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Archive for the ‘secured creditors’ tag

Giving a Creditor “Adequate Protection”

February 28th, 2018 at 8:00 am

To be able to keep your property that’s collateral or security on a secured debt, you must give that secured creditor “adequate protection.”   

 

In the bankruptcy system, debtors and creditors each get certain protections.

“Automatic Stay” Protection for You

A major protection that you as a debtor filing bankruptcy get is the “automatic stay.” That’s the part of bankruptcy law which stops creditors’ collection actions against you. That includes stopping a secured creditor from repossessing or foreclosing its collateral or its security. (See Section 362(a) of the U.S. Bankruptcy Code.)

The automatic stay protection goes into effect immediately upon your filing of bankruptcy. But it doesn’t necessarily keep the collateral protected for the long term. The creditor can challenge that protection. 

“Adequate Protection” Protection for Secured Creditors

“Adequate protection” refers to what you must provide to your creditor to be able to keep your collateral long-term. The term refers to conditions you must meet to keep the automatic stay in effect. (See Section 361 of the U.S. Bankruptcy Code.)

Why the Creditor Gets “Adequate Protection”

Bankruptcy law tries to respect and balance debtors’ and creditors’ property rights.

With secured debts, your original contract gave you a right to keep the collateral, but only while meeting certain conditions. You could keep possession as long as you made payments when due, maintained insurance, and maybe met some other conditions.

That contract also gave your creditor the right to take away the collateral if you didn’t satisfy the conditions. So you’d lose the collateral if you didn’t make payments on time or keep insurance in effect.

Your bankruptcy filing stops your creditor from taking the collateral, but then you still have to satisfy the creditor’s property rights. You do that by providing the creditor “adequate protection.”

What is “Adequate Protection”?

The Bankruptcy Code says that “adequate protection” is

provided by… mak[ing]…  periodic cash payments to [the creditor] to the extent that the [automatic] stay… results in a decrease in the value of such [creditor’s] interest in such property.” 

See Section 361(a) of the Bankruptcy Code.

In practical terms this means is that to maintain the automatic stay and keep collateral you need to:

  • pay the creditor periodic (usually monthly) payments
  • in an amount large enough to at least offset any reduction of the creditor’s interest in the property while you keep the property

Payments to Offset the Decrease in the Value of Creditor’s Interest in the Property

This essentially means that you need to pay enough each month to make up for depreciation and any other loss in value of the collateral while you continue in possession of it.

Take an example of a vehicle loan. The vehicle loses value simply by the passing of time and from your use of the vehicle. Assume that over the course of one year your $15,000 used vehicle would depreciate by $2,400—to being worth $12,600. That’s $200 of reduction in value each month. To provide adequate protection you would have to pay the creditor at least $200 towards the loan each month.

Beyond depreciation, there’s a risk that your vehicle could be damaged or destroyed in an accident. It could also be stolen. The creditor is also entitled to protection from these possible big decreases in the value of its collateral. So besides the $200 per month, adequate protection requires you to maintain insurance on the vehicle.

Conclusion

Again, if you provide adequate protection in these ways, you can protect the collateral securing your secured debts in the long run.

 

A Creditor Challenge to the Automatic Stay

February 19th, 2018 at 8:00 am

Filing bankruptcy stops creditors’ collections against you immediately. But sometimes a creditor tries to get permission to collect anyway. 

 

In our last 10 blog posts we’ve been talking about the “automatic stay.” It is one of the most important and immediate benefits of bankruptcy. The automatic stay stops most kinds of creditor attempts to collect their debts against you, your income, and your assets.

We’ve been looking at the relatively few special situations where the automatic stay protection does not apply. (Examples have included certain family court debts and proceedings, and some tax procedures.)

Today we focus in on how creditors can react to bankruptcy’s automatic stay. Creditors can sometimes challenge whether the automatic stay remains in effect or not, or whether conditions apply to its protection.

Creditor Challenges to the Automatic Stay

When you think of “relief” in bankruptcy what comes to mind is relief from your creditors. At the heart of the bankruptcy petition are the words, “I request relief.” (See page 6 just above the signature line of Official Form 101.)

