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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.

 

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.

 

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.

 

Be Cautious about Reaffirming a Debt

December 22nd, 2017 at 8:00 am

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

 

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

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

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

Passing up Your One Opportunity to Escape the Debt

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

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

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

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

Reaffirmation Risk

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

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

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

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

Avoiding this Risk

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

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

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

Choosing to Accept the Risk

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

 

A Debt Reaffirmed under Chapter 7

December 20th, 2017 at 8:00 am

You can usually keep collateral you need to keep by entering into a “reaffirmation agreement” with the creditor during your Chapter 7 case. 

 

Last time we got into debts that you might voluntarily pay after a Chapter 7 case out of personal obligation. Today we cover debts voluntarily paid but for the purpose of keeping the collateral that’s securing the debt. This is usually done by “reaffirming” the secured debt.

There can be lots of important side issues with “reaffirmations.” For example, do you always have to reaffirm a debt in order to keep the collateral? What happens if you’re not current on the debt you want to reaffirm? Can you reaffirm a debt when it’s unsecured—when there is no collateral to retain?  When is reaffirming a debt dangerous?

We’ll get to those and other side issues next time. But today we’re introducing reaffirmations in their most straightforward form.

The Straightforward Scenario

Let’s say you’re current on a debt that’s secured by something you definitely want to keep. It could be a home mortgage, a vehicle loan, or a furniture contract—or just about any secured debt. We’ll focus on vehicle loans, since they’re likely the most commonly reaffirmed.

You want and need to keep the vehicle, and maybe have had to work hard to keep the loan current. In fact one of your legitimate reasons for doing bankruptcy is to get rid of other debts so that you CAN keep current on your vehicle loan.

You may even be wonder whether filing bankruptcy might mean you wouldn’t be allowed to keep paying your vehicle loan. Rest assured that’s virtually never a problem. Your creditor wants to be paid, and paid in full. Having you reaffirm the debt makes that much more likely.

The bankruptcy court will generally not have any issue with you reaffirming a secured debt. Assuming your bankruptcy lawyer agrees that it’s in your best interest to keep your vehicle and remain liable on the loan, he or she will sign off on it and the court will allow the reaffirmation to go through.

The Chapter 7 Reaffirmation Agreement

You reaffirm a debt by signing a reaffirmation agreement. This paperwork is usually prepared by the creditor and presented to you through your lawyer. You review it carefully, get fully informed about its effects by your lawyer, have him or her sign it, you sign it, and then it’s filed at the bankruptcy court. It must be filed before the time the court grants you a discharge of your debts. That usually happens about 60 days after your “meeting of creditors,” or about 3 months after your Chapter 7 filing.

The main consequence of a reaffirmation agreement is that it excludes that particular debt from the discharge of your debts. You would owe that single debt as if you hadn’t filed the Chapter 7 bankruptcy case at all. See Section 524(c) of the U.S. Bankruptcy Code about the effect of a reaffirmation agreement.

Rescinding a Reaffirmation Agreement

Even after getting well informed by your lawyer and signing the agreement you might change your mind. Your vehicle may all of a sudden need an expensive repair. You may get access to a less expensive vehicle. Or you might get another job enabling you to use public transit and no longer need the vehicle.

Reaffirmation law gives you a SHORT rescission period to change your mind. Your deadline to rescind is either at the time the court discharges your other debts or 60 days after the reaffirmation agreement is filed at court, whichever is later. You rescind by simply telling the creditor that you are doing so. You don’t need to give any reason. See Section 524(c)(4) of the Bankruptcy Code about rescinding a reaffirmation agreement.

Benefit to Your Credit Record

Reaffirming a debt is one of the quickest ways to improve your credit record after bankruptcy. Assuming you want to keep your vehicle (or whatever collateral is on the debt), and it’s in your interest to do so, you can start putting your positive payment history into your credit record the first month after completing your case (if not even a bit sooner). Assuming you’re acting responsibly otherwise your on-time payments should have a positive effect on your credit.

Chapter 7 vs. Chapter 13

Reaffirmations happen in Chapter 7; technically not in Chapter 13 “adjustment of debts” cases. That’s because under Chapter 13 you generally get to retain your assets in return for working out a repayment plan.

Even without “reaffirmation,” in Chapter 13 if you are current on a secured debt and want to keep the collateral it’s usually just as easy as under Chapter 7.

Chapter 13 can even be a safer way to keep your vehicle. We’ll get into this in an upcoming blog post. For now, be aware that usually keeping a needed, paid-current vehicle works under both options. It’s not likely going to swing your choice towards either Chapter 7 or 13.

 

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