, in the case of a vehicle loan the vehicle’s title states that your lender is the lienholder. That lien on the title makes the loan secured by the vehicle. That, together with the security agreement you signed, gives the lender certain rights over your vehicle.

Let’s assume that you have a vehicle that you are paying for through a vehicle loan. If you look at your vehicle’s title, your lender is listed as the lienholder on your vehicle. The loan documents include a security agreement that gives the lender the right to repossess the vehicle if you don’t make the loan payments.

Also let’s assume that you really want to keep your vehicle. One of the main reasons you are considering filing bankruptcy is to write off all or most of your other debts so you can afford to pay your vehicle loan.

Reaffirming the Vehicle Loan

Filing a Chapter 7 “straight bankruptcy” case could well accomplish this. It could permanently forgive (“discharge”) all or most of your other debts. That could free up enough of your monthly cash flow so you’d have money to pay your vehicle loan payments.

Talk with a bankruptcy lawyer to find out which of your own debts would be discharged. Bankruptcy discharges most debts, but there are quite a few exceptions. (See our last 10 blog posts about those exceptions.)  Your lawyer will help you put together your after–bankruptcy budget. From that you’ll see whether you’d be able to pay on your vehicle loan after discharging your other debts.

If so, filing a Chapter 7 case and signing a vehicle loan reaffirmation agreement may be your best option.

Reaffirmation Is a Voluntary Discharge Exception

A reaffirmation agreement excludes the vehicle loan from the discharge of debts Chapter 7 bankruptcy otherwise entitles you to. You enter into it voluntarily in return for getting to keep your vehicle.

It’s voluntary because you recognize that your lender has the right to take your vehicle if don’t make your payments. That doesn’t change when you file bankruptcy. The point of the reaffirmation agreement is to allow you to keep your vehicle.

Voluntarily Deciding Not to Reaffirm

You can file a bankruptcy case and choose NOT to reaffirm your vehicle loan. In a Chapter 7 case that would generally mean that you’d surrender the vehicle to your lender. The bankruptcy discharge would then virtually always write off any remaining debt you’d owe on the vehicle loan.

Think very seriously and open-mindedly about this option before you reaffirm the loan. Bankruptcy gives you a one-time opportunity to get out of the vehicle loan. Consider whether you would definitely be able to afford its monthly payments, insurance, maintenance and other costs. Find out what the vehicle is now worth compared to what you owe. Think creatively about other transportation options. Don’t just reaffirm the loan because you figure you have no other choice. Make it an informed choice, whichever way you choose.

The Risks of Reaffirming

A reaffirmation agreement excludes the vehicle loan from the bankruptcy discharge. So it returns to the lender all of the rights it had over you that it had before your bankruptcy.

That of course includes the right to repossess your vehicle if you don’t make payments on time. But likely also included is the right to repossess if you let the insurance lapse. Or the lender may impose its own insurance and charge you an exorbitant amount for it. The lender may even be quicker about force-placing insurance or repossessing after bankruptcy than before.

So do not enter into a reaffirmation agreement lightly. It would certainly be unfortunate for somebody to go through the efforts of a Chapter 7 case, get a fresh financial start, only to have a vehicle repossession and its resulting debt a year or two later.

Other Options?

Are there any other options if you couldn’t afford the vehicle payments even after discharging your other debts?

Also, 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?

We’ll cover these practical questions in the next blog post or two.

In the meantime, reaffirmation agreements are covered by the Bankruptcy Code at Section 524(c).

 

The Surprising Benefits: Ending Your Vehicle Lease under Chapter 13

October 24th, 2018 at 7:00 am

Chapter 7 gets you out of a vehicle lease owing nothing. Chapter 13 is more complicated but can give you pretty much the same good result.

 

Ending a Vehicle Lease in Chapter 7

Our last blog post was about how a Chapter 7 “straight bankruptcy” can get you out of a vehicle lease. You can “reject” a financially bad lease, and then discharge (permanently write off) whatever you’d owe after surrendering the vehicle. Otherwise you could owe a lot of money when you get out of the lease.

So if you decide that you don’t want to keep your leased vehicle, and need bankruptcy relief, Chapter 7 is likely the cleanest solution.

Ending a Vehicle Lease in Chapter 13

But what if you have other reasons to file a Chapter 13 “adjustment of debts” case instead? Chapter 13 can be a great way to save your home, catch up on child or spousal support, deal with income tax debt, and solve many other big financial problems, much better than under Chapter 7.

So it’s good news that you can surrender your leased vehicle through Chapter 13 just like under Chapter 7. However, discharging any resulting debt from the lease contract is not as straightforward as in a Chapter 7 case. Here’s how it works.

Possible Debts from Surrendering a Leased Vehicle

First be aware that you could owe various kinds of debts when you surrender a leased vehicle. Surrendering before lease end could make you liable for contractual penalties and/or all the remaining unpaid lease payments. Surrendering the vehicle at the end of the lease could make you liable for high mileage, excessive wear and tear, and the difference between the vehicle’s originally anticipated value at the end of the lease and the actual “realized value” then. Either way the amount you would owe could be thousands of dollars.  

Rejecting the Lease under Chapter 13

Under Chapter 13 you have the options of either rejecting the lease and returning the car, or continuing the lease. For today we’re assuming you no longer need or want to keep and pay for the vehicle.

The immediate benefits of rejecting the lease are just like under Chapter 7. You immediately stop paying the monthly lease payments, and then return the vehicle to the lessor after filing the case. If you’re behind on payments, you don’t have to pay them.

But under Chapter 13 there’s a complication. Your lessor can file a “proof of claim” reflecting whatever amount you would owe under the lease contract. The lessor does so in order to try to get paid part of any remaining debt. This debt is then added to the pile of all your other “general unsecured” debts.

The Category of “General Unsecured” Debts in Chapter 13

In a Chapter 13 case, your debts are divided into categories, one being your “general unsecured” debts. These are the debts that are 1) not secured by any of your property or possessions, and are also 2) not a “priority” debt (various specially-treated ones).

Often you have to pay all or most of what you owe on your secured and priority debts. But this is seldom true with general unsecured debts. Often you pay little or even nothing on your general unsecured debts in a Chapter 13 case. Whether or how much you pay depends on a lot of factors. The main factors are the amount of your secured and priority debts, and how much you can afford to pay to all of your creditors after expenses.

Often Vehicle Lease Debt Does Not Increase What You Pay

In most Chapter 13 cases a debt from surrendering your leased vehicle does not increase what pay in your case. That is, adding what you owe on the lease to your other general unsecured debts does not increase the amount that you pay into your pool of general unsecured debts.

There are two circumstances where that happens, one less common and other very common.

First, in some parts of the country you are allowed to pay 0% of your “general unsecured” debts. This happens if all you can afford to pay during your 3-to-5-year payment plan goes to your secured and priority debts. This leaves no money for the general unsecured debts. Paying 0% of the general unsecured debts means paying 0% on any vehicle lease debt.

Second, in most situations you end up paying the pool of general unsecured debts a specific amount of money. That amount is what you can afford to pay through the plan minus what goes to secured and priority debts. That specific amount gets divided up among the general unsecured debts. This amount being paid to the general unsecured debts does not increase if there is more of those debts. Adding the debt from the surrendered leased vehicle just reduces the amount other general unsecured debts receive. It does not increase how much you pay.  

For example, assume that after you pay all your secured and priority debts you have $2,000 left over to pay all your general unsecured debts over the life of your Chapter 13 plan. Your vehicle lessor files a claim saying you owe $3,000 after surrendering the vehicle. You owe $30,000 to all your other general unsecured debts. Adding the $3,000 lease debt to the other $30,000 means you owe a total of $33,000 of general unsecured debts. But you pay only the $2,000 that is available (over the life of the plan) either way. Having the $3,000 lease debt just means that the other general unsecured debts receive that much less.

 

The Surprising Benefits: An Example of Vehicle Loan Cramdown

October 1st, 2018 at 7:00 am

Vehicle loan cramdown can greatly reduce your monthly payment and the total amount you pay on your loan. Here’s a helpful example.

 

Cramdown in Chapter 13

Last week we introduced cramdown as an extremely helpful tool for reducing the cost of your vehicle loan. Cramdown can often:

  1. Reduce your monthly payments—sometimes significantly.
  2. Reduce the amount you pay on your vehicle contract altogether—often by thousands of dollars.
  3. Excuse you from catching up on any back payments on your vehicle.

Here’s an example to illustrate just how good cramdown can be.

The Facts in Our Example

Assume you are making payments on a 2015 Ford Fusion SE that you bought new more than three years ago. You bought from a dealer for $27,000. After adding the various fees and taxes, and subtracting your modest down payment, you financed $27,000. Because your credit was iffy your loan was at the high interest rate of 8.9% on a 84-month loan.

