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Archive for the ‘repossession’ tag

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).

 

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.

 

The Automatic Stay in Chapter 7 and 13

November 22nd, 2017 at 8:00 am

Filing a Chapter 7 or 13 case both stop creditor collection actions against you just the same. But after that the differences are huge. 


Last time we focused on how you can use the Chapter 7 and Chapter 13 options to your time advantage. Chapter 7 “straight bankruptcy” is very fast. If all or most of your debts can be discharged (written off), that quickness can be an important advantage. But its speed can be a downside. If you are behind on a secured debt, Chapter 13’s 3-to-5-year-long duration can be a crucial advantage. It not only buys you time but gives your protection and flexibility for dealing with such special debts.

So, both bankruptcy options provide protection, but of different kinds. Let’s see how these work to see which would be better for you.

The Immediate Protection

With either kind of bankruptcy you get immediate relief from almost all creditor collection actions.

The “automatic stay” kicks in simultaneously with the filing of your Chapter 7 or 13 bankruptcy petition. Its power is in how fast it works and how strongly it prevents creditors from taking further collection action against you. (See Section 362(a) of the U.S. Bankruptcy Code.)

How Long the Protection Lasts

The automatic stay lasts as long as your case does. So, it expires about 3-4 months after you and your bankruptcy lawyer file a Chapter 7 case. On the other hand, it expires about 3-to-5-years after filing a Chapter 13 case. (See Section 362(c) of the U.S. Bankruptcy Code.)

However, a creditor may be able to end that protection as applicable to that creditor. Creditors usually can’t prevent the automatic stay from going into immediate effect at the beginning of your case. However creditors CAN ask for “relief from the automatic stay.” That is, AFTER the automatic stay goes into effect a creditor can ask the bankruptcy court to make an exception for that creditor and let it pursue you or its collateral.   (See Section 362(d) of the U.S. Bankruptcy Code.)

How does all this all works in practice under Chapter 7 vs. Chapter 13?

Chapter 7 Is Not Designed for Ongoing Protection

As we’ve said, the automatic stay protection lasts just 3-4 months at best under Chapter 7. But in addition, certain important creditors have more reason to ask for “relief from stay” to make that even shorter.

Chapter 7 provides no mechanism for dealing with important debts that you want or need to pay. Consider debts backed by collateral you want to keep, such as a home mortgage or vehicle loan. If you’ve fallen behind there’s no tool under Chapter 7 for catching up. You have to make arrangements directly with the creditor. If you (through your lawyer) and the creditor can agree, that’s fine. But if not, the creditor can file a motion asking for permission to foreclose on or repossess the collateral. It may even do so right after you file your case, before you’ve even started any negotiation. It’s signaling that you better meet its terms or else it wants to take back the home or vehicle.

Chapter 13 IS for Ongoing Protection

Chapter 13 starts with the fact that the automatic stay lasts SO much longer. It lasts a few years instead of a few months. But just as with Chapter 7, under Chapter 13 a creditor with collateral can file a motion asking for permission to foreclose on or repossess the collateral.

The big difference is that Chapter 13 provides a mechanism for catching up on such debts. If you’re behind on a mortgage or loan with collateral, your Chapter 13 payment plan will specify how much you’ll pay each month to catch up. Assuming your proposed terms are sensible, the creditor will likely go along.

A key difference is that Chapter 13 gives you an efficient and effective way to take the initiative. Because creditors know that bankruptcy judges will approve reasonable terms, they don’t object. And they don’t waste their time and money asking for “relief from stay” knowing it would have no effect. Then once your proposed payment plan is formally approved by the judge, creditors must live with your terms.

Be aware that if a creditor thinks your catch-up terms are not reasonable it can object or file a motion. Then usually a compromise can be worked out.

Of course you have to comply with the terms of your plan as approved by the bankruptcy judge. If you don’t, the affected creditor can then file a motion asking to be allowed to pursue the collateral. Depending on the facts you may be given another chance or you may not.

Conclusion

The relatively short period of protection under Chapter 7 may be just fine if you have no surviving debts. Chapter 7 may also be fine if the surviving debt can be handled reasonably through simple negotiation. But Chapter 13 provides longer and stronger protection for you regarding past-due debts secured by collateral you want to keep.

 

The Financial Effect of Surrendering Collateral in Chapter 13

November 25th, 2016 at 8:00 am

If you are concerned that in a Chapter 13 case a debt resulting from surrendered collateral will cost you more, often it won’t.