But the meaning of “relief” when used in this phrase, “relief from the automatic stay,” the meaning is very different. This phrase refers a creditor’s “relief” from the protection that the automatic stay gives you. A creditor challenges your right to that protection by asking the bankruptcy court for “relief from the automatic stay” (or simply “relief from stay”).  

This might also be referred to as a creditor’s motion to lift the automatic stay injunction.

Most Creditors Don’t Ask for Relief from Stay

Creditors get relief from stay only if they qualify under certain circumstances laid out in the law. (See Section 362(d) of the U.S. Bankruptcy Code about creditor requests for “relief from the stay.”)

So don’t be concerned that all or many of your creditors will try to take this protection away from you.

Most Chapter 7 “straight bankruptcy” cases are completed without ANY creditor trying to do so. They do happen but often don’t change the outcome.

These challenges are more common in a Chapter 13 “adjustment of debts.” That’s because these kinds of case last much longer, and often involve changes to the payment terms of secured debts, resulting in more opportunities for negotiations and legal wrangling. Still this usually only involves one or two creditors. And even in Chapter 13 there are many cases with no such challenges.

Secured Creditors Requesting Relief from Stay

Most creditors which ask for relief from stay do so to get permission to take back collateral. Or often their goal is to put conditions on the automatic stay to encourage you to keep making payments on the collateral-secured debt. Here’s an example.

  • You file a Chapter 7 case when you are 2 payments behind on a vehicle loan. You want to keep this vehicle and have said so in your bankruptcy paperwork. Because of your payment history the lender files a motion for relief from the automatic stay. It wants to push you to catch up on those late payments quickly. It also wants court permission to repossess the vehicle if you don’t make those payments or fall behind later. The lender and you and your bankruptcy lawyer enter into negotiations. If necessary the issue goes to the bankruptcy judge for a decision. Usually the result is a negotiated agreement on the terms for catching up and keeping current on the payments. If you don’t comply you would likely quickly lose the automatic stay protection and lose your vehicle. If you comply you keep your vehicle.

Other Creditors Requesting Relief from Stay

Much less common, but sometimes a creditor without a secured debt has reason to ask for relief from stay. Here’s an example.

  • You file a Chapter 13 case right after being served with an eviction lawsuit by your residential landlord. The automatic stay stops the eviction. Your Chapter 13 payment plan shows how you will catch up on the unpaid rent payments and keep current thereafter. The landlord wants to proceed with the eviction. Most likely the automatic stay will continue in effect and stop the eviction as long as your payment plan does show how you’ll comply with the rental agreement, and then you in fact do what your plan says you will.  

 

Cramdown on Collateral Not Purchased with the Debt

January 15th, 2018 at 8:00 am

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

 

The Cramdown Advantage

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

The 910-Day and 1-Year Conditions

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

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

Purchase Money Security Interest

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

An Example

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

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

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

Chapter 7 vs. 13

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

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

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

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

Cramdown at Work

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

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

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

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

 

Verifying that a Creditor Has a Valid Security Interest

January 12th, 2018 at 8:00 am

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

Reaffirmation vs. Cramdown

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

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

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

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

A Valid Security Interest

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

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

Then a year later you file a bankruptcy case.

Effect of No Security Interest in Bankruptcy

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

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

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

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

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

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

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

Determine If a Debt is Really Secured

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

 

Timing: Qualifying for Cramdown on Personal Property Collateral

September 29th, 2017 at 7:00 am

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


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

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

Cramdown on “Any Other Thing of Value”

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

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

An Example

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

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

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

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

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

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

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

 

Objecting to a Creditor’s Proof of Claim in Chapter 13

December 26th, 2016 at 8:00 am

If you object to a creditor’s proof of claim in your Chapter 13 case, and prevail in that dispute, you pay nothing on that debt.

 

Our last blog post was about what happens to creditors who fail to file a proof of claim on time in a Chapter 13 “adjustment of debts” case. The creditor’s debt receives no payment through your Chapter 13 plan, and the debt is discharged—written off.

There’s another way to achieve this same result. Your bankruptcy lawyer can object to a creditor’s proof of claim if you don’t owe the debt as stated.