The monthly payment of $433 has been tough to keep up on. You’re now a month late and your next payment is due in a week. You know that you’re close to getting your vehicle repossessed.

After 34 monthly payments of $433 you’d normally owe about $18,000 but with a bunch of late fees and other charges you owe around $19,000. Your vehicle is currently worth $13,000, with 55,000 miles (average for a 2015 vehicle).

Under Chapter 7 “Straight Bankruptcy”

If you filed a Chapter 7 case you’d basically have a choice between keeping the car with its present loan terms or surrendering it and writing off the loan.

Assuming that you absolutely need the transportation, you’d have to “reaffirm” the loan. That means that you’d have to catch up on the missed payments and agree to keep it current. You’d be stuck with the current monthly payment amount. You’d be stuck with the high interest rate (costing you more than $9,000 over the length of the contract). If you ever failed to keep current and the vehicle got repossessed, you’d likely owe a large “deficiency balance.” And your vehicle would be gone.

Savings through Cramdown

In contrast, under Chapter 13 cramdown both your monthly payment and the total amount paid would be reduced.

In our example, you and your bankruptcy lawyer reduce the monthly payment as follows. The $19,000 balance on the contract gets divided into the secured and unsecured portions.

The secured portion is based on the current value of the vehicle: $13,000. You have 3 to 5 years to pay that amount. Depending on all the circumstances you should be able to reduce the interest rate—assume down to 4%. $13,000 amortized at 4% over the maximum 60 months works out to only about $239 per month.

What about the Unsecured Part of the Vehicle Loan?

What happens to the remaining unsecured portion in the amount of $6,000? (That’s the $19,000 current loan balance minus the above $13,000 secured portion.) It gets lumped into the pool of your other “general unsecured” debts. So what happens to that $6,000 debt?

It depends. In most situations you effectively pay nothing more during your Chapter 13 case as a result of this $6,000 debt. This would happen for two potential reasons.

0% Chapter 13 Plans

First, after paying allowed living expenses and higher priority debt—including the monthly $239 vehicle payments, and also recent income taxes, home mortgage and support arrearage, and such—you may have nothing left over for the general unsecured debts. Under these circumstances you’d be paying 0% on these debts during your Chapter 13 payment plan. Then at the end of the 3-to-5-year plan those general unsecured debts would be discharged—completely written off. This would include the $6,000 unsecured part of the vehicle loan. You’d pay nothing on it (and still keep your vehicle).

Partial Payment Chapter 13 Plans

Second, you may instead have some money during your plan to pay towards your general unsecured debts. But even then, in most Chapter 13 cases the existence of the unsecured part of your vehicle loan does not increase how much you pay into your plan over the life of the plan.

Let’s add a few more facts to our example. Assume that you have $40,000 in other general unsecured debts (credit cards, medical bills, old income taxes, and such). Add the $6,000 unsecured part of your vehicle loan, for a total of $46,000 of general unsecured debts. Assume also that over the course of your Chapter 13 plan you have disposable income (after allowed expenses and higher priority debts) totaling $4,000. You pay that $4,000 over time through your monthly plan payments.

If you didn’t owe the $6,000 unsecured part of your vehicle loan, that $4,000 would result in you paying 10% of your general unsecured debts ($4,000 out of $40,000 owed). When you include the $6,000 unsecured part, the $4,000 paid would result in you paying about 8.7% of your general unsecured debts ($4,000 out of $46,000 owed). But either way you’re paying what you can afford to pay—$4,000 over the life of your case. The existence of the $6,000 unsecured part of the vehicle loan has no effect on how much you pay. What you pay just gets distributed a little differently. The other general unsecured debts get pay a little less so that the $6,000 debt receives a small part of the $4,000.

Most Plans Do Not Pay More Resulting from the Unsecured Part of the Vehicle Loan

This happens in most cases that are not 0% plans (discussed above). The only way that an unsecured part of a vehicle loan would increase the amount you pay in your plan is if you have disposable income larger than your other general unsecured debts. In the example, you’d have to have more than $40,000 of disposable income during your plan. Only then would the addition of the $6,000 unsecured part of your vehicle loan to the general unsecured pool increase what you’d pay. That situation is rare. Most people don’t have disposable income during their case larger than their non-vehicle general unsecured debts.

Qualifying for Cramdown

Remember that cramdown is only available in Chapter 13 “adjustment of debts.” Not Chapter 7. Also, to qualify the vehicle loan must be at least 910 days old (about 2 and a half years) when filing the Chapter 13 case.  And finally, cramdown is beneficial for most purposes only when the vehicle is worth less than the balance on the loan. The more it’s worth less, the greater the likely benefit of the cramdown.

