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Archive for the ‘vehicle repossession’ tag

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.

 

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.

 

Examples of Reaffirmation Agreement vs. Chapter 13

January 5th, 2018 at 8:00 am

Here are examples of the reaffirmation of a secured debt (like a vehicle loan) in a Chapter 7 case vs. addressing it in a Chapter 13 case. 

 

The last blog post was about when to reaffirm a secured debt under Chapter 7 and when to handle that under Chapter 13 instead. This kind of comparison of options can get a bit dry. So today we’re demonstrating how it really works with some examples. We change the facts a few times to show when each of these two options makes more sense.

The Initial Facts

Let’s say a guy named Trevor just fell two months behind on his vehicle loan. He’s at immediate risk of getting his car repossessed. He really needs to keep his vehicle to get to and from work. He’s always behind on his vehicle loan because he has so many other debts—mostly medical bill and unsecured credit cards. What’s especially killing him is that he got sued on some big medical bills and is getting his wages garnished.

Trevor sees a good bankruptcy lawyer. She tells him that filing quickly under either Chapter 7 or 13 would stop the repossession. Either option would also permanently stop the paycheck garnishment. He tells her that his brother can give him the money to catch up on the two missed payments.  The brother is only willing to do this if he takes care of his other debts with some kind of bankruptcy solution.

Chapter 7 Reaffirmation If Can Bring Secured Debt Current

Much of the time if you want to keep collateral on a secured debt in a Chapter 7 case you must bring the debt current within a few weeks, and then reaffirm the debt on its original terms. This is particularly true with vehicle loans with the larger national lenders. In other words, you have to agree to remain fully liable on the debt. You have to agree to continue being legally bound by all the terms of the contract. (See our recent blog posts about the risks of reaffirming.)

Trevor has a relatively easy way to bring his vehicle loan current, thanks to his brother. So his lawyer recommends that he files a Chapter 7 “straight bankruptcy” case. Shortly after filing he can bring the vehicle loan current and sign a reaffirmation agreement. With all his other debts being discharged (legally written off), he’ll be able to keep current on his car payments. Problems solved.

If He Can’t Catch Up Fast

But what if Trevor didn’t have his brother’s help? He may not be able to catch up fast enough to be able to reaffirm his vehicle loan. In a Chapter 7 case he has about 2 months after filing—3 months at the most—to catch up. That’s because you usually have to get current before the creditor will let you reaffirm. And you have to reaffirm before the bankruptcy court enters the “discharge order” about 3 months after filing.

Assuming that Trevor didn’t think he could catch up in time, and because he absolutely didn’t want to risk not being able to keep his car, his lawyer would likely recommend Chapter 13 “adjustment of debts” filing instead. This would give him many months—maybe even a couple years—to bring the vehicle loan current.

Other Special Debts Encouraging a Chapter 13 Filing

Now also assume that Trevor’s financial pressures had also put him quite a few months behind on his spousal support.  His ex-spouse had actually been quite flexible, letting him skip payments here and there, or send smaller amounts. But once the lawsuit’s garnishments started, his spousal support payments became even more irregular. So, his ex-spouse got fed up and sent the account to the state’s support enforcement agency. Trevor now finds himself $4,500 behind on support, with aggressive collection to start any moment. And a Chapter 7 filing won’t stop the state’s collection of this support.

Trevor’s lawyer tells him that a Chapter 13 filing WILL stop collection for this $4,500 of support. He’d have up to 5 years to bring that current. His Chapter 13 payment plan would be based on what he could afford to pay. That plan would show how he would—over time—catch up on both the vehicle loan arrearage and the support arrearage, while keeping current on ongoing payments.

His lawyer tells Trevor that a possible downside to Chapter 13 is he’d have to pay all that he could afford to his other creditors during 3 years. (5 years if his income is too high based on his state and family size.) But there may be very little—even possibly nothing—going to his other debts if most of his income goes to living expenses and to bring these two special debts current.

Trevor decides on a Chapter 13 case. He will be able to keep his vehicle, catching up as his budget allows. He also has a reasonable way to bring his big spousal support arrearage current. He knows that at the end of the process he’ll be current on these two, and will otherwise be completely debt free.

 

Reaffirmation Agreement vs. Chapter 13

January 3rd, 2018 at 8:00 am

When is it better to reaffirm a secured debt (such as a vehicle loan) in a Chapter 7 case vs. handling it instead in a Chapter 13 case? 

 

The last 5 blog posts in December were about keeping the collateral you want by “reaffirming” the debt. “Reaffirmation” applies only to Chapter 7 “straight bankruptcy”cases. (We’ve focused mostly on reaffirming a vehicle loan.) Today we get into keeping collateral (such as a vehicle) instead in a Chapter 13 “adjustment of debts” case. Our main question today: when is Chapter 13 a better way to keep your collateral than Chapter 7?

Rule of Thumb: Chapter 7 unless Need More Help

There are basically two questions:

  1. Would you be able to keep your collateral/vehicle in a Chapter 7 case?
  2. Even if so, would you get a significantly better result in a Chapter 13 case?

1. When You’re Able to Keep the Collateral in Chapter 7

If you are current on your debt payments, you would very likely be able to keep your collateral/vehicle under Chapter 7. You usually have to formally reaffirm the debt. That means you exclude that debt from the discharge (legal write off) that Chapter 7 provides. You continue to be fully liable on that one debt.

Creditors are usually very happy to be singled out this way. You are much better of a credit risk once you no longer owe all or most of your other debts.

Even if you are not current a Chapter 7 reaffirmation works if:

  • you are able to bring the debt current within two or so months after filing, or
  • the creditor is willing to work out the missed payments—give you more time to catch up, put the missed payments at the end of the contract, or even forgive the payments altogether

Chapter 7 also works well in those situations that a creditor is willing to lower the monthly payment and maybe even the total owed. This seldom happens with vehicle loans, except maybe if the vehicle is worth much, much less than you owe.

2. When Chapter 13 Can Give You a Better Result

Even if you CAN keep the collateral in a Chapter 7 case that doesn’t necessarily mean that you should if Chapter 13 would give you a much better result.

If you’re not current on payments, Chapter 13 would give you much more time to catch up. Consider if your creditor is making you catch up immediately before reaffirming, or within a few months after reaffirming. Let’s say you COULD catch up but it would take extraordinary effort to do so. Chapter 13 could give you many months—or maybe even a few years—to catch up. If that would greatly help you that extra time to catch up which Chapter 13 gives you could make its much longer procedure worthwhile. This may be especially true if you have other very pressing debts (child or spousal support, income taxes, etc.).

Whether or not you are current on payments, Chapter 13 can give you a much better result if your collateral is worth significantly less than you owe on it. You can do a “cramdown” when your collateral is NOT real estate but instead “personal property.” Personal property is essentially anything that isn’t real estate, including vehicles, furniture, appliances, electronics, etc.  Without going into detail here, “cramdown” allows you to re-write your loan based on how much your collateral is worth. You can usually reduce the monthly payment and the total you pay, sometimes very significantly. “Cramdown” is available only under Chapter 13, not Chapter 7.

Especially Bad Payment History

As we said earlier, it’s usually in a creditor’s best interest to allow you to reaffirm a debt whenever you are willing to do so. But in rare circumstances a creditor may refuse to allow you to reaffirm the debt and keep the collateral. This may happen if you’ve had an especially bad payment record—consistently been very late on your payments, for example. Or if you’ve failed to maintain insurance. At some point a creditor may just prefer to repossess the collateral, sell it, and to end the relationship. Talk with you bankruptcy lawyer about whether this may be an issue for you if your history sounds like this. He or she likely has experience with your creditor about such matters.

In situations when a creditor may not be willing to let you reaffirm, Chapter 13 may be worth seriously consideration. In a Chapter 13 case the creditor has much less say about whether you get to keep collateral. You and your lawyer put the secured debt into your payment plan, leaving the creditor with limited grounds for objection. It’s true that your prior history may result in some greater restrictions. For example, if you’ve let a vehicle’s insurance lapse before, you can’t let that happen during the Chapter 13 case or you may lose your vehicle.  Also you DO have to comply with the plan that you propose and the court approves. But as long as you do so you’ll be able to keep the collateral and will own it free and clear by the end of the case.

 

The Reaffirmation Hearing

December 27th, 2017 at 8:00 am

You don’t need to go to a reaffirmation hearing, unless you don’t have a lawyer, or he or she does not sign the reaffirmation agreement. 

 

Reaffirmation Agreement

If you want to keep the collateral on a debt usually you have to exclude that debt from the legal write-off (“discharge”) of your debts that you receive in a Chapter 7 “straight bankruptcy” case. You exclude that debt from the discharge by signing a “reaffirmation agreement.” You remain legally liable on that debt. Through that document. most of the time you agree to all the terms of your original debt agreement. See this sample form reaffirmation agreement.

For example, you agree to pay the same monthly payment at the same interest rate as originally agreed. And you agree that if you don’t make the payments the creditor can repossess the collateral. And in most circumstances the creditor can then come after you for any remaining balance owed. (See our recent blog post about this risk of owing a “deficiency balance” after repossession.)

Conditions When Don’t Need Court Approval

After you sign a reaffirmation agreement it is filed at the bankruptcy court. Most of the time it then goes into effect without the need for court approval. So there’s no reaffirmation hearing.

 The reaffirmation agreement does need court approval in two circumstances. If:

  • you don’t have a bankruptcy lawyer representing you, or
  • your lawyer does not sign the reaffirmation agreement

Why Would My Lawyer Not Sign the Reaffirmation Agreement?

By law your lawyer has the option of signing off on the reaffirmation agreement. To do so he or she would need to sign off on the following specific considerations:

that—

(A) such [reaffirmation] agreement represents a fully informed and voluntary agreement by the debtor;

(B) such agreement does not impose an undue hardship on the debtor or a dependent of the debtor; and

(C) the attorney fully advised the debtor of the legal effect and consequences of—

(i) an agreement of the kind specified in this subsection; and

(ii) any default under such an agreement…

See Section 524(c)(3) of the U.S. Bankruptcy Code.

Subsections (A) and (C) would not likely be a problem for most lawyers. He or she would make sure you were “fully informed” and “fully advised” as indicated. Subsection (B) could sometimes be more challenging. Your budget may show that as much as you want or need the collateral (for example, a vehicle), you can‘t afford the loan payments and its other costs (insurance and maintenance, for a vehicle.) If so, the reaffirmation agreement appears to be “impose an undue hardship” on you and your family.

Usually you and lawyer can produce a budget that shows that you CAN afford to keep the collateral. But if not, your lawyer would understandably be reluctant to certify that the agreement did not impose an undue hardship. If he or she didn’t sign the reaffirmation agreement so certifying, you’d have to get court approval at a reaffirmation hearing.

The Reaffirmation Hearing Procedure

At the time scheduled for your reaffirmation hearing wait in the courtroom until the judge’s clerk calls your case. If you have a lawyer he or she will likely be there as well.

Approach the podium when the clerk calls your case. The judge will explain the purpose of the hearing. Then you’ll need to provide evidence showing that reaffirming the debt will not impose an undue hardship on you. You’ll need to show that you can make the payment while still being able to pay all your other necessary expenses.

You will also likely need to tell the judge that you understand “the legal effect and consequences of” the agreement. You will also specifically need to show you understand what happens if you default on the reaffirmation agreement.  Particularly, the judge needs to be assured that you know that you will be liable on the debt in spite of filing bankruptcy.

If the judge is satisfied that you will not suffer an undue hardship, and that you understand what you are doing, she or he will approve the reaffirmation agreement. You’ll be able to keep the collateral as long as you abide by the agreement.

But if the judge is not satisfied, he or she will disapprove the agreement. At that point, if the creditor requires a binding reaffirmation agreement, it will be able to take back the collateral. That is not a result you want. So make sure you discuss all this with your lawyer early in the process to avoid this from happening.

 

Reaffirming a Debt That’s Not Current

December 25th, 2017 at 8:00 am

You usually have to get current on a secured debt before you can reaffirm it. But the terms of a reaffirmation agreement may be negotiable. 

 

Two blog posts ago we introduced reaffirmation agreements, and in the last one we discussed their risks. Today we get into what happens if you are not current on a debt that you want to reaffirm.

Reaffirmation Basics

Reaffirming a debt means excluding it from the legal write-off (the “discharge”) that you get in a Chapter 7 case.

The most common reason to reaffirm a debt is to be allowed to keep the collateral securing that debt.  There are occasional other reasons. For example you might agree to reaffirm a debt because you allegedly incurred it fraudulently. So you settle the debt by agreeing to reaffirm and pay a portion. But the vast majority of reaffirmations are done to retain collateral that you want to keep.

Most of the time when you reaffirm, you agree to all the terms of your original debt agreement. For example, you agree that if you fail to make vehicle loan payments the creditor can repossess your vehicle and come after you for any remaining balance. (See our last blog post about this risk.)

The Common Obligation to Get Current First

Because you usually reaffirm all the terms of the original debt agreement, most of the time you have to be current on that original agreement when you enter into the reaffirmation agreement. Otherwise you’d be in default from the start.

Especially with vehicle loans, and particularly with the larger vehicle lenders, they allow no negotiation about this. It’s the same thing with not being able to reduce the monthly payment amount, or the total debt amount. Even if the vehicle is not worth what you owe, if you want to keep the vehicle most of the time they make you agree to pay the full amount owed.

Possibility of Negotiating Past-Due Payments

This does not mean that any of these terms are never negotiable. For example, if you owed $5,000 on a vehicle clearly not worth more than $3,000, it would sure seem to make economic sense for the lender to be willing to lower the balance to, say,$3,750, plus make some money on future interest, instead having you surrender the vehicle.  Or if you were a payment or two behind, to reaffirm for $4,000 and give you time to catch up.

In a reaffirmation the two parties could change any of the terms of the original agreement, if they both wanted to. If you were behind, you could be given time to catch up. Or the payments could be put on the end of the contract, so you could delay catching up until then.