 

Secured Debts in Chapter 13

In a Chapter 13 “adjustment of debts” case you have the option of keeping or surrendering collateral.

Whether it’s your home, your vehicle, or any other collateral, Chapter 13 gives you powerful tools for keeping that collateral.

But in spite of that, sometimes the best option is still to surrender that collateral. You may have overextended yourself buying a vehicle whose payments and insurance you can no longer afford. Or you’ve learned that it’s a lemon and not worth the constant repair costs. Or you bought a home that you’re so far behind on that it’s not worth the cost and effort to catch up, even if Chapter 13 gives you a lot of time to do so.

Secured Debts Turned into Unsecured Ones

So Chapter 13 gives you the option of just surrendering the vehicle or home or other collateral to the creditor. That has the effect of turning that debt from a secured debt into an unsecured one. The creditor usually accepts possession of the vehicle or home, sells it, and, if the sale proceeds do not satisfy the debt, you may owe the remaining balance.

Outside of bankruptcy, if you are liable on that “deficiency balance,” you’d have to pay it. You’d be sued for payment if you didn’t pay. In a Chapter 7 “straight bankruptcy,” that remaining unsecured debt would usually simply be discharged—legally written off. But what happens to that remaining debt under Chapter 13?

Dealing with the Remaining Unsecured Debt under Chapter 13

A Chapter 13 case usually involves a 3-to-5-year payment plan. At the end of the payment period, there’s a discharge of all or virtually all of your remaining debts.

In many Chapter 13 plans, much of the money paid out to creditors goes to special debts. Those special debts are either secured and priority debts. Secured debts are payments to creditors with liens on collateral you want to keep, as mentioned above. Priority debts are ones—usually unpaid income taxes and/or child or spousal support—that would not be discharged in bankruptcy and so need to be paid. In many Chapter 13 cases, most of the debtors’ disposable income goes to pay these secured and priority debts.

This often leaves relatively little money for the rest of the debts—the unsecured, non-priority ones. Sometimes, it leaves no money at all for these other debts—0% of the amounts owed.

But there are also some Chapter 13 cases—usually ones with relatively little secured and priority debts—in which the plan provides for paying a large percentage of the other debts. There are even cases which require paying 100% of the unsecured debts.

But these are rare. Much more common are plans paying a low percentage of the unsecured debts. Chapter 13 requires payment of all disposable income to creditors during the course of the 3-to-5-year case. Often that simply doesn’t leave much left for the unsecured debts.

Surrendering Collateral Seldom a Financial Disadvantage

Without understanding how Chapter 13 really works, it may seem like a disadvantageous way to surrender collateral. Why pay even just part of the remaining unsecured debt after surrendering collateral when you can just discharge that debt in a Chapter 7 case without paying anything?

There are in fact good reasons not to mind surrendering collateral in a Chapter 13 case:

  • You wouldn’t be in a Chapter 13 case unless it gave you a big advantage for other reasons. For example, you may be willing to surrender a vehicle you really didn’t need if Chapter 13 gave you great way to save your home. There are many, many reasons that Chapter 13 is better than Chapter 7. Paying a small part of the unsecured debt on the surrendered collateral may be well worth the other benefits.  
  • But in probably the majority of cases you would NOT be paying ANY more into your Chapter 13 plan because of a surrendered vehicle, home or other collateral. Why not?
    • If you have a 0% plan as mentioned above, you’re not paying anything to any general unsecured debts. So adding the debt from the surrendered vehicle, home, etc. makes no difference. Paying nothing on a somewhat larger pile of debt is still nothing.
    • Even if your plan IS scheduled to pay a certain percent of your general unsecured debts, it STILL doesn’t usually cost you more. That’s because in most cases you only have a certain amount of money available for the pool of all these debts. Adding another debt to that pool only spreads that same available money out among more debts. When you add the debt from the surrendered collateral, the other debts are just paid less.

Conclusion

Before you shy away from surrendering collateral in a Chapter 13, ask you bankruptcy lawyer if it will cost you any more to do so. In most cases it does not.

 

When a Creditor Does Not Enforce its Lien

August 17th, 2016 at 7:00 am

Sometimes, even if what you bought is legally collateral on a debt, you can just write off and not pay the debt yet keep what you bought.  


For the last 3 blog posts we’ve been talking about those relatively rare situations when in bankruptcy you can treat a secured debt as an unsecured one. This is rare because generally liens are NOT discharged—written off—in bankruptcy. A secured creditor’s right to enforce the lien normally survives bankruptcy.

