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Archive for the ‘cramdown’ tag

Cramdown on Furniture and Other Personal Property Debts

June 10th, 2019 at 7:00 am

Cramdown lowers vehicle loan payments and the total paid on the loan. But you can also get similar benefits on other personal property debts. 


 

Our last 4 blog posts have been about Chapter 13 cramdown of vehicle loans. For most people filing a consumer bankruptcy case, their vehicle loan is their largest and most important personal property debt.

But cramdown can also apply to debts secured by personal property other than your vehicle. Some examples are furniture and appliance loans, secured credit cards, and pawnbroker loans.  Cramdown on such debts can reduce both monthly payments and the total you pay on the debt. Often both your immediate savings and the long-term savings are significant. If you’re behind on payments you’d likely not need to catch up.  

If the secured debt is large enough, or if keeping the collateral is important enough, the opportunity to cram down the debt may be reason enough to file under Chapter 13 “adjustment of debts” instead of Chapter 7 “straight bankruptcy.” Or if you have decided on Chapter 13 for other reasons, the savings on your non-vehicle personal property loan(s) will likely help you have a successful Chapter 13 case.

Cramdown Divides a Debt into the Secured and Unsecured Portions

Bankruptcy law divides an undersecured debt into secured and unsecured portions. See Section 506(a)(1) of the U.S. Bankruptcy Code. (“Undersecured” means that the collateral securing a debt is worth less than the amount of the debt it is securing.)

Chapter 13 cramdown allows you to create new payment terms based on the secured portion only. Besides the reduced amount of principal being paid, the payments usually stretch out over a longer period. The interest rate is often also reduced.  These all usually result in a reduction in the monthly payment.

Then you pay the remaining unsecured portion usually only to the extent that you can afford to, if at all. That generally reduces the amount you pay before you own the collateral free and clear at the end of your case.

For Example

Assume you bought bedroom and living room furniture a year ago for you and your kids. You had moved to a new job and thought you could easily afford the monthly payments. You financed the entire $5,000 price of the furniture, at 15% interest, and monthly payments of $200. The first payment was not due until 6 months later.

But now a year from the purchase, the income from your new job has not turned out to be as much as you’d expected. Plus some old income tax debts have caught up with you. So now you’re filing a Chapter 13 case.

What happens to the furniture debt? It’s an undersecured one, with the depreciated furniture now worth only $2,500 while the debt is still $4,500. (That high balance is because of the 6 months of no payments and then irregular payments the following 6 months.)

You’d pay the $2,500 secured portion of the debt over the 36 months of the Chapter 13 payment plan. The annual interest rate would be lowered to around 5%. The resulting monthly payment is only $75 per month.

The remaining $2,500 unsecured portion of the furniture loan would be lumped in with your other general unsecured debts. You’d pay it only to the extent that you had money left over during your payment plan after paying your other more important debts (such as your unpaid income taxes).

So here’s the end result. Without bankruptcy cramdown, you’d have to pay the $4,500 balance plus about $1,000 of interest, a total of about $5,500. With Chapter 13 cramdown, you’d pay $2,500, plus only about $200 of interest, resulting in a total of as little as $2,700. (This assumes paying nothing on the unsecured portion.)

Just as importantly, paying only $75 per month instead of $200 would ease up on your cash flow. That would give you crucial money each month for either necessary living expenses or high-priority debt—such as taxes). This could make possible for you to meet your Chapter 13 goals—such as paying off the taxes you must pay.

Cramdown Timing Condition on “Any Other Thing of Value”

There is one timing condition related to personal property debts secured by other than a “motor vehicle.” If you bought “any other thing of value,” cramdown is not available for 1 year after its purchase. Section 1325(a)(5) of the Bankruptcy Code, and the “hanging paragraph” referring to that subsection, found right below Section 1325(a)(9).  Cramdown is available after that 1-year period has passed.

 

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.

 

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: Saving Your Vehicle Better through Chapter 13

September 24th, 2018 at 7:00 am

Chapter 7 is limited in how it can help with your vehicle loan. Chapter 13 can do much more—buy more time and often reduce your payments. 