If the Creditor Does Not Respond to the Objection

Creditors sometimes file proofs of claim that are clearly not legally valid. Your debt may no longer be collectable because the statute of limitation has expired. An ex-spouse may owe the debt on which you’re not liable. Someone with the same name as you may owe the debt instead of you.

In these and similar situations your lawyer would likely file an objection to the proof of claim. Otherwise the legally invalid debt would be treated as a legitimate one. That illegitimate claim could share in whatever you are paying other similar debts under your Chapter 13 payment plan.

When there’s a clearly invalid proof of claim, the creditor would likely not even respond to your lawyer’s formal objection. Or if the creditor does respond, there’s a good chance it can be convinced to withdraw its proof of claim. Creditors can be penalized for legally pursuing a clearly invalid debt.

So the creditor may not respond to your lawyer’s objection or may respond but be quickly convinced that the debt’s not valid. Either way, the objection prevails and the bankruptcy judge throws out the proof of claim. You pay nothing on that debt through your Chapter 13 plan.

Even if a creditor believes that you owe the debt, it may still not respond to the objection. Depending on the terms of your Chapter 13 plan, the creditor may decide that the cost of fighting the objection is not worth what you would pay it under the plan. Or the creditor may just mess up and not get around to responding by the deadline. For whatever reason, if a creditor fails to respond timely to your objection, its proof of claim is thrown out. Again, you pay nothing on that alleged debt.

If the Creditor Responds to the Objection

However, if you and your lawyer file an objection to a creditor’s proof of claim, and the creditor responds and appears committed to fighting this fight, then you and your lawyer need to decide whether the fight is worth fighting.

It may not be worth fighting if allowing that proof of claim won’t make any practical difference in your case. Or it may not be worth fighting if the likely practical difference is less than the costs of fighting it.

When Liability on a Debt is a Big Deal

This whole discussion makes more sense if we explain the following. With most debts it’s clear whether or not you owe the debt, and its amount. But with some debts either your liability or the amount you owe, or both, can be very unclear. Indeed, people are often pushed into bankruptcy because of a contentious legal dispute about an alleged debt. Examples include:

  • liability disputes in a multi-vehicle accident with insufficient insurance
  • family fights about a deceased relative’s assets
  • litigation among or between a business’ owners and investors about the operation or closure of the business

So, a complicated dispute or litigation that was raging before the bankruptcy was filed could well just continue on in the bankruptcy court. Both sides’ decisions about whether to continue that fight turns on financial practicalities of the Chapter 13 case.

If you’re in this situation, assume the creditor files a proof of claim showing what it thinks it’s owed.  Presumably you disagree either as to owing anything, or the amount claimed, or both. But you need to decide whether it’s worth objecting to it and bringing that fight to the bankruptcy court. If it doesn’t make any or enough financial difference in your Chapter 13 case, it’s probably not worth objecting. Or it may be worth objecting just to see if the creditor responds. But then if it does, letting the creditor win on its claim.

May Not Be Worth Objecting

There are Chapter 13 payment plans—maybe the majority of them in most jurisdictions—in which most creditors’ proofs of claim makes no difference in what the debtor pays. These are cases in which the debtor basically pays what the debtor can afford during a set period of time. That stream of payments pays certain amounts to any secured and “priority” debts, then whatever’s left over goes to the “general unsecured” debts. Assuming that the disputed debt is a “general unsecured” one—as is usually the case—its amount likely won’t matter.

That’s because the total amount of all “general unsecured” proofs of claim often has no effect on the dollar amount the debtor pays. The pool of “general unsecured” debts gets paid the same amount regardless. The larger total amount of debt in that pools simply shifts around who shares in that amount. The percentage of the debts paid is just reduced to account for more debt in that pool.

Consider This Example

Assume that, as is often the case, you are paying much of your Chapter 13 plan payments to secured and/or “priority” debts. You are catching up on and then paying a vehicle loan, catching up on child support arrearage, and/or paying an income tax debt. Let’s say that over the life of your Chapter 13 case you are paying a total of $15,000 to all your “general unsecured” debts. This is based on what you can afford to pay over your case’s 3-to-5-year life. (The required length is based mostly on your pre-filing income.)