As a result most of the time you have only two choices with a secured debt in bankruptcy. First, you can keep whatever asset of yours upon which the creditor has the lien. But then you have to pay the debt. Or second, you can surrender the asset with the lien to the creditor. Then you can discharge the debt.

But sometimes you can have your cake and eat it too—keep the asset and pay nothing.

This happens in two situations that we haven’t covered before:

  • There is a legally valid lien but the creditor chooses not to enforce it.
  • You, or the creditor, or both, believe that the debt is secured by a lien on the asset, but you learn the creditor actually does not have a legally valid lien.

We’ll cover the first of these today, and the second one in an upcoming post.

A Lien Not Enforced

Why would a creditor not pursue an asset in which it has a lien? It wouldn’t do so out of the goodness of its heart. If a creditor can get back some of the money it lost in a debt discharged in bankruptcy by enforcing its lien in your asset, generally it will.

A secured creditor would not enforce its lien generally when the time and expense in doing so is not worthwhile. Often it’s not worthwhile because the asset in which it has a lien has a low market value. That may be the case even though that asset may have a comparatively high value to you.

Here’s an example of this.

Low Market Value

Certain consumer goods by their nature have a very fast rate of depreciation. If you buy a laptop computer or tablet for $500, within a month it’s worth close to nothing. Why? First, people don’t want to buy a used computer/laptop because it’s almost impossible to verify that it doesn’t have a hidden virus or malware. Second, technology advances so fast that these kinds of electronics become obsolete very quickly. Third, as a result there is not much of a market for used electronics.  A creditor would not be able to get hardly anything for it once it goes through the time and expense of taking possession of it.  

So a creditor with a valid lien on your laptop/tablet may very well do nothing if you file a Chapter 7 “straight bankruptcy” case. In that case you would have to acknowledge that the debt was secured by the item if indeed it is. But you may simply not hear from the creditor asking for surrender of the laptop/tablet. And you may never hear from the creditor ever again after its debt is discharged a few months later.

The creditor is just being practical. Why should it waste its employees’ time to get ahold of the laptop/tablet and sell it if virtually no money can be gotten out of it?

Creditor Using Its Leverage

However, a pushy creditor could see this all differently. Although this kind of asset has such low fair market value, it may be worth very, very much to you. You’ve put software that you like on the devise. You’ve got it configured the way you want it. It has data in its memory that’s important to you. You could transfer all that to another devise, but you now likely don’t have the money or credit to buy another one. And even if you could buy another one, getting the new devise up to speed would involve hours and weeks of your effort.  A creditor could use that as leverage to make you pay the debt, or at least part of it.

How can you tell the difference between these two kinds of creditors? How do you know whether you’d have to pay for a debt in order to keep an asset like this? And if you’d have to pay something, how could you minimize how much you have to pay?

Creditors tend to have policies one way or the other. Your bankruptcy lawyer deals with these creditors every day and is very likely familiar with the policies of your creditors. He or she will advise you about appropriate tactics to meet your goals.

Also, creditors candidly understandably take advantage of people who file bankruptcy and don’t have a lawyer representing them. They can use their leverage much more effectively against someone who isn’t fully informed about the pertinent legal issues, and doesn’t know when or how to push back.

 

Power over Your Secured Debts through Chapter 7

June 24th, 2016 at 7:00 am

Stop secured creditors from taking your property, unsecured debts from turning into secured ones. Keep or surrender collateral as you wish.

 

Our last blog post a couple days was about secured debts. We explained that for a debt to be legally secured against something you own the creditor must go through certain steps to accomplish that, or else it won’t be secured. We showed how you could contractually enter into a secured debt voluntarily. But our blog post also showed that a creditor can turn its unsecured debt into a secured one by suing you or using other means of involuntarily imposing a lien on your possessions and/or real estate.

Today we look at how bankruptcy—specifically Chapter 7—can give you certain powers and advantages over your secured debts.

The Chapter 7 Powers Over Secured Debts

When you file a Chapter 7 “straight bankruptcy” case, doing so:

1) stops your creditor from taking your property which secures a secured debt;

2) prevents a creditor with an unsecured debt from turning it into a secured one;

3) enables you keep property which already secures your debts; and

4 allows you, if you want to give up any property which secures a debt, to give up that property to the creditor without owing anything more on the debt.

–Stop Creditors from Taking Your Property

As of the moment your Chapter 7 case is filed, your secured creditors are immediately stopped from taking possession of whatever you own that secures their debts. This protection comes from the “automatic stay,” the federal law that stops virtually all collection activity by all your creditors again you, your income, and your assets.

The U.S. Bankruptcy Code specifically states in its section on the “automatic stay” that the filing of a bankruptcy petition “operates as a stay, applicable to all entities, of… (3) any act to obtain possession of property … or to exercise control over property…  [and] (5) any act to… enforce against property of the debtor any lien… .” See Section 362(a)(3) and (5) of the Bankruptcy Code. That is, a creditor with a secured debt may not obtain possession or exercise control over your property securing its debt, or enforce its lien on such property, while the “automatic stay” is in effect.

Your vehicle lender can’t repossess your vehicle, or enforce its lien against your vehicle, for example.

This “stay” is in effect either temporarily or permanently. It’s in effect during the time that a Chapter 7 case is active. But normally that’s only a period of about 4 months. You have that amount of time, and sometimes shorter, to make a deal with your secured creditors about either keeping or surrendering property in which they have a lien.

–Prevent Creditors from Turning Unsecured Debts into Secured Ones

The “automatic stay” not only stops secured creditors from enforcing its liens against your property. It also stops creditors with unsecured debts from acquiring new liens against your property. The “automatic stay” prevents unsecured debts from being turned into secured ones.

There are various ways that creditors can do that if you have not filed bankruptcy. Virtually all creditors could sue you, get a judgment against you and a judgment lien against all or much of your property. Or the IRS and state tax agency could get a tax lien against all or most of your property for unpaid taxes. If you get behind on child or spousal support, your ex-spouse or support enforcement agency could impose a support lien against your property. There are many other similar kinds of liens that can be created on your property.

Since creditors with secured debts have much more leverage in bankruptcy than those with unsecured creditors, preventing creditors from acquiring a lien in what you own is an important benefit.

–Enable You to Keep Property Securing a Debt 

If you want to keep your property in which a creditor has a lien, Chapter 7 bankruptcy can help a number of ways:

  • If you are current in your payments on a secured debt and want to keep the collateral, you are virtually always allowed to do so. Your creditor is usually very happy to let you keep making payments to keep the account in good standing. 
  • If you have fallen behind on your payments on a secured debt, you will usually be given a certain amount of time to bring the account current. Catching up on payments—such as on a vehicle loan—should be easier for you to do when you no longer have to pay other creditors after filing a Chapter 7 case.
  • In limited situations the payment terms of the debt may be renegotiated (such as with a home mortgage modification). As a result you may be able to avoid having to catch up on late payments, negotiate a lower interest rate, and perhaps even lower the monthly payment and/or principal balance.
  • Very specific kinds of secured debts, and only under certain circumstances, can be turned into unsecured debts. For example, judgment liens on your home may be “avoided”—taken off your home’s title—and the debt is “discharged” so you pay nothing.

–Allow You to Surrender Property Securing a Debt

If, without filing bankruptcy, you simply surrender collateral to a creditor because you can’t afford the payments, or simply do not need or want the collateral any more, you can end up still owing much of the debt. That’s because after the creditor sells the surrendered collateral for less than the balance, and adds in its repossession and other costs, you could easily end up still owing much of the balance. And the creditor will have the right to sue you for that balance.

In addition, if the creditor were to write off all or part of that remaining balance (through a negotiated settlement, for example), you could be hit with a significant income tax obligation. The amount forgiven may be considered “cancelation of debt income,” which is then treated as income upon which you have to pay income taxes. See the IRS’s “Tax Topic” on “Canceled Debt” and its information specifically on “Home Foreclosure and Debt Cancelation.”

Chapter 7 solves both of these problems. It would almost always “discharge” (permanently write off) any balance owing after the surrender of any collateral. And the “discharge” of debts in bankruptcy is treated as an IRS exclusion of “cancelation of debt income.” So any forgiveness of debt is not considered income and it’s not taxed.

As a result you can freely surrender collateral in a Chapter 7 case if that is what you decide is best for you.

 

Chapter 7 and Chapter 13–“Cramdown” on Personal Property Collateral

October 9th, 2015 at 7:00 am

After covering Chapter 7 last time, now how does Chapter 13 help you keep (or surrender) collateral on a debt?

 

Last time we explained the crucial difference between secured and unsecured debts, and focused particularly on “purchase money” secured debts. That led to laying out the advantages Chapter 7 “straight bankruptcy” gives you when dealing with something you bought that is now collateral on the debt you owe.

Today we show the often even greater advantages that come under Chapter 13 “adjustment of debts” with this kind of collateral.

Creditor Leverage under Chapter 7

We showed last time how under Chapter 7 a secured creditor can require you to pay the debt if you want to keep the collateral. Even though you can “discharge” (legally write off) the debt, the creditor retains the right to repossess the collateral after your bankruptcy is over.

You can always just surrender the collateral—let’s say it’s a couch—and you would usually not owe anything on the debt once the Chapter 7 case was completed. But if you really want to keep the couch you may well have to pay much more than it’s worth, assuming you owe more than that.

The creditor uses as leverage against you its ability to repossess the couch. Your home or apartment may feel bare without the couch. You probably don’t have the cash to go out and buy another one, and your credit is likely not good enough at the moment to finance its purchase. So your creditor takes advantage of these circumstances by making you pay more, up to the full balance that you owe, no matter how little the couch is now worth.

Chapter 13 “Cramdown”

As long as you made your purchase at least a year ago, under Chapter 13 you can defeat this creditor leverage. You are allowed in effect to rewrite the terms of the debt based on the value of the collateral.

The debt is divided into two parts, one part being the value of the collateral, and the other part being the rest of the debt amount. The first part is treated as secured, and the other part as unsecured.

Using the example again of the couch, let’s say you paid $900 a year and a half ago for it but with a high interest rate and some missed payments you still owe $750. The couch was overpriced and depreciated quickly—you can’t sell a used couch for much—so it’s now only worth $300.

In a Chapter 7 case you may be stuck with the original payment terms, including the full balance of $750, the high interest rate, and the risk that down the line you wouldn’t be able to make the payments and the couch would still be repossessed, and you could still owe on the debt.

In contrast, through “cramdown” your Chapter 13 payment plan would have you pay $300 over the course of as much as 3 to 5 years, likely at a reduced rate of interest and usually a much lower monthly payment.

What Happens to the Unsecured Part of the Debt

The unsecured portion—the remaining $450 owed—would be lumped in with all your other “general unsecured” debts. This pool of debts is only paid as much as you can afford to pay during the length of your case after paying your secured debts, “priority” unsecured debts (such as recent income taxes and child/spousal support arrearage), and “administrative” expenses like your attorney fees and trustee fees. Often these “general unsecured” debts are paid only a few pennies on the dollar, or even nothing.

In many circumstances, even if you are paying some portion of the “general unsecured” debt, including this $450 unsecured debt on the couch, that doesn’t add a penny to what you have to pay in your Chapter 13 payment plan. That’s because usually you only have a certain amount of money that you can afford to pay to the entire pool of “general unsecured” debts after all your more important debts. So adding the $450 to that pool simply means that all the other “general unsecured” debts just get $450 less. You don’t pay any more.

Besides Paying Less, It’s Safer

In a Chapter 7 case you’re at the mercy of the creditor if you miss a payment on a debt after you’ve “reaffirmed” the debt—agreed to remain liable. The creditor would be able to repossess the couch, sell it, and come after you for any remaining debt after applying the sale proceeds to the debt balance. 

There’s no protection against such creditor actions because your Chapter 7 case has been completed and closed, and the “automatic stay,” the protection against creditors’ collection actions, is no longer in effect. That’s not a problem with most or all of your other debts that were discharged, because those creditors can never pursue those debts again.

But with a reaffirmed debt you continue to owe it, and so if your circumstances change and you can’t make the payments you have no recourse unless the creditor is voluntarily willing to be flexible.

Under Chapter 13 the “automatic stay” continues in effect throughout the 3-to-5-year payment plan. If your circumstances change you and your attorney can usually make adjustments to that payment plan, all while being protected from the creditor. You would usually still be able to keep the collateral—the couch.

Or you may even decide at that point to surrender the couch, such as if you are now moving and don’t need it any more. The remaining debt would all be a “general unsecured” one, which, as explained above, would often not add anything to the amount you have to pay to complete your case.

Or finally, it may even make sense many months or even years into your Chapter 13 case to convert it into a Chapter 7 one. That would give you the option of surrendering the couch and owing nothing. Or at that point you could still keep it and pay the remaining debt or a negotiated lower amount. The couch may have even depreciated to being worth almost nothing, and you may be able to keep it without paying anything more.

 

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