 

Problems to Solve

Last week we addressed the kind of help Chapter 7 “straight bankruptcy” provides on your vehicle loan. Mostly it clears the deck of your other debts so that you can afford to keep your vehicle. Hopefully Chapter 7 accomplishes that.

But what if you can’t afford the contractual monthly payments even then? What if your vehicle isn’t worth what you owe on it? What if you’re behind on your payments or insurance and can’t catch up fast enough?

If you can’t or don’t want to keep your vehicle Chapter 7 also gives you the option of surrendering it. The benefit is that it legally write off your obligation to pay the “deficiency balance.” That’s the often surprisingly large remaining debt after a vehicle repossession or surrender. Writing off the debt is better than being saddled with it if you don’t file bankruptcy.

But what if you definitely need to keep your vehicle but can’t do so under Chapter 7? What can Chapter 13 do for you better?

Chapter 13 Buys Time—Often much More Time

If you are late on your vehicle loan payments, filing a Chapter 7 case will prevent an immediate pending repossession. But then virtually always you’ll have to catch up on any arrearage within the next month or two. That’s of course on top of keeping up on ongoing monthly payments.

Chapter 13 usually gives you much more time. Instead of giving you weeks to catch up, usually you’d have many months to do so. Exactly how much time you’d have depends on many factors. But generally you’d start paying your regular payments as they became due, and then chip away at the arrearage over the course of at least several months.

Chapter 13 “Cramdown” May Reduce Monthly Payments—Sometimes Significantly

You don’t always have to pay your regular monthly payments as they come due after filing under Chapter 13. If you qualify for “cramdown” you would likely pay less per month on the vehicle loan—possibly much less.

Cramdown is an informal term for the Chapter 13 procedure for legally re-writing the loan if your vehicle is worth less than you owe. To qualify your vehicle loan must be more than 910 days old at your Chapter 13 filing. (That’s slightly less than two and a half years.)

The loan payments are reduced because the loan is restructured based on the value of the vehicle. You pay that secured portion of the loan through monthly payments. Those payments are usually much less because they are based on the vehicle value instead of the contract balance.

Also, the payments are further reduced under Chapter 13 if the amount to be paid is to be paid out over a period longer than the time left on the contract.

Finally, if your vehicle loan has a relatively high interest rate, you can often also reduce that rate.

Each of these helps reduce the monthly payment on the loan.

You May Not Need to Catch Up on Missed Payments

If you qualify for cramdown you usually don’t have to pay any missed payments after filing a Chapter 13 case. You just pay going forward, at the reduced monthly payment.

Not having to scramble to pay missed payments is a huge benefit. You can concentrate on your most important obligations, such as the crammed down monthly payment.

Catching Up on Lapsed Vehicle Insurance

If you’d fallen behind on your vehicle insurance, that would be an extremely important obligation to focus on. You DO have to reinstate lapsed insurance quickly in order to keep your vehicle—in either Chapter 7 or 13. So the fact with cramdown you may not have to pay any missed payments or else be allowed to catch up more slowly means that you’d have more money available to reinstate your insurance.

Examples, Please

No doubt the benefits listed above sound great. It’s great to have much more time to catch up or to not need to catch up at all. It’s great to have reduced monthly payments, to pay less overall on a vehicle until it’s yours free and clear.

But these benefits would make more sense and be even more impressive if we showed how they work in practice. We’ll do that in our blog post next time.

 

The Surprising Benefits: Saving Your Vehicle Better through Chapter 13

A Dozen Surprising Benefits of Bankruptcy

March 19th, 2018 at 7:00 am

Bankruptcy can go beyond giving you immediate and long-term relief from your debts. It comes with many other surprising benefits. 

 

The next 12 blog posts will be about some of the most powerful and surprising benefits of bankruptcy.

You’re likely considering bankruptcy because you’re financially overwhelmed and need relief. You need immediate relief from debt collection pressures. You need long-term relief from having to pay debts you can’t handle. Bankruptcy provides that immediate and long-term relief.

