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Archive for the ‘vehicle arrearage’ tag

Keep Your Vehicle without Reaffirmation

May 6th, 2019 at 7:00 am

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

 

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

We ended last week with two unanswered questions:

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

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

Risks to Avoid If You Can

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

A “Ride-Through” Option?

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

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

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

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

“Ride-Through” Problems

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

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

Your Remaining Options

You may nevertheless have some options.

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

 

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.

 

Chapter 7 Buys Time to Redeem Your Vehicle

November 6th, 2017 at 8:00 am

If your vehicle is worth less than its debt, and you can get the money representing that value, you can “redeem” the vehicle free and clear. 

 

Two blog post ago we went through a list of ways Chapter 7 buys you time with your vehicle lender. Included was that it buys “time to gather funds to redeem your vehicle for less than you owe on it.” This “redemption” option deserves more attention.

Reaffirmation and Redemption

If you want to keep your vehicle in a Chapter 7 “straight bankruptcy,” your two options are “reaffirmation” and “redemption.” You can either reaffirm the debt or redeem the vehicle.

Reaffirmation is far more common. You enter into a reaffirmation agreement, agreeing to repay the loan as if you had not filed bankruptcy. You almost always recommit to paying the entire loan balance, reaffirming that you want to pay it. You agree to remain liable on the original loan, excluding it from the discharge that you are receiving of all or most of your other debts. (We covered reaffirmation a few months ago.)

Redemption is far less common. But it can sometimes save you lots of money so it’s worth knowing about.

Redemption in Contrast to Reaffirmation

It might help to think of redemption as being the opposite of reaffirmation in three ways:

  • You don’t resurrect the vehicle loan (excluding it from the discharge of debts) as in reaffirmation. With redemption you get rid of the loan.
  • You don’t agree to pay the full amount of the loan. With redemption you pay only the current retail fair market value of the vehicle.  
  • You don’t pay the debt through your regular monthly payments. With redemption you must pay off the vehicle’s value “in full at time of redemption.” In practical terms that means you have to come up with that full amount in one lump sum just a month or two after filing your Chapter 7 case.

See the short Section 722 of the Bankruptcy Code about redemption.

Paying Off the Redemption Amount

This lump sum payoff of the vehicle value is obviously often a problem. If you owe lots more than your vehicle is worth you’d love to save the difference. But even if the value is much less than the debt, coming up with the money may seem impossible. Sometimes it is.  Where do people come up with redemption money? Here are three ideas:

  • Brainstorm about creative ways to come up with the necessary cash out of your own assets. Do you have anything you can sell or borrow against to raise the cash? Can you get access to any retirement savings, and is doing so worthwhile? Although you should almost always protect any retirement money, tapping into it might be worthwhile if the amount you’d save on the vehicle loan justify doing so. Overall, think outside the box. Don’t immediately assume you don’t have any way to pull together the money.
  • Consider asking relatives or friends to lend or even donate to you the money you need for redemption. Explain how this will allow you to keep your necessary transportation for much less money. Offer to make the friend or relative the lienholder on the vehicle after redeeming from your original lender.
  • Talk with your bankruptcy lawyer about getting a redemption loan from a financial institution. Certain ones do this specialized kind of financing. You will likely pay a relatively high interest rate, so carefully review the terms with your lawyer. In the right circumstances a redemption loan reduces your monthly payment amount and/or how long you make the payments to make it very worthwhile.

 

Timing: Qualifying for Vehicle Loan Cramdown

September 27th, 2017 at 7:00 am

If your vehicle is worth less than you owe on it, with good timing cramdown could reduce your monthly payment AND the total amount you pay.  


Vehicle Loan Cramdown

“Cramdown” is an informal term for one of the most tangible benefits of Chapter 13 “adjustment of debts” bankruptcy. You won’t find the term in the federal Bankruptcy Code, yet lawyers and judges use it all the time.

It refers to a procedure provided under Chapter 13 law for legally rewriting a vehicle loan.  It results, usually, in reducing both the monthly payment and the total you pay for the vehicle. The more your vehicle is “underwater”—worth less than what you owe on it—the more you benefit from cramdown.

Secured and Unsecured Parts of a Vehicle Loan

Cramdown works by dividing the total amount you owe on your vehicle loan into secured and unsecured parts.

The secured part you must pay for sure. But because that amount is less than the total amount you owe, the new monthly payment amount based on it will naturally be less. You can also often reduce the interest rate. Plus you can usually stretch the monthly payments out over a longer period than the original loan.  These all reduce your monthly payment.

The remaining unsecured part of your vehicle loan you pay only as much as you can afford. It’s just part of all your “general unsecured” debts. Usually you pay these only to the extent you have available money during the life of your case, money not already going either to living expenses or to other more important debts. So, often you end up paying the unsecured part of your vehicle loan just pennies on the dollar.

Combining all this, cramdown gets you to a free-and-clear vehicle for a lot less money.

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).

Non-Timing Conditions for Cramdown

Cramdown only works if your vehicle is worth less than the balance on the loan. You’re “cramming down” the loan amount to the secured amount, so this assumes that the secured amount is less.

It’s also worth emphasizing again that cramdown is ONLY available in a Chapter 13 case, not Chapter 7. Chapter 13 provides a way—through the court-approved payment plan—to divide the debt into secured and unsecured parts, and pay accordingly. Chapter 7 “straight bankruptcy” doesn’t let you do cramdown.

Cramdown also requires the motor vehicle collateral to have been “acquired for the personal use of the debtor.”  (See the “hanging paragraph” referred to above.)  So no cramdown on vehicles acquired for business use.

The Timing Condition

If you meet all the above conditions you still don’t get cramdown without one more timing condition.  You must have entered into your vehicle loan more than 910 days before your Chapter 13 case is filed. (That’s slightly less than two and a half years.)

What’s the point of this timing condition? It wasn’t always part of the law. It was added in 2005 to give a bit more advantage to auto loan creditors. Vehicles, especially new ones, depreciate quickly, especially during their first several years. This 910 –day rule prevents a debtor from financing a vehicle and then doing a cramdown on it quickly.

Conclusion

So be aware of this timing rule when you first go in to see your bankruptcy lawyer. Bring your loan vehicle paperwork (or whatever you have available) to see if and when you qualify for cramdown. You’ll find out how much you can lower your vehicle payment, and how much you can save overall.

 

Keeping Your Vehicle by Reaffirming the Vehicle Loan

July 12th, 2017 at 7:00 am

In a Chapter 7 case you “reaffirm” your vehicle loan if you want to keep your vehicle. This means you keep paying it.

 

Most debts that you owe are discharged in a Chapter 7 “straight bankruptcy.” That means that they are legally, permanently written off.

That includes your vehicle loan. But with a vehicle loan the lender has a lien on your vehicle. So if you don’t pay on it the lender has a right to take your vehicle. A Chapter 7 filing would usually just delay that by a few weeks.

So if you want to keep your vehicle, you have to voluntarily exclude the vehicle loan from the discharge of debts. You have to agree to reaffirm the debt.

The term makes sense. You originally agreed to pay the vehicle loan when you bought the vehicle. Then you file the bankruptcy case in which that loan would be discharged. But instead you reaffirm the loan obligation, saying you want to owe it after all, by excluding it from the discharge.

The Reaffirmation Agreement

A reaffirmation agreement is the document through which you exclude your vehicle loan from the debt discharge. It’s generally prepared by your vehicle lender and sent to your bankruptcy lawyer. You review it with him or her, if you agree you sign it, and then it’s filed at the bankruptcy court. The reaffirmation agreement must be filed at court before the court grants the discharge of debts, and it must meet some other conditions. See Section 524(c) of the U.S. Bankruptcy Code.

You Are Not Required to Reaffirm the Vehicle Loan

It’s crucial to understand that you do not have to reaffirm the debt. Bankruptcy gives you a one-time opportunity to get out of a bad vehicle purchase. It gives you the opportunity to owe nothing on the contract, if you so choose, for whatever reason. The vehicle may have turned out not be reliable. You may not be able to afford its monthly payments and other costs. You may owe more than the vehicle is worth.

So instead of reaffirming the vehicle loan, you have the unique opportunity to surrender the vehicle and discharge whatever remaining debt there would be.

Most of the time when you surrendered a vehicle you would still owe the creditor thousands of dollars. This is called the deficiency balance—the amount of debt you owe, plus usually substantial fees, minus a credit for the proceeds of the sale of your sold vehicle. Think seriously about taking advantage of the option of surrendering your vehicle and then owing nothing.

The Risk of Repossession if You Reaffirm

If you reaffirm a vehicle loan and then later can’t make the payments, your vehicle will get repossessed. And then you’ll likely owe a deficiency balance. That’s because the reaffirmation agreement reinstates all of the lender’s rights. That’s another reason to consider very seriously, and discuss with your lawyer, about whether it’s truly wise to keep the vehicle and reaffirm the loan.

 

Escaping a Vehicle Lease in Chapter 13

February 3rd, 2017 at 8:00 am

Getting out of a vehicle lease by “rejecting” it in Chapter 13 isn’t quite as quick as in Chapter 7 but has about the same practical effect.

 

Getting out of Your Lease in Chapter 7 vs. Chapter 13

Two days ago we discussed how a Chapter 7 “straight bankruptcy” gets you out of a car or truck lease. It discharges (permanently writes off) whatever debt you’d have from surrendering that car or truck.

When you get out of a vehicle lease you often owe money to the lessor; sometimes a lot of money. That can be true whether you break the lease early or get to the end. Either way you could owe the lessor thousands of dollars in contractual fees.

Once you’ve decided that you need to file bankruptcy, and that you want to get out of the vehicle lease, as long as you qualify for Chapter 7 and it’s the best option overall, you can almost always discharge all the debts arising from the lease. A Chapter 7 case is likely the easiest and quickest option.

But for many reasons a Chapter 13 “adjustment of debts” case may be the better way to go.

First, you may not qualify for Chapter 7 based on your income and expenses under the “means” test.

Second, more likely you’re filing under Chapter 13 because it’s simply be the better option. It gives you tools to meet important financial goals, tools unavailable under Chapter 7.  You can often protect an asset that would be at risk of being taken by a Chapter 7 trustee. Chapter 13 provides numerous ways to preserve precious collateral on your secured debts, such as your home or vehicle (beyond the leased one). Sometimes you can keep your home/vehicle while paying less than you’d pay under Chapter 7. Chapter 13 can also protect you while you catch up on child or spousal support arrearage, or on income taxes. You pay or catch up on these special debts while making payments based on your realistic budget.  These are just some of the good reasons to file a Chapter 13 case, unrelated to your vehicle lease.

The Chapter 13 Option

Whether you’re filing a Chapter 13 case because you don’t qualify under Chapter 7 or because Chapter 13 is better all around, you can surrender your leased vehicle and discharge the debt. Discharging—legally writing off—that debt is not as straightforward as under Chapter 7. But it almost always leaves you with the same result. You would owe nothing at all on the vehicle lease once your bankruptcy case is finished.

“Rejecting” Your Vehicle Lease

Under Chapter 13 you can either “assume” (continue with) the lease or “reject” it and return the vehicle. Two blog posts we explained how to “assume” your lease and keep your leased vehicle.

But to instead get out of your lease through your bankruptcy lawyer you simply state in your Chapter 13 that you are “rejecting” the lease. Arrangements are made to return the vehicle to the lessor.  You don’t make any more monthly lease payments, and if you’re behind you don’t have to catch up.

Whatever you owe on the contract—which may be a substantial amount—is then treated as a “general unsecured” debt.

Treatment of “General Unsecured” Debts

Debts are either “secured,” “priority,” or “general unsecured.” Your remaining lease debt fits in the third category. It is “unsecured” in that it’s no long secured by anything since you’ve surrendered the vehicle. It’s “general” in that it’s not a “priority” debt, which are favored ones (like child support and certain income taxes).

Your lessor would likely file a “proof of claim” with the bankruptcy court. That’s a statement asserting how much you contractually owe on the lease. Assuming it’s accurate and you don’t object to it, its amount is lumped in with all your other “general unsecured” debts.

In your Chapter 13 plan, usually you pay all or most of your secured and “priority” debts. But that’s very seldom true for the “general unsecured” ones. How much, if any, you pay on this category of debts depends on a lot of factors. Mostly it depends on your income and expenses, how much you have in secured and “priority” debts, and what, if anything, is left over for “general unsecured” debts in the period of time you’re in the Chapter 13 case.

Often the Lease Debt Has No Financial Effect

In many situations the existence of the lease surrender debt does not increase what you pay into your Chapter 13 payment plan.

How could that be? It happens in two circumstances, one less common, the other much more so.

1. You may be allowed to pay nothing at all to your “general unsecured” debts, a “0% plan.” This happens when all of your available “disposable income” during your 3-to-5-year Chapter 13 case get paid on secured debts (such as a home mortgage, or vehicle or furniture loans) and/or “priority” debts (such as income taxes and child or spousal support arrearage). If you pay 0% of your “general unsecured” debts, that means that you’re paying 0% of your vehicle lease debt.

2. The more common Chapter 13 plans are those in which you pay the “general unsecured” debts something instead of nothing, Still, the existence of the leased vehicle debt very often does not increase how much you pay into your plan. That’s because most of the time you pay a fixed amount on all of your “general unsecured” debts. That amount is essentially what your budget says you can afford to pay over the life of your case. So, as a result, adding more debt to that pool—the debt from the surrendered leased vehicle—simply reduces the money that would otherwise have gone to other “general unsecured” debts. You pay no more; the money going to the “general unsecured” debts just gets divided differently.

 

Escaping a Vehicle Lease in Chapter 7

February 1st, 2017 at 8:00 am

Vehicle leases are often not such a good deal. If you find out your isn’t, you can almost certainly “reject” that lease and pay no more. 

 

Our last two blog posts have been about how to keep your leased vehicle in a Chapter 7 or 13 bankruptcy case. But what if you don’t want to keep your lease? Vehicle leases are often not as good of a deal as you might have thought at the beginning. Bankruptcy gives you the rare and often valuable opportunity of getting out of your lease.

Today we talk about leaving your vehicle lease behind without owing anything on it through Chapter 7 “straight bankruptcy.” Our next blog post will be about how that works through Chapter 13 “adjustment of debts.”

Popular but Risky Vehicle Leases

We mentioned a couple blog posts ago that vehicle leases are getting more and more popular. In a recent 5-year span they increased from 17% to 27% of vehicle transactions. People clearly like the low money down and lower monthly payments that often come with leases.

But vehicle leases also often come with significant downsides.

Disadvantages

1. Unlike a vehicle loan, at the end of the lease term you OWN nothing. Once you pay off a vehicle loan and you have a free and clear car or truck. With that as a goal it’s more likely you’ll take better care of your vehicle. So you’ll then likely have it for years more while you pay no monthly payments. Instead, at the end of a lease you return the vehicle and have nothing. What seemed less inexpensive short-term usually ends up being much more expensive long-term.

2. You own no vehicle at the end of the lease so there’s no trade-in vehicle for your next vehicle purchase. You’d usually have to come up with a cash down payment, making a purchase more challenging. It’s unlikely that you’ve saved the money from the lower monthly lease payments to put into your next vehicle. As a result you may be stuck with getting into another vehicle lease, continuing the expensive cycle.  

3. If you put on more mileage than the contract allows you could owe substantial penalties at lease end. This can happen with more-than-normal interior or exterior wear and tear. Or you may have to pay extra if the vehicle simply depreciates more than the lessor anticipated.

4. Getting out of the lease before the end of the lease term is usually very expensive. It could easily cost several thousands of dollars. The amount you would owe would be based on the “realized value.” That’s the relatively low amount the lessor would get from selling the vehicle at an auto auction. The amount wouldn’t even be known until after you surrendered the vehicle.

Buying Your Leased Vehicle at the End of the Term

You might be able to finance the purchase of your leased vehicle at the end of the lease term. But you simply can’t count on it. You are stuck with the terms the creditor is willing to extend to you. If your credit isn’t the greatest, you could easily be denied. If you owe extra because of the contractual penalties referred to above, you’d be paying too much for that vehicle. Plus you’d be paying interest on that higher amount, further increasing your cost for the vehicle.

The Bottom Line

The reality is that leasing is usually the most expensive and risky way of “owning” a car or truck. You have possession of the car while it’s depreciating the most. Then you have to surrender it, potentially paying extra to just to get out of the lease. Then without a trade-in vehicle this is often repeated with the next lease. So you’re continuously making payments, never owning a vehicle outright. It’s a continuously expensive cycle.

The Chapter 7 Discharge Solution

A Chapter 7 “discharge” can write off almost all vehicle lease obligations. Except in the unlikely event that you got the lease by through a serious misrepresentation or fraud, you will get out of whatever you owe on the lease.

You may need to get out of the lease early because your circumstances have changed. You may no longer be able to afford the monthly lease payments. You may have fallen behind on those payments. You may just not need the vehicle any more or may need your money for more crucial expenses.

Or you may instead be at or near the end of your lease and owe or expect to owe high mileage or excessive wear and tear charges on the lease.

In all these situations you can get out of your vehicle lease and owe nothing to the lessor.

“Rejecting” the Lease

When your bankruptcy lawyer files your Chapter 7 case, you can either “assume” or “reject” the vehicle lease. “Assuming” the lease means keeping the vehicle and being bound by all the terms of the lease. “Rejecting” the lease means surrendering the vehicle and writing off all your financial obligations under the lease.

To “reject” the lease, you simply state your intention to do so when filing your Chapter 7 case, on a document called the “Statement of Intention for Individuals.” Your lessor then has the right to accept back the vehicle. (Section 365(p)(1) of the U.S. Bankruptcy Code.) So you or your lawyer would make arrangements to make the timing convenient for you.

Then you wouldn’t be legally liable for any further installment payments, early termination fees, or end-of-lease penalties. Those obligations would all be discharged, along with all or most of your other debts.

 

“Assuming” a Vehicle Lease in Default in Chapter 13

January 30th, 2017 at 8:00 am

Although Chapter 7 can work fine if you’re current on your lease, use Chapter 13 instead if you’re behind and need time to catch up. 


Keeping a Leased Vehicle under Chapter 7

A couple days ago we wrote about keeping a leased vehicle through a Chapter 7 “straight bankruptcy” case. That requires formally “assuming” the lease and getting your lessor to go along with that.

The lessor is not likely going to go along with the “assumption” if you’re behind on the lease payments, and can’t catch up right away. Even if you’re now current but have had a weak payment history, the lessor may be reluctant to continue the lease.

Two Situations for “Assuming” a Lease under Chapter 13

First, as stated in our introductory sentence, Chapter 13 gives you much more time to get current if you’re behind. A Chapter 13 case takes much, much longer than a Chapter 7 one—usually 3 to 5 years instead of just 3 to 4 months. Being in a bankruptcy case that long may seem like a disadvantage. But since you are significantly protected from your lessor during that time, it can be a huge advantage. You usually can get so much more time to cure any missed payments. That can enable you to keep your leased vehicle when you otherwise simply could not afford to do so.

The second situation for “assuming” a vehicle lease is if you want to keep that vehicle and have unrelated reasons for being in a Chapter 13 case. You can often deal much better in Chapter 13 with income taxes and divorce-related debts, for example. It also gives you amazing tools for addressing home mortgage(s) and/or another vehicle’s secured debt. So if you’ve decided to file a Chapter 13 case for reasons nothing to do with the vehicle lease, it’s good to know that Chapter 13 allows you to “assume” your vehicle lease.

How to “Assume” Your Lease under Chapter 13

“Assume” the lease by formally proposing to do so within your Chapter 13 payment plan. Section 1322(b) of the Bankruptcy Code states what a Chapter 13 plan may do. Subsection 1322(b)(7) says that a plan “may provide for the assumption… of any executory contract or unexpired lease of the debtor…  .”

Your bankruptcy lawyer prepares your payment plan stating whether you are current on the lease payments. If so, you’ll just continue making your monthly lease payments. If you’re behind, your plan will say how much you are behind and your proposed terms for catching up.  

The lessor, the Chapter 13 trustee, and your other creditors have the opportunity to review your proposed plan’s terms. They can raise objections. But if you and your lawyer initially put the plan together well, there may be no objections. If, however, any objections are raised, they can usually be resolved through negotiation. For example, you can curing the missed payments faster (by perhaps delaying payment to other creditors).

Assuming that things go as they should, the bankruptcy judge issues an order “confirming,” or officially approving, the plan. Your vehicle lease is then “assumed.” It continues in effect, along with all of its terms, for the life of the lease.

Cautionary Note

Be aware that the Chapter 13 trustee technically has the right to “assume” a vehicle lease before you do, but only if the lease has such extraordinarily favorable terms that it could be sold and transferred to someone else to make money for your other creditors. That is extremely seldom the case, especially in a consumer bankruptcy case. Check with your bankruptcy lawyer to be sure that’s not your situation.

 

“Assuming” a Vehicle Lease in Chapter 7

January 27th, 2017 at 8:00 am

You can most likely “assume” your vehicle lease and keep that vehicle under Chapter 7. But you need to be current or able to be quickly. 

 

We’ve talked about unexpired leases and how they’re treated in a Chapter 7 “straight bankruptcy” case. Today we get into the most common big one—the vehicle lease.

More and More Vehicle Leases

In the five years from 2009 to 2014, the percentage of vehicle transactions that were actually leases went from about 17% to 27%.

Why this strong trend? No doubt there are lots of reasons. But people seem to fixate more on the monthly payment amount than anything else, which usually favors leases. Vehicle manufacturers have capitalized on this in their advertising. That month-to-month advantage often comes with the disadvantage of higher overall costs.

In any event, when money’s tight and you need reliable transportation, leasing may really be your only feasible option.   

Keeping Your Vehicle in Bankruptcy

If you do have a lease and need to keep your leased vehicle, you likely can do so in bankruptcy. Today blog post describes how this can happen in a Chapter 7 case. Tomorrow’s will be about Chapter 13 “adjustment of debts.”

The Trustee’s Role

As described in our last post two days ago, the Chapter 7 trustee has a possible but unlikely say here. In very rare situations a vehicle lease can be sold for money. But it’s simply not likely that you got such a sweet deal that somebody would pay you to take over your lease. However, if you did your trustee could possibly sell off the lease and pay the proceeds to your creditors. Talk with your bankruