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Archive for the ‘reaffirmation’ tag

Keep Your Vehicle without Reaffirmation

May 6th, 2019 at 7:00 am

Can you keep your vehicle without reaffirming its loan? Can you make the payments without reaffirming?  What if you can’t afford the payments? 

 

Last week we discussed keeping your vehicle in Chapter 7 by entering into a reaffirmation agreement with your vehicle lender. Through this agreement you exclude your vehicle loan from the discharge of debts. In return you get to keep your vehicle. You also get an early start on rebuilding your credit by making payments on and eventually paying off this loan.

We ended last week with two unanswered questions:

  • Would you be able to keep your vehicle in a Chapter 7 case if you DIDN’T sign a reaffirmation agreement but just kept current on your payments and insurance?
  • Are there any other options if you couldn’t afford the vehicle payments even after discharging your other debts?

We cover the first question today, the second one next time.

Risks to Avoid If You Can

Think long and hard before entering into a reaffirmation agreement. If you sign the agreement you’re passing up on this one-time opportunity to get out from under the debt. Be sure you understand the risk that you might not be able to make the loan payments at some point. Then you’d have to surrender the vehicle. At that point you would likely be left owing the lender a “deficiency balance.” This is the amount remaining on your debt after applying the lender’s proceeds from selling your vehicle after repossession.  The “deficiency balance” you’d owe would likely be much more than you expect because of the costs the lender is allowed to add to the debt, and the relatively small amount it would likely get from auctioning off your vehicle.

A “Ride-Through” Option?

One possible way to avoid this risk of a deficiency balance debt is to make the payments without reaffirming the debt.

The idea is that your lender shouldn’t be able to repossess your vehicle if you’re complying with all your contractual obligations. This mostly includes being perfect on your monthly payments and keeping the vehicle insurance current.

And if you don’t sign a reaffirmation agreement you won’t be liable for any remaining debt on the loan. The vehicle loan debt would be discharged along with your other debts.

So you’re trying to keep the vehicle without the risk of owing a big balance if you ever have to surrender it.

“Ride-Through” Problems

There’s one huge problem with this attractive-sounding option. In most (if not all) of the country, a vehicle lender DOES have the right to repossess a vehicle once the Chapter 7 case is over if there’s no signed reaffirmation agreement. This is true even if the loan payments and the vehicle insurance are current.

So, most lenders insist on a reaffirmation agreement if you want to keep the vehicle. They have good reason to do so. They want you to pay off the entire loan. You’ll more likely do that if you have the risk of owing a deficiency balance hanging over you throughout the remaining life of the loan.  The lender doesn’t want to leave you with the option of surrendering the vehicle whenever you want without financial penalty.

Your Remaining Options

You may nevertheless have some options.

  • Some vehicle lenders may still allow you to just keep current without reaffirming, and keep the vehicle. These would more likely be smaller lenders. This may work especially with a vehicle that’s already worth less than what you owe. In this situation the lender may prefer getting your monthly payments instead of having to take a loss on the loan. This may be better on their books now and the lender has a good chance of getting more money in the long run. So ask your bankruptcy lawyer if your lender may be amenable to this.        
  • In some situations the bankruptcy court may not approve a reaffirmation agreement.                                                                                                                                                                    This can happen if your lawyer will (strategically or otherwise) not sign off on the agreement. This then triggers the court’s review and necessary approval (which is not needed if your lawyer signs off). The court would likely not approve the agreement if your budget shows that you can’t afford the loan payments. If the court doesn’t approve the agreement, you may be able to keep the vehicle by just keeping current on the payments (by scrimping on the rest of your expenses). This option is tricky and should only be done with the advice and close assistance of your lawyer.
  • Some lenders might let you adjust the contract terms in your reaffirmation agreement, such as by lowering the monthly payments. Since then you’ll more likely be able to make the payments, it’s less likely the vehicle will get repossessed. So reaffirming in this situation is less risky. Frankly, most vehicle lenders aren’t this flexible, but talk with your lawyer about whether yours might be.
  • Chapter 13 “cram down” could force your lender to accept lower monthly payments, and even money overall. This is an important option if you must keep your car and can’t afford to do so without lower payments. This is the topic of next week’s blog post.