But bankruptcy can often also give you some other rather amazing benefits, beyond the basic relief you expect. The next dozen weekly blog posts will give you details about the following benefits:

1. Get Back Money Recently Paid to a Creditor

Through “preference” law you could get back money you’ve recently paid to a creditor—paid either voluntarily or not.  

2. Undo Judgment Liens on Your Home

Through judgment lien “avoidance” you can often permanently remove a judgment lien, a tremendous practical benefit.   

3. Get Back Your Driver’s License after an Unpaid Judgment

Reinstate your license if you lost it by not paying a debt from an uninsured or underinsured motor vehicle accident.

4. Reinstate Your Driver’s License from Failing to Pay Tickets

Reinstate your license if it had been suspended for unpaid traffic infractions.

5. Get Back Your Just-Repossessed Vehicle

Filing bankruptcy not only prevents vehicle repossession; it may be able to get your vehicle back to you after it’s already been repossessed.

6. Get Out of an Unaffordable Payment Plan with the IRS/State

Bankruptcy comes with a surprising array of tools to use against your tax debts, allowing you to prevent or get you out of an onerous monthly payment plan.

7. Prevent Debt Collections from Re-Starting after Being “Stayed”

Bankruptcy doesn’t stop or only temporarily stops certain select debts from being collected—such as child/spousal support arrearage, recent income taxes, student loans, and debts incurred through fraud. But there are tools bankruptcy provides for resolving special debts like these permanently.

8. Prevent an Income Tax Lien Recording and Its Potentially Huge Damage

An income tax lien can turn a debt that could be discharged—permanently written off—into a debt that you must pay in full. A timely bankruptcy filing can prevent this financial hit.            

9. Bankruptcy Can Often Reduce Some or All of a Tax Lien’s Financial Impact

In some situations a tax lien can be made either wholly or partially ineffective. Besides saving you lots of money you get the peace of mind that your home is not at risk.

10. Avoid Paying Your Ex-Spouse Most of Your Property Settlement Debts

Chapter 13 allows you to discharge—write-off—some or all non-support obligations of your divorce.

11. “Cram down” and Change the Payment Terms of Your Vehicle Loan

If your vehicle loan is more than two and a half years old, you can usually reduce your monthly payments and the total amount you pay on the loan.

12. Get Out of Your Vehicle Lease through Bankruptcy

Leasing is often the cheapest way to have a vehicle short term, but is actually usually the most expensive long-term. Bankruptcy can be the best way to get out of this expensive obligation.

 

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.

 

Cramdown on Collateral Not Purchased with the Debt

January 15th, 2018 at 8:00 am

The 910-day & 1-year conditions for doing a Chapter 13 cramdown don’t apply if the creditor doesn’t have a purchase money security interest.

 

The Cramdown Advantage

Last week we got into Chapter 13 cramdown of vehicle loans and furniture loans. Cramdown can be an excellent way to keep personal property that’s securing a loan. It allows you usually to reduce the monthly payment as well as the total you pay on the debt. Often the reductions are significant. Cramdown can enable you to keep a vehicle or some other important personal property that you couldn’t otherwise. It can be a reason to file a Chapter 13 case because it isn’t available under Chapter 7 “straight bankruptcy.”

The 910-Day and 1-Year Conditions

But as we’ve been discussing there is a timing condition you must meet to qualify for Chapter 13 cramdown. With vehicles you must have entered into the contract at least 910 days (about two and half years) before filing the Chapter 13 case. With any other kind of collateral the contract must be at least a year old.

So, if you bought and financed a vehicle two years ago you can’t do a cramdown on the loan. If you paid too much and it’s depreciated a ton since then, too bad. You are stuck with the full balance on the vehicle loan.

Purchase Money Security Interest

However, in some circumstances these 910-day and 1-year conditions don’t apply. Then you can do a cramdown at any time. That’s if you did NOT buy the collateral with the proceeds of the loan at issue. Rather you owned the vehicle or other collateral free and clear and provided it as collateral for a loan. If so, the 910-day and 1-year conditions don’t apply and you can do cramdown on newer loans.

An Example

Imagine that eighteen months ago you took out a car title loan for $4,500. You had fallen behind on your home mortgage and were desperate to catch up. The collateral on the title loan was your sole vehicle, which had no liens against it at the time. It’s now worth $2,000.

You knew that the 50% interest rate was crazy but you’d expected to pay the loan off quickly with a tax refund. But your refund was smaller than you expected, and went to other even more pressing expenses. So you renewed the title loan, twice. You now owe $5,500 because of the interest and renewal charges. You’re supposed to pay $500 per month on that loan but have just fallen a month behind. You are afraid your car is about to be repossessed. (See “The consumer perils of a car title loan.”)

You’ve decided to file bankruptcy. On the advice of your bankruptcy lawyer you are filing a Chapter 13 “adjustment of debts” case.  There are other reasons having to do with your home mortgage, but you also learn you can do a cramdown on this car title loan. You can do so even though you’re still a year short of the 910 days since getting the loan.

Chapter 7 vs. 13

If you filed a Chapter 7 case instead you’d be stuck with the car title loan if you wanted to keep your vehicle. The lender might be willing to adjust some of the terms of the loan. But it would have no obligation to do so. Bankruptcy does not remove the lender’s lien from your vehicle’s title. The only leverage you have is your threat to let them take away your vehicle. (That way the lender would only get the liquidation value of your vehicle.) But the lender knows that you likely really need your vehicle. So that threat often doesn’t help make the lender more flexible. As a result, under Chapter 7 you’d likely have to pay the full balance of $5,500, at $500 per month, at the exorbitant interest rate, or close to it.

Under slightly different circumstances there could be a similar result even under Chapter 13. Assume that you’d bought the vehicle and financed it through this lender 18 months ago. You would not qualify for Chapter 13 cramdown because you wouldn’t meet the 910-day rule. You wouldn’t for another year.

That’s because that 910-day condition only applies “if the creditor has a purchase money security interest securing the debt.” (See the unnumbered “hanging paragraph” right after Section 1325(a)(9) of the U.S. Bankruptcy Code.)  “Purchase money security interest” is not defined in the Bankruptcy Code. But it essentially means a creditor’s right to your property created when you use the creditor’s money to purchase that property and immediately give the creditor a security interest in that property.

So if you give a creditor a security interest in collateral you already own, the 910-day and 1-year conditions don’t apply. (That’s a non-purchase money security interest.)  You can go ahead and cramdown this car title loan.

Cramdown at Work

The result is that you and your lawyer would propose to pay $2,000 as the secured portion of this loan. Your payment plan would have you pay, say, $100 per month (instead of $500). You’d reduce the interest rate to about 6% (instead of 50%).

The creditor would not have much say about this, except possibly to dispute the value of the vehicle. It might also have some argument with the appropriateness of the monthly payment amount and interest rate. But most likely the terms would end up as you proposed or not much different.

The remaining unsecured portion of $3,500 would be lumped in with all your other general unsecured debts. You would pay these only to the extent that you could afford to pay them during the 3-to-5-year plan. Because all or most of your money would instead go towards secured and priority debts, likely little or nothing would be available to pay this $3,500.

At the end of the Chapter 13 case, whatever wasn’t paid would be discharged—permanently written off. You would end up paying a fraction of what you would have otherwise on the title loan. You would be able to keep your vehicle when it would have been very difficult or impossible without cramdown.

 

Verifying that a Creditor Has a Valid Security Interest

January 12th, 2018 at 8:00 am

A creditor’s rights over you in either Chapter 7 or 13 vastly increase if it has a security interest. Now’s the time to find out for sure.

Reaffirmation vs. Cramdown

The last four blog posts have compared Chapter 7 reaffirmation with Chapter 13 cramdown of a secured debt.

With reaffirmation you keep the vehicle or other collateral but continue to owe the debt. Usually you owe the full debt, and the monthly payments remain the same. But sometimes the debt and monthly payments can be reduced if the collateral is worth less than the balance.

With cramdown you keep the collateral and usually pay less monthly and les overall. The debt is divided into secured and unsecured portions. The secured portion is equal to the value of the collateral; the unsecured portion is the rest of the debt. You pay the secured portion over time, with monthly payments usually less than the usual contract amount. Often the interest rate is reduced as well. The unsecured portion you pay only to the extent you can afford to do so during your Chapter 13 plan. Whatever you can’t pay is discharged—permanently written off.

Reaffirmation apples only to Chapter 7 “straight bankruptcy.” Cramdown applies only to Chapter 13 “adjustment of debts.”

A Valid Security Interest

Both reaffirmation and cramdown are needed only with debts that are legally secured against something you own. Your creditor must have a valid, legally enforceable security interest in something you own. Otherwise the debt is just a general unsecured debt. If so you could discharge that debt without paying anything to the creditor. You don’t have to enter into a reaffirmation agreement to pay the debt in full or in part. You don’t have to pay the secured portion in a cramdown if the debt is not secured at all.

Consider this example. Assume you took out a personal loan of $6,000. You agreed to give the lender a security interest in all your furniture. But the creditor does not have you sign anything but a promissory note. That’s an agreement to pay the debt. The creditor does not have you sign a security agreement or anything else stating that you are backing up the debt with a right to the furniture if you don’t pay the debt.

Then a year later you file a bankruptcy case.

Effect of No Security Interest in Bankruptcy

Assume that the amount owed on the debt is now $5,500, and your furniture has a replacement value of $3,000.

If you file a Chapter 7 case you could very likely simply discharge that debt without paying anything. And the creditor would have no right to your furniture.

If instead this creditor DID have a security interest in the furniture, one of three things would likely happen in a Chapter 7 case:

  • If you wanted to keep your furniture, the creditor could insist that you agree to pay the debt under the original monthly payment and all the other terms of the loan.
  • Acknowledging that the furniture was not worth the amount of the debt, the creditor could reduce the amount reaffirmed to closer to $3,000, and maybe reduce the monthly payments.
  • You could surrender the furniture to the creditor and pay nothing.

In a Chapter 13 case one of two things would likely happen:

  • If you wanted to keep your furniture, through cramdown you’d pay $3,000 plus (possibly reduced) interest. You’d pay the remaining $2,500 if and to the extent you could afford to do that in your payment plan.
  • You could surrender the furniture to the creditor and pay the remaining debt if and to the extent you could.

So you can see that the creditor has infinitely more leverage when its debt is secured than when it’s not. This is true in both Chapter 7 and 13.

Determine If a Debt is Really Secured

The key lesson in this is to find out whether debts you think are secured really are. Most of the time if you think a creditor has a security interest in something, it actually does. But sometimes your understanding about this ends up being wrong. So talk with your bankruptcy lawyer about each one of your seemingly secured debts. Now is the time to find out whether your assumption is wrong and/or a creditor has neglected to make its debt a legally secured one.

 

Example of Reaffirming vs. Cramming Down Furniture Loan

January 10th, 2018 at 8:00 am

An example comparing the reaffirmation of a debt secured by furniture in a Chapter 7 case and cramming down that debt in a Chapter 13 case. 

 

Last time we showed how cramdown on a vehicle loan can reduce the payments and the total amount you pay. The amount you save monthly and in total may be enough to justify filing a Chapter 13 case. The alternative is usually paying the full monthly payments and the full contract balance through Chapter 7 reaffirmation.

Cramdown on Debt Secured by Non-Vehicle Personal Property

The concept is the same with secured debts on personal property other than your vehicle. Chapter 13 allows you to re-write the debt based on the value of the collateral, such as furniture you bought. That collateral value amount becomes the secured part of the debt. You pay that part in full, with interest but often at a lower interest rate. The monthly payment is almost always less than the contract amount. That’s because it’s based on the value of the collateral, which is less than the full loan balance.

Also, the total paid on the debt is usually less because the remaining unsecured part of the loan almost always is never paid in full, and is often paid quite little.

The following example helps make sense of this, including how furniture/personal property cramdown is different from vehicle loan cramdown.

The Background Facts

Let’s say Michael and Jessica moved 2 years ago to their present home in a new state, pursuing job opportunities. They bought a substantial amount of furniture and appliances for the home and their two middle school-aged children. That seemed to make more sense at the time because their kids had just outgrown their beds and other furniture. They bought and financed $5,500 worth of stuff.

After 6 months grace period, they began making the $180 monthly payments. At an interest rate of 24% per year, these payments were to last 48 months.

Then a year ago Michael was hit with a serious illness that lasted 6 months. Although he’d thought his work-based insurance was decent, he still ended up with $18,000 in medical bills. He had some disability insurance through work, but it provided only a portion of his normal income. So Michael and Jessica did not have the money to make the furniture/appliance loan payments, or pay the medical bills. Today they still owe $5,000 on the furniture/appliance loan. They also fell behind on their other substantial unsecured debts—personal loans and credit cards.  They are now being sued by a collection company on one of the larger medical bills.

The Chapter 7 Reaffirmation Option

They go to see a bankruptcy lawyer about their options. The lawyer informs them that a Chapter 7 bankruptcy filing would discharge—legally write off—all of the medical debts and indeed all of their debts. They would no longer owe anything on them.

An exception is the furniture/appliance loan. They COULD surrender all of the furniture and appliances and owe nothing. But that would largely empty out their home. Jessica and Emily are hesitant to do that, mostly because it would be hard on their kids.

Their other option is to reaffirm the debt. This means that they would agree to continue being liable on the debt. They would exclude that one debt from the discharge of debts that the Chapter 7 case would provide them.

Two Possible Reaffirmation Options

As we saw in the last blog, most vehicle lenders require you to reaffirm the debt without any change in its terms. Take it or leave it. If you want to keep the vehicle you must sign back on for the full debt, all of the contract terms. That’s true even if the vehicle is worth less than what you owe on it.

Creditors secured by non-vehicle personal property tend to be more flexible. Furniture and appliances lose their value even faster than vehicle. There is a well-established system of auto auctions for getting cash for repossessed vehicles. But furniture and appliances, and especially electronics, turn almost valueless, and are a pain to cash in. Creditors tend to be happy to get paid something by their customer rather than having to go through the hassle of repossessing and selling the used furniture/appliances for very little money.

So Jessica and Michael may not be stuck with a full reaffirmation. Their lawyer may well have a history of dealing with their furniture/appliance creditor. The lawyer may well be able to negotiate a reaffirmation at reduced monthly payments, on a reduced total debt. For example, both sides could agree the furniture/appliances now are worth only $2,500. Michael and Jessica could agree to pay that amount on monthly payments of $97, for 30 payments, at 12% interest. That would be close to half as much per month ($97 vs. $180), over a shorter period of time (30 months vs. 41 more months on the contract). The savings—both monthly and overall—would be substantial.

Cramdown In Chapter 13

But what if the creditor insisted on a full reaffirmation—$180 per month on the $5,000 contract balance? It’s possible, but again most creditors under these facts would be more flexible.

But if not, Michael and Jessica have the Chapter 13 cramdown option.

There is one condition. The debt has to be at least 1 year old at the time of their Chapter 13 case filing. (This is in contrast to 2 and a half years with vehicle.) Here the debt is 2 years old so this condition is met.

In their Chapter 13 payment plan their lawyer would specify terms very similar to the reaffirmation just mentioned above. The $5,000 debt would be divided into the $2,500 secured portion and the remaining $2,500 unsecured portion. The plan would designate $97 per month to be paid to this creditor over about 30 months at 6% interest. That would pay off the secured portion.

The remaining $2,500 unsecured portion would be put into the pool of medical bills and all the other debts. This pool would be paid only if and to the extent there was money left over. Let’s assume that 5% of this pool got paid in Michael and Jessica’s Chapter 13 case.

So, through cramdown this furniture creditor would be paid the $2,500 secured portion, at reduced interest. It would also receive 5% of the remaining $2,500, or another $125. This is a total of $2,625 (plus some interest). Jessica and Michael and their kids would be able to keep the furniture. At the end of the payment plan the rest of the furniture/appliance debt, and all the rest of their debts, would be forever discharged.

Conclusion

These two options—reaffirmation or cramdown—give a lot of control to Michael and Jessica. They can keep or let go of the collateral. If they keep it and the creditor is sufficiently flexible, a reaffirmation with reduced terms can work well. If the creditor insists on not changing the terms, Jessica and Michael can chose to go along. It would be a way to start rebuilding their credit record faster. But if they want to pay less they can use a Chapter 13 cramdown instead.

 

Timing: Qualifying for Cramdown on Personal Property Collateral

September 29th, 2017 at 7:00 am

Chapter 13 cramdown doesn’t just work for vehicle loans. You can also cram down debt for the purchase of “any other thing of value.” 


Our last blog post was about the cramdown of vehicle loans. Cramdown can significantly decrease your monthly payment and reduce how much you pay for your vehicle before it’s yours.  To qualify, your loan has to meet some conditions. In particular the vehicle loan has to be more than 910 days old when you file your Chapter 13 case. (That’s about 2 and a half years old.)

But cramdown also applies to other kinds of purchase loans with collateral, not just vehicles. And instead of 910 days there needs to be only 365 days between your purchase and your Chapter 13 filing. 

Cramdown on “Any Other Thing of Value”

In a Chapter 13 case you can do a cramdown on loans with collateral that is “any other thing of value.” (See Section 1325(a)(5) of the Bankruptcy Code, and the odd “hanging paragraph” referring to that subsection, found right below Section 1325(a)(9).)  So you can often reduce monthly payments and reduce how much you pay for that “other thing of value.”

If you bought the “thing of value” by financing its purchase, you can’t do a cramdown “if the debt was incurred during the 1-year period preceding that filing.”  (From the same “hanging paragraph as above.) After that 1-year period you CAN cram down that secured debt.

An Example

Say you bought a houseful of modest furniture a year and a half ago when you moved your family to your present home. You’d been hired for a promising new job and hoped that it was your ticket for paying off a lot of accumulated debt. But the job did not pay nearly as much as you’d been led to believe. So now you see a bankruptcy lawyer because you need financial relief.

The purchase price for all the furniture a year and a half ago was $7,500. The interest rate on the contract is 18% because of your already weak credit rating.   The monthly payment is $250. Because you didn’t have to make payments for the first 6 months, and then you missed payments and accrued late fees over the last several months, the debt is now still $7,000.

Because most furniture depreciates very quickly it’s all now worth only $3,000.

So if you now file a Chapter 13 case you can do a cramdown on this furniture loan. You qualify because you bought the furniture more than a year ago. 

Through your Chapter 13 payment plan you’d pay the $3,000 value of the furniture, the secured part of the loan.  The interest rate gets reduced, let’s say to 5%. The monthly payment would go down to, say, $100. You’d pay these $100 payments for around 32 months during your 3-year plan.

You’d pay very little on the remaining $4,000 unsecured part of the $7,000 debt. That $4,000 would simply be added to the rest of your “general unsecured” debts. These include any medical bills, credit card debts, and most other debts not secured by collateral. These would all receive whatever money you could afford to pay during the 3-year payment plan—beyond your reasonable living expenses and other higher priority debts (such as the secured part of the furniture loan).

At the end of 3 years your Chapter 13 case would be finished. You’d have paid off the $3,000, saving money from the lower interest rate, and saving cash flow through the much lower monthly payment. You’d have paid little or nothing on the $4,000 unsecured part of the debt. Yet you’d own the furniture free and clear, having paid way less than half of what you would have otherwise. 

 

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