 

The Surprising Benefits: Getting Back Your Repossessed Vehicle

May 28th, 2018 at 7:00 am

It’s much easier to prevent repossession by filing bankruptcy beforehand. But if you’ve already been repo’d, you now have to act very fast. 

 

When Does a Lender Repossess a Vehicle?

When CAN a vehicle lender repossess your vehicle? Just about all vehicle loan contracts let the lender repossess the minute you are late on a payment. There may be a legal grace period, but not usually. This is also true for other breaches of the contract, such as if you let the vehicle insurance lapse.  So usually a lender can repossess, without warning, when you are not in fully compliance with any contract obligations.

But most lenders don’t repossess right away. They’d usually rather have you make the payments so that they earn the interest on the contract. But they have the legal right to repossess, and sometimes act very fast.

So how much time do you have before your lender would actually repossess? That depends on your payment history and the repossession practices of the lender. It’s truly hard to tell how many days you  can be late, or how long your insurance can be lapsed, before repossession.

Much Better to File BEFORE Repossession

Filing bankruptcy stops repossession from happening immediately. It literally stops the repo agent from taking your vehicle even if he or she has already started to do so.

The moment your bankruptcy lawyer electronically files your case the “automatic stay” goes into effect. This “stays,” or legally stops, virtually all collection efforts against you and your property. Specifically, filing bankruptcy stops the enforcement of lender’s liens against your property. A vehicle repossession is an enforcement of a lender’s lien on your vehicle, and so it is stopped. See Subsections 362(a)(4) and (5) of the U.S. Bankruptcy Code about the “stay… of… any act to… enforce any lien” against your property.                                                                                                          

Filing a Chapter 7 vs. 13 Case to Stop Repossession

A Chapter 7 “straight bankruptcy” will stop a pending repossession. It will give you a bit of time to bring your loan current. Usually you’ll have no more than about 2 months, sometime less, seldom more. If your insurance has lapsed you’ll have to reinstate it pretty much right away.

Stopping repossession by filing a Chapter 13 “adjustment of debts” gives you lots more time to catch up on the late payments. Instead of a couple months under Chapter 7, under Chapter 13 you get as much as a few years to catch up. Also you may qualify for “cramdown” of the vehicle loan. If so, after stopping the repo you may not need to catch up at all. Plus you may be able to reduce your monthly payments and pay less overall for the vehicle than you would have under the contract. “Cramdown” is not available in Chapter 7. But even under Chapter 13, you still need to pay to reinstate any lapsed insurance quickly to be able to keep your vehicle.

Getting Back Possession AFTER Repossession

Whether you can get your vehicle back after it’s already been repossessed depends on timing and the bankruptcy Chapter you file under.

As for timing, you DO have to act fast. Otherwise it will be too late to get it back, even through bankruptcy.

Bankruptcy’s “automatic stay” stops the lender, at least temporarily, from taking the next steps after the repossession. That’s because those next steps are at least arguably part of the lender’s enforcing its lien on the vehicle, which bankruptcy stops. This may depend on your state’s laws and local interpretations of bankruptcy law. Your bankruptcy lawyer will talk with you about this in your conversation about the repossession.

The next steps after repossession usually involve selling the vehicle, often in an auto auction. Once your lender sells the vehicle, it’s too late to get back your vehicle through bankruptcy.

Chapter 7 vs. 13 in Getting Back Possession

Assuming you file fast enough, whether you actually getting your vehicle back often depends on whether you file under Chapter 7 or Chapter 13.

A Chapter 7 case will work only if you have a fair amount of money immediately available. You’d have to pay the repossession costs (of likely hundreds of dollars) plus bring the account fully current. If you’re not current on insurance you’ll also have to pay to reinstate it.

Even all that may not be enough. If your lender still doesn’t want to cooperate, it may be able to avoid giving back your vehicle.  Whether or not it can be forced to depends on how your local bankruptcy court interprets the law.

Filing Chapter 13 is much more likely to be effective. That’s because it provides a legal mechanism for you to catch up on the back payments over a much longer period of time. This is done through monthly payments in your court-approved Chapter 13 plan. You will still likely have to pay the repossession costs up front. Plus you’ll have to be current on insurance. Then if your plan shows that you’ll catch up on the back payments, most lenders will voluntarily return your vehicle. If not, the bankruptcy court would likely order the lender to do so.

 

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.

 

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