 

Keep Your Vehicle by Reaffirming its Loan

April 29th, 2019 at 7:00 am

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

A Vehicle Loan is a Secured Debts

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

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

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

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

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

Reaffirming the Vehicle Loan

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

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

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

Reaffirmation Is a Voluntary Discharge Exception

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

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

Voluntarily Deciding Not to Reaffirm

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

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

The Risks of Reaffirming

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

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

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

Other Options?

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

Also, would you be able to keep your vehicle in a Chapter 7 case if you DIDN’T sign a reaffirmation agreement but just kept current on your payments and insurance?

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

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

 

A Handy Guide to Chapter 7 vs. 13 for Your Secured Debts

January 22nd, 2018 at 8:00 am

When is it better to reaffirm your secured debt—such as a vehicle loan—in a Chapter 7 case or instead cram it down under Chapter 13?  

 

The last 4 weeks of blog posts have been about options for keeping collateral through Chapter 7 and Chapter 13. Mostly these options have involved reaffirming a secured debt in Chapter 7 or cramming it down in Chapter 13. Here is a handy summary and guide.

Reaffirmation in Chapter 7

You can only reaffirm a debt in a “straight bankruptcy” Chapter 7 case. Here’s what you need to know about reaffirmation:

  • By reaffirming a debt you legally exclude it from the discharge (write-off) of your debts that bankruptcy otherwise provides you. This means that you are volunteering to continue owing that particular debt. In return you can keep the collateral (such as a vehicle), and start rebuilding your credit.
  • For many debts secured by collateral, if you want to keep the collateral you have to reaffirm the debt. But sometimes you can just continue making payments and not going through a formal reaffirmation. It depends on the creditor. Talk with your bankruptcy lawyer.
  • Reaffirmations are risky because you are stuck with the debt if your circumstances change. This can especially be problem if you can’t make the payments, the collateral is repossessed, and you still owe the remaining “deficiency balance.”  
  • With most vehicle loan reaffirmations you have to accept ALL the terms of the loan. In particular you can’t lower the payments or the total amount you owe. But sometimes, more often with smaller creditors, the payment terms can be changed. Find out from your bankruptcy lawyer about your creditor’s policies.
  • If you’re behind on your payments often you have to catch up quickly if you want to keep the collateral. This is especially true with vehicle loans. By quickly we mean bringing the account current within about 2 months of filing the Chapter 7 case.
  • The reason there’s often not much flexibility in the timing is because reaffirmation agreements must be signed and filed at the bankruptcy court before the discharge of debts. The discharge happens about 3 months after you file your case.
  • If you don’t have a bankruptcy lawyer, or if he or she doesn’t sign the reaffirmation agreement, you must attend a reaffirmation hearing. At this hearing the bankruptcy judge asks you questions about the reaffirmation and decides whether to approve it. Avoid this by being on the same page with your lawyer so both of you sign the reaffirmation agreement.
  • You can change your mind about and cancel—or rescind—a reaffirmation agreement after filing it at court. But the rescission must be within a very short time—within 60 days of the reaffirmation’s filing or before the entry of the discharge order, whichever is later.

Cramdown in Chapter 13

You can only cram down a debt in an “adjustment of debts” Chapter 13 case. Here’s what you need to know about cramdown:

  • Cramdown can often reduce your monthly payment and the total amount you pay on a secured debt. With a vehicle loan, under the right circumstances you can significantly reduce both the monthly payment and the total paid.
  • Cramdown only makes sense if the collateral is worth less than you owe on the debt. The more that the collateral is worth less than the debt amount the more cramdown could help. That’s because you pay the full amount of that portion of the debt equal to the value of the collateral. On a loan with a $15,000 balance secured by a truck worth $9,000, you would definitely pay $9,000 of that loan.
  • The remaining unsecured portion you would usually only pay to the extent you could afford to do so. It would be lumped in with the rest of your “general unsecured debts.” In the above example, the remaining $6,000 unsecured portion would be lumped in with your credit cards, medical bills, etc. Often you pay only a small percent of these unsecured debts, and sometimes 0%.
  • Because you usually pay only a certain set amount of your “general unsecured debts,” adding the unsecured portion of your secured debt to those debts usually does not increase the dollar amount you pay on this group of debts. So that usually does not increase the total you have to pay during your 3-to-5-year payment plan. In the example, assume you owe $50,000 in other “general unsecured debts.” Adding the $6,000 unsecured portion would make it $56,000. But if your plan had you paying only $3,000 towards this pool, whether the total in that pool was $50,000 or $56,000 would increase the $3,000 you’d pay.
  • At the end of your Chapter 13 case the unpaid portion of your “general unsecured debts” are discharged. This means the debts are permanently written off. That includes the unsecured portion of the crammed down vehicle or other secured debt.
  • With cramdown, you don’t need to catch up on any unpaid payments.
  • You can’t do a cramdown on most vehicle loans until the loan is more than 910 days old. That’s about two and half years old. Before that you could get more time to catch up on any late payments. But you don’t get the advantage of paying only the secured portion of the vehicle debt.
  • Similarly you can’t do a cramdown on debts secured by other than vehicles until the debt is more than a year old.
  • These two timing thresholds (910 days and 1-year) do not apply if the collateral was not purchased with the debt. So if you already owned the collateral but then offered it to secured a subsequent loan, there are no 910-day and 1-year timing thresholds. You can do a cramdown at any time.
  • Similarly, these two timing thresholds don’t apply if the vehicle or other collateral was not acquired for “personal use.” So purchases for business or other possibly uses can be crammed down without waiting for these time periods to pass.   

Other Considerations

  • A creditor has much more leverage over you when its debt is legally secured against something you own that you want to keep. So make sure that a debt you believe is secured actually is. Creditors occasionally mess up on the procedures to create a secured debt, which can be complicated. Your lawyer can determine whether your creditor took the necessary steps to create an enforceable “perfected security interest” on your asset.
  • Besides your creditor, you also need to consider the interests of the bankruptcy trustee if you have equity in the collateral. Usually that equity is protected by “exemptions.” Your lawyer will determine if anything you own is covered by the available exemptions. If not both Chapter 7 and 13 have ways of protecting a non-exempt asset.

 

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 Reaffirmation Agreement vs. Cramdown of Vehicle Loan

January 8th, 2018 at 8:00 am

Here’s an example of the reaffirmation of a vehicle loan in a Chapter 7 case vs. “cramdown” of the debt in a Chapter 13 case.

 

We’re in a series of blog posts about choosing between Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.”  Along these lines two blog posts ago we outlined when to reaffirm a secured debt (focusing on a vehicle loan) under Chapter 7 vs. handling it under Chapter 13 instead. Then last time we gave some examples showing which option works better in different situations.  That focused on situations in which someone had fallen behind on the payments, and/or had a rough payment history. But we didn’t cover the special situation of Chapter 13 “cramdown.”

Today we’ll give an example when cramdown on a vehicle loan may be a good reason to file a Chapter 13 case.

The Background Facts

Let’s say Christina is current on her vehicle loan. She got far behind on all her other debts because of a serious illness for which she was underinsured. She’s healthy now but being so sick hit her hard financially. She has way more debt than she could ever pay off, and she’s being sued by two of her creditors.

She absolutely has to keep her vehicle to be able to get to work and take her son to school. So Christina knows she has to file a bankruptcy case to be able to make payments on her vehicle. She has to act soon because the lawsuits will turn into judgments and then into garnishments of her paycheck.

The Chapter 7 Reaffirmation Option

Her bankruptcy lawyer informs her that a Chapter 7 bankruptcy filing would discharge all her non-vehicle debts. This means she would no longer owe anything on them.

Plus Christina could enter into a reaffirmation agreement with her vehicle lender, and continue paying on that debt. She does not mind continuing to be legally liable on this debt because keeping her car is her highest priority. Plus continuing to pay on the vehicle loan consistent with her original contract would help resuscitate her post-bankruptcy credit record.  

The Chapter 13 Vehicle Loan Cramdown

But now let’s add a few more facts. When Christina bought her car 3 years ago she had a much higher paying job than she has now. The car she bought reflected her relatively high pay. Then, through a combination of bad choices and bad luck she lost her job, became a single mom, and had the car accident.