Assume further that you have 10 undisputed “general unsecured” debts totaling $75,000. There’s one more disputed debt, one you don’t believe you owe but the alleged creditor asserts you owe $30,000, on top of the $75,000 you don’t dispute. Without that $30,000 debt, you’d be paying 20% of your “general unsecured” debts—$15,000 paid out of $75,000 owed. With that additional $30,000 claim allowed, you’d be paying about 14% of your “general unsecured” debts–$15,000 of $105,000.

But in most situations, the amount you are paying into your Chapter 13 plan to your “general unsecured” debts—the $15,000 here—would not change. Your other “general unsecured” debts would simply receive somewhat less to make up for the amount the disputed debt receives. In most situations like this you wouldn’t invest the time and attorney fees to dispute that proof of claim. It simply wouldn’t affect you financially.

Sometimes Very Worth Objecting

But there are definitely situations where allowing a disputable proof of claim to stand unopposed would cost you.  It could dramatically increase how much you would have to pay into your Chapter 13 plan before completing it. Such a proof of claim could even jeopardize your ability to complete your Chapter 13 case successfully.

In our next blog post will get into situations when you’d want to object strenuously to an objectionable proof of claim.

 

“Relief from the Automatic Stay”

October 7th, 2016 at 7:00 am

Creditors sometimes have grounds to ask for permission to resume or start collection action against you in spite of your bankruptcy filing.

 

In our last blog post we talked about the “automatic stay.” It’s one of the most important benefits of filing bankruptcy. It’s certainly the fastest, going into effect immediately when you or your lawyer files your bankruptcy case. The automatic stay stops virtually all attempts by creditors to collect their debts against you, your money, and your property.

But sometimes this protection is only temporary. Creditors sometimes have some say about whether the automatic stays in effect, its protection ends, or is modified. See Section 362(d) of the U.S. Bankruptcy Code.

“Relief from the Automatic Stay”

When you think of “relief” in bankruptcy you most likely think of your relief from creditors. A couple blog posts ago we said that at the heart of the bankruptcy petition are the words, “I request relief.”

But when used in this phrase, “relief from the automatic stay,” the meaning is essentially the opposite. The phrase refers to a kind of relief that benefits a creditor. When a creditor wants to challenge the protection the automatic stay is giving you, it asks the bankruptcy court for “relief from the automatic stay.” (A shorthand form of that is simply “relief from stay.”) It’s asking for permission to pursue either the debt in general or some specific aspect of your obligation.

Most Creditors Don’t Ask for Relief from Stay

Creditors only have grounds to ask for this kind of relief in certain circumstances. Don’t be concerned that all or most of your creditors will try to take this protection away from you. Most bankruptcy cases are completed without any creditor filing a motion for “relief from stay.” In most cases all or most of your creditors must abide by the automatic stay protections throughout the case.

Secured Creditors with Grounds for Relief from Stay

Most creditors which file motions for relief from stay are doing so to get permission to repossess collateral. Or they are trying to put conditions on the automatic stay to induce you to keep making your stream of payments on the collateral-secured debt.

Two examples:

  • You file a Chapter 7 “straight bankruptcy” case when you are 2 payments behind on a vehicle loan. You indicate on your Statement of Intentions that you want to keep the vehicle. The lender files a motion for relief from the automatic stay for two purposes: to push you to catch up on those late payments more quickly, and to get court permission to repossess the vehicle if you don’t make those payments or fall further behind.
  • You file a Chapter 13 “adjustment of debts” to stop your home from being foreclosed.  You’re 15 months behind on payments of $1,200, a total of $18,000. Your Chapter 13 payment plan gives you 5 years to pay that arrearage. The bankruptcy court approves this plan, but then ten months later you miss a plan payment and a mortgage payment.  The mortgage holder files a motion for relief from stay to get permission to resume the foreclosure. You can surrender the home at that point if you’ve decided you don’t want it. Or if you still want to keep the home, most of the time you are given another chance. However, the continuation of the automatic stay is conditioned on you meeting certain terms. Those terms are usually put into a court order, conditioning your protection for the home. At that point you can automatically lose the automatic stay as to the home if you don’t comply with the new terms.

 

When a Creditor Does Not Have an Enforceable Lien

August 19th, 2016 at 7:00 am

For a debt to be secured, the creditor has to go through the right legal steps. Otherwise you don’t have to pay the debt.

 

Expressing Your Intentions with Your Secured Debts

When you file a Chapter 7 “straight bankruptcy” case you list all your debts on the bankruptcy court documents. You separately list secured and unsecured ones. A secured debts is one in which the creditor has a lien on an asset you own. For example, a vehicle loan is a secured debt in which the lender is a lienholder on your vehicle’s title.

As to each of your secured debts, you inform the creditor whether you intend to keep the asset or not. If you intend to keep it, you also state what you intend to do with the debt. For example, with a vehicle loan, if you state that you intend to keep the vehicle you would likely also state that you intend to “reaffirm” the debt—that is, pay the debt under its usual terms in order to be able to keep the vehicle.

These disclosures are done through the “Chapter 7 Individual Debtor’s Statement of Intention” form. Your lawyer will help you complete it; after you sign it copies are mailed to your creditors and it’s filed at the bankruptcy court.

What It Takes for a Debt to Be Legally Secured

Creditors must take certain legal steps to create a legally enforceable lien in something you purchase or in something you already owed. Those legal steps are determined by state laws, which tend to be similar from state to state. But they can differ a lot in the details.

Those legal steps vary a lot among different kinds of collateral. Let’s go back to our example of a lender’s lien on a vehicle. The paperwork and procedure to create a lien on a vehicle title is completely different from the paperwork and procedure that your home mortgage lender used to create a lien on your home. And those are completely different from how a furniture store creates a lien on what you buy there.

If a Creditor Doesn’t Go Through the Legal Steps

It’s usually the creditor’s job to do what is necessary to create a lien on what you are buying or on what you are providing as collateral. After all, the creditor is the one who wants the extra leverage against you. You’ll more likely pay a debt it it’s backed up by a lien on something you need or want. And if you don’t pay, the creditor will at least be able to repossess or foreclose on the collateral to get back some of the money it lent.

For countless reasons creditors don’t always go through the legally necessary steps. If not, what happens to that debt in a Chapter 7 case?  

Debts Unexpectedly Not Secured

As mentioned above, there are different procedures for creating liens for different kinds of collateral. Those procedures differ in sometimes crucial details from state to state, and those state laws change over time. Notwithstanding these challenges, you’d think creditors would keep on top of this given how important it would be for them. But they don’t always know the laws as well as you’d think. Or even if their official procedures are appropriate, their employees don’t always follow those procedures perfectly. Creditors can mess up.

As a result when you file a bankruptcy case it’s smart to find out whether debts that you think are secured really are. The difference can be huge. Simply put, it can make the difference between having to pay a debt in full vs. paying nothing at all.

We’ll illustrate this with an example.

The Example

Assume that you bought your stove, refrigerator, clothes washer and drier at a local appliance store 18 months ago.  You and your family had moved into a rental home which didn’t have these appliances. You bought them all on credit for $3,000, financed on a contract through the store. You thought you remember hearing or reading somewhere that the store had a right to repossess what you bought if you didn’t pay off the contract. That would’ve meant that the store had a legally enforceable lien on the appliances to secure the debt you owed.

You didn’t have to make payments on the contract for the first 3 months (“90 days same as cash”). Then a high interest rate kicked in, and you made most of the relatively small payments. But then you didn’t pay the last couple payments, and now still owe $2,600.

You and your spouse have now filed a Chapter 7 bankruptcy case to get a fresh financial start.

Your family really needs these appliances. You have no spare cash with which to replace them, and no credit with which to do so. So you figure you’ll have to keep paying on the high interest contract until it’s paid off. With the low payments and high interest you’d probably end up paying close to $4,000 more on appliances that currently likely have a fair market value of no more than a combined $1,500. But you figure you really don’t have a choice.

The Store Contract Didn’t Actually Create a Secured Debt

However, your bankruptcy lawyer looks through the purchase contract and finds out that the store did not create a lien in the appliances. To create a lien, the contract needed to clearly state that it was doing so. But it did not. As a result, the debt is not legally secured by those appliances or by anything else you own. It’s an unsecured debt, one that can almost certainly be discharged—legally written off—without paying for the appliances.

So, instead of having to pay anything more on the appliances, much less the $4,000 or so that you thought you would, you pay nothing. And the appliances are yours to keep free and clear.

 

“General Unsecured” Debts Discharged in Chapter 13

August 8th, 2016 at 7:00 am

To the extent you do not pay off your debts during a Chapter 13 payment plan, the remaining balance is usually legally written off forever.

 

Our last two blog posts were about how Chapter 7 “straight bankruptcy” deals with “general unsecured” debts. But how about Chapter 13 “adjustment of debts”?  What happens to those simple debts, which are neither secured by a lien on something you own nor are not a “priority” debt?   

“Priority” and “General Unsecured” Debts

Let’s go back and distinguish these two kinds of debts. The distinction is crucial because of how they are treated under Chapter 13. You have to pay “priority” debts in full during the course of the 3-to-5-year payment plan. You generally only have to pay “general unsecured” debts to the extent you have money to pay them.

So what’s the difference? Simply, “priority” debts are specific categories of debts that Congress has decided must be treated specially. They are debts that the law says that in a Chapter 13 case you must pay in full before paying the “general  unsecured” debts anything.

The “priority” debts are all on a list in the Bankruptcy Code. If a debt is not one of the kinds on that list, then it’s a “general unsecured” debt. The main “priority” debts in consumer Chapter 13 cases are recent income taxes and past-due child and spousal support.

The Discharge of “General Unsecured” Debts

People file Chapter 13 usually not because of their “general unsecured” debts. Chapter 13 provides extremely helpful tools for dealing with secured debts like home mortgages and vehicle loans. And it gives you time to pay “priority” debts while being protected from creditors like the IRS or state tax department, and from your ex-spouse or the support enforcement agency.  

Still, what happens to your “general unsecured” debts in a successful Chapter 13 case? What happens is that after paying these debts as much as your budget allow you to pay them (after paying any secured and “priority” debts), the remaining balance, no matter how little or how much, is discharged—legally written off.

Here’s how this works in practice.

An Example

Assume that, based on your income from a steady job, you qualify for a 3-year Chapter 13 bankruptcy. You have $110,000 in a combination of credit cards, medical bills, and personal loans. As long as there is no collateral tied to any of those debts, they are very likely “general unsecured” debts.

You are also $8,000 behind on your home mortgage on a home you want to keep. That’s a secured debt you must pay. Under Chapter 13, the home mortgage lender is usually required to let you catch up on the mortgage over the 3-year life of the payment plan.

And you owe $6,000 in income taxes for the last two tax years. That’s a “priority” debt you must pay. The IRS/state is required to give you that time to pay the “priority” debt. Plus, as long as the IRS/state has not recorded a tax lien, you don’t pay any ongoing interest or penalties.

In this example, based on your budget, after paying your monthly mortgage and all other reasonable living expenses, you can afford to pay $450 per month to all your creditors.

$450 per month for 36 months totals $16,200 paid into your Chapter 13 payment plan. That is enough to catch up on the $8,000 mortgage arrearage and pay off the $6,000 tax debt. There’s $2,200 left over.

(The Chapter 13 trustee (who administers the distribution of money to the creditors and otherwise oversees the case) gets paid a certain percentage. And if you didn’t originally pay your bankruptcy lawyer in full you can pay the balance through the plan payments. But to simplify the math here, let’s exclude these “administrative fees.”)

The End Result

So what happens to the $2,200 left over after you catch up on the mortgage and pay off the taxes? It’s paid on your “general unsecured” debts, distributed pro rata based on the amount of each debt. Overall you would pay $2,200 of the $110,000 owed on these debts, or 2% of the “general unsecured” debts.

And what would happen to the remaining 98% of those debts? After you successfully complete the 36-month payment plan, the bankruptcy judge enters a court order legally discharging those debts.

You’d have caught up on your mortgage, paid off the tax debt, and paid 2% of the “general unsecured” debts. Other than the regular payments on your mortgage, you’d be debt-free.

 

Independence from Debt

July 4th, 2016 at 7:00 am

This 4th of July make your move towards financial freedom.  Get informed. You’ll feel tons better once you know your options.

 

We take this break from our ongoing series of blog posts on secured debts this 4th of July to talk about freedom from debt. 

Your Life Today

If you’re reading this most likely you’ve got some rather serious financial problems. Most likely your debts are overwhelming you, worrying you all the time.

You’ve probably been trying to improve your situation for a long time, likely for years. It’s really affected your life. It hasn’t helped your personal relationships. The anxiety is impacting your health.  It’s hard to feel good about yourself, to be happy or relaxed.

It’s difficult to take care of your basic daily needs, and of those who depend on you. It’s frustrating to think about the long-term responsibilities that you aren’t getting ahead on, like saving for retirement.

What You Need

Financial peace. Financial freedom.

You’d like to be able to afford what’s important to you. You’d like to not be worrying all the time. You’d like to have reasons to be hopeful; you’d like to have a future worth looking forward to.

Take the First Step

You’ve heard the expression that the first step is always the hardest. There’s something about human nature, especially when we’re feeling down, that makes us assume that resolving a problem will be harder than it actually ends up being. We are often pleasantly surprised that once we take the first step the process is not as hard as we had feared. Then afterwards we wish we would have had the nerve to take that first step much earlier and avoid unnecessary grief in the meantime.

So take that first simple but crucial step: find out your legal options about your debts.

From Fear to Practical Options

You find out your options by seeing a lawyer who focuses on helping people like you solve their consumer and/or business debt problems.

This may be easier than you think because asking for this kind of help is usually free, at least to get started. Most lawyers who help people deal with their debts don’t charge for their initial meeting with you.

At this meeting you will have the opportunity to tell the lawyer about your situation, your concerns, and your goals. The lawyer will usually outline your most likely legal options, along with their major advantages and disadvantages.

But Do You Really Get Something for Nothing at that Initial Consultation?

Most lawyers who help consumers and small businesses with debt problems don’t charge for their initial meeting for various reasons.

And sure, it’s partly a marketing tactic. Lawyers hope that once you take the trouble to meet with them you will like them and will more likely hire them if they decide to retain a lawyer.

There’s also the reality that when you are in financial trouble you likely can’t spare the money on shopping for a lawyer. So fortunately most lawyers don’t charge for that chance for you to check them out and get advice from them.

It’s worth mentioning that most of these lawyers actually do care about you and genuinely want to help you. That’s because who get into the field of helping people deal with their debts they get satisfaction from improving their clients’ lives.

So take advantage of their free offer.

Be Picky and Find a Good Match

Just because you have an initial consultation with a lawyer, you have absolutely no obligation to continue working with that lawyer. You are seeking information and advice, and maybe looking for an attorney to help you. After the initial meeting ask yourself the following questions.

Did the lawyer listen carefully to you to get enough information about you and your finances? Did he or she present your options clearly, and answer your questions about them in an understandable way? Do any of the options presented meet your goals?

Was the lawyer considerate, treating you like a human being? Were your concerns heard and addressed directly? Was the lawyer knowledgeable but not overbearingly so? Were you comfortable with him or her? Did you feel he or she was worthy of your trust? Were you and the lawyer a good fit?

But Won’t Lawyers Always Recommend Filing a Bankruptcy Case?

No. That would be contrary to their ethical and legal obligation to you.

Lawyers are strictly required to represent YOU, not to pressure you into any preconceived direction. They must advise you of your options, and the advantages and disadvantages to you, without any regard for their financial self-interest. They can be sued for malpractice for giving bad advice, or could lose their law license. That applies even to free initial consultation meetings.

Furthermore, a lawyer’s job is to lay out the options so that YOU can make an informed decision. The attorney doesn’t tell you what to do; that’s your choice. Yes, his or her job is to advise you, and usually to make recommendations, strongly or otherwise. But not to make decisions for you or to make you do anything. If the lawyer you meet seems to be putting any uncomfortable pressure on you, find another one who respects your appropriate role as the decision-maker.

Take that First Step

Call to set up a consultation meeting with a lawyer who focuses on debt matters. Meet with him or her. You will almost certainly come away from that initial meeting much, much better informed about your options. You will very likely feel much better about being able to find the freedom from debts that you need.

 

Call today for a FREE Consultation

210-342-3400

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