The practical problem is the willingness of the lender. As mentioned above, the larger vehicle lenders tend to be inflexible. For reasons beyond the scope of this blog post, they’ve largely decided it’s take it or leave it. Either reaffirm all the terms of the original deal or surrender the vehicle. Talk with your bankruptcy lawyer to find out whether this is true about your lender.  

Chapter 13 As a Negotiating Threat

Be aware that the Chapter 13 “adjustment of debts” option usually gives you much more power over your vehicle lender if you’re behind on your secured debt. You almost always have many months and sometimes even years to catch up. If you qualify for “cramdown” you would likely be able to lower the monthly payments. Usually you could even reduce the total amount you pay before you get the title, sometimes significantly.

When you talk with you lawyer ask how Chapter 13 would affect your vehicle or other secured debt. Ask whether threatening to turn your case into a Chapter 13 one might encourage your lender to be more flexible. And of course give appropriate consideration to filing a Chapter 13 case instead for the benefits it would give you.

 

Be Cautious about Reaffirming a Debt

December 22nd, 2017 at 8:00 am

Reaffirming a debt, including a vehicle loan, can be a very sensible choice. But be fully aware of the risks and possible other options. 

 

Last time we introduced reaffirmation agreements as a good way to keep collateral like a vehicle under Chapter 7. Essentially, you get to keep the vehicle or other collateral in return for agreeing to remain liable on the debt. Plus this enables you to put positive information on your credit report as you make each monthly payment.

But reaffirming a debt comes with risks. You need to be clear about those risks as you consider whether to sign a reaffirmation agreement.

We’ll focus again today on vehicle loan reaffirmations because they are common, and a handy way to explain the issues.

Passing up Your One Opportunity to Escape the Debt

Chapter 7 “straight bankruptcy” gives you the near-lifetime opportunity to get out from under your debts. Don’t pass up on this opportunity as to any of your debts unless you do so with your eyes wide open.

Be especially careful with relatively large debts, such as a car or truck loan.

Are you are simply assuming that you want your present vehicle and its debt, without seriously considering other alternatives?  Stop and think about whether you have ANY alternatives. Do you have a friend or relative who’d sell (or maybe even give) you another, cheaper, but reasonably reliable vehicle? Does public or other alternate transportation make sense considering how much money you’d save, on monthly payments AND the other many costs of vehicle ownership? What other transportation could you get with the money you’d save without a vehicle payment and the other costs?

Sometimes it absolutely makes sense to get rid of all of your other debts and just reaffirm one. But think long and hard about whether it might be better for you—on the short run and long—to not reaffirm and thus get rid of ALL your debts.

Reaffirmation Risk

The big risk when you reaffirm a debt is having to pay it later when you wished you didn’t. 

Circumstances change. In the context of a vehicle loan, you might not be able to afford the payments like you expected. The vehicle may cost lots more in repairs. A much less expensive vehicle may come your way and you wish you weren’t stuck with the reaffirmed one.  Your job or other life circumstances may change so you don’t need the vehicle so much.

If your vehicle gets repossessed at some point after you’ve reaffirmed the debt you’ll very likely owe a substantial balance. That’s because the creditor will likely sell the repossessed vehicle at an auto auction for very little proceeds. It will apply those modest sale proceeds to the debt, but after likely adding large fees related to the repossession. The creditor will then demand payment of this “deficiency balance” in a lump sum. If you don’t pay it quickly vehicle creditors usually don’t hesitate to sue for that balance.

So after having gone through bankruptcy months or years later you end up with a new serious debt problem. You’d also significantly hurt your credit record just when you’d hoped to make progress after your bankruptcy filing.

Avoiding this Risk

Of course you can avoid this risk by surrendering your vehicle or other collateral and not reaffirming the debt. Any potential deficiency balance or other obligation would then be discharged—permanently written off. This would happen within 3 or 4 months after your bankruptcy filing, and you’d be completely free of the debt.

You MIGHT be able to keep the collateral WITHOUT reaffirming the debt. In SOME circumstances you could just keep current on the payments, fulfill any other obligations on the debt (such as maintaining the required insurance on the vehicle), but NOT enter into a reaffirmation agreement. Under some state laws the creditor could not or would not repossess the vehicle. Then if your circumstances later changed you could surrender the vehicle without owing anything. Because you had not reaffirmed the debt the creditor would only have rights to the collateral itself. It would have no further rights on the debt, including to any deficiency balance.

Talk with your bankruptcy lawyer about whether this “pass-through” option is available on your vehicle or other secured loan. It depends on your state’s laws, the practices of your lender, and sometimes your specific circumstances.

Choosing to Accept the Risk

Reaffirming a debt may be completely sensible. If you definitely need or even strongly want your vehicle (or other collateral), can afford both the monthly payment and other costs of ownership, can do so long-term, reaffirming the debt can be a prudent choice. Just do it only after getting fully informed of the risks and seriously considering the alternatives.

 

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.

 

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