The result of all this is that vehicle loan’s monthly payments are quite high. They are more than she can afford to pay even without her other debts. This is in part because of her costly childcare and other expenses related to her baby.

Christina’s lawyer informs her that in a Chapter 7 reaffirmation she’d have to pay the vehicle loan’s full monthly payments. But Chapter 13 “cramdown” of that vehicle loan could reduce that monthly payment amount. In fact, cramdown could save her money both short-term and long-term.

IF she qualifies, cramdown essentially allows her to re-write her car loan based on the fair market value of her vehicle.

Qualifying for Vehicle Loan Cramdown

First, cramdown doesn’t do any good for Christina unless her vehicle is worth less than she owes on it. Otherwise no reduction in her monthly payment or in the amount she owes is possible. The less her car is worth compared to what she owes the more cramdown helps her.

Second, cramdown on a consumer vehicle loan only applies if the loan is more than 910 days old at filing. (See the unnumbered “hanging paragraph” right after Section 1325(a)(9) of the U.S. Bankruptcy Code.) 910 days is about 2 and half years. Since Christina bought her car 3 years ago, she meets this 910-day requirement.

Cramdown Applied

Adding some final facts, assume that Christina’s car is worth $8,000 but she still owes $15,500 on it. The monthly payments were $600 on a 5-year contract. She can realistically afford to pay $275 per month into her Chapter 13 plan payment. Based on her present income, she would have to pay that for 3 years.

Cramdown for Christina would mean that she could pay only $8,000 for her car, plus interest. That interest would often be at a reduced rate. That covers the secured part of her debts—the $8,000 of the $15,500 that she owes.

She would pay the remaining unsecured portion—the remaining $7,500—if and only to the extent that she could afford to do so. That $7,500 would be put into the pool of all her other unsecured debts. That pool would receive any leftover money she pays into her Chapter 13 plan. That means whatever money—IF ANY—after the $8,000 secured debt portion of the vehicle loan, plus interest, plus Chapter 13 administrative expenses (the trustee fees and any remaining attorney fees).

In this case Christina is paying $275 for 36 months, or $9,900. Of that $8,000 plus about $750 in interest would go to her vehicle lender. Virtually all of the remaining $1,150 ($9,900 minus $8,750) would go to her trustee and attorney fees.

So, Christina would end up paying Chapter 13 monthly plan payments of less than HALF her present monthly car payments. ($275 vs. $600). Although the plan payments would extend longer than her car loan would have (3 years instead of 2), the total she’d pay on ALL of her debts would much less than how much she would have paid on just her car if she had filed a Chapter 7 case and reaffirmed on the vehicle loan.  ($9,900 in her Chapter 13 plan vs about $16,500 to reaffirm her vehicle loan.)

Conclusion

So here it looks like Christina could save both monthly and in the long run under Chapter 13 cramdown.  Most importantly, the lower monthly payments would enable her to keep her car when she otherwise couldn’t.

Note that usually there are other considerations affecting the choice between Chapter 7 and 13. Sometimes there are many considerations that need to be weighed against each other. For example, if Christina had a way to get another vehicle—through a relative, perhaps—going through a Chapter 13 just to keep her car may well not be worthwhile. However, if she was behind on a mortgage or taxes, these could be additional reasons to file under Chapter 13. Choosing your best option truly does require looking at your complete financial life with the help of your experienced bankruptcy lawyer.

 

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.

 

Rescinding a Reaffirmation Agreement

December 29th, 2017 at 8:00 am

Unlike most legal contracts, you can change your mind and undo a reaffirmation agreement during a short period of time after signing it.  

 

Reaffirmation Agreements

Our last four blog posts have been about reaffirmation agreements in a “straight bankruptcy” Chapter 7 case. In particular the first of these introduced these special agreements and the second one discussed their risks. (The ones dated December 20 and 22.) You might want to look at those before reading further here.

In one sentence: if you want to keep for yourself the collateral on a debt (such as a vehicle), usually you have to agree to continue owing that debt, which you do by signing a reaffirmation agreement. That agreement excludes that one debt from the discharge (the legal write-off) of your debts provided through your bankruptcy case.

Your bankruptcy lawyer should fully advise you of your options and rights before you sign a reaffirmation agreement. One of the rights you should learn about is your time-limited right to rescind the agreement. This is the subject of today’s blog post.

Your Right to Rescind

Your ability to rescind a reaffirmation is laid out clearly in the bankruptcy court’s sample reaffirmation agreement form. It states (see top of page 5):

You may rescind (cancel) your reaffirmation agreement at any time before the bankruptcy court enters a discharge order, or before the expiration of the 60-day period that begins on the date your reaffirmation agreement is filed with the court, whichever occurs later. To rescind (cancel) your reaffirmation agreement, you must notify the creditor that your reaffirmation agreement is rescinded (or canceled).

Timing of Rescission

Notice the two-pronged deadline—either before the court’s discharge order or within 60 days of the reaffirmation agreement’s court filing. The discharge order is usually entered about 60 days after your “meeting of creditors.” That in turns usually comes about a month after the filing of your Chapter 7 case. More often than not a reaffirmation agreement is filed after the “meeting of creditors.” So, usually the rescission deadline is 60 days after the reaffirmation agreement gets filed at the bankruptcy court.

The problem is that usually you don’t know when your reaffirmation agreement is filed. Furthermore, once it’s filed most lawyers will understandable assume that you’re not going to change your mind about it. So you’ll be told about your right of rescission but then most of the time nobody figures out or tracks when that right expires.

(The exception might be when there is a specific reason that you are considering rescinding even at the time you sign the reaffirmation agreement. We’ll give an example towards the end of this blog post.)

Seriously consider specifically asking your lawyer to determine your rescission deadline, and then calendar it. Your circumstances could change even in that short time so you don’t want the deadline to pass unnoticed. It’s good for you to consider one last time whether you really want to stick with that debt.

Notice of Rescission

If you do change your mind and want to rescind the reaffirmation agreement, instruct your lawyer to give the appropriate notice to the creditor.

Make sure that lawyer’s representation has not ended. Some lawyers end their responsibilities to you at the discharge and closure of the case. That often happens before the rescission deadline. Don’t just assume that your lawyer is continuing to represent you and “will take care of it.” Get verification that he or she is accepting the responsibility and is giving the creditor notice of rescission.

If you are not represented by a lawyer, you must make absolutely sure that you notify the creditor adequately. Mail the notice by certified mail, return receipt requested, so that you get verification well before the deadline. Use the address in your creditor schedules, after verifying it is accurate. Under certain circumstances it may make sense to send notice to more than one address. For example, if the creditor has been represented by a lawyer definitely give notice to the lawyer as well.                                                                                            

Circumstances to Rescind

The vast majority of the time you will not rescind a reaffirmation agreement. You’ll have understood what you signed and its consequences. Your circumstances likely won’t change much during the short time between signing the agreement and your deadline to rescind. Your well-informed decision to reaffirm will stand the test of time.

However, you would consider rescinding if somehow you didn’t understand the consequences of reaffirming, or your circumstances changed.

Considering the safeguards in place it’s hard to not be well-informed about what reaffirming a debt means. If you’re represented by a lawyer he or she must certify that certain specific details were explained to you. If you’re not represented by a lawyer you go to a reaffirmation hearing where a judge does the same thing. But if somehow something was still not clear, you can simply get out by rescinding.

Circumstances can change in countless ways. You may suddenly get access to another less expensive vehicle, and decide to get out of your reaffirmation agreement. You may realize that you can’t afford the vehicle after all. Your insurance may go way up because of a couple tickets or an accident. The vehicle may need a string of repairs you can’t afford.

One other situation is if you are not sure whether you want to reaffirm at the point you have to decide. For example, you may be waiting to hear if you got accepted for a better-paying job enabling you to pay the vehicle loan payments. So you sign the reaffirmation agreement to allow you to keep the vehicle. Then you don’t rescind if you get the job; you can rescind if you don’t.

To be clear, you don’t need any particular reason to rescind. You have an absolute right to do so within the stated time.

 

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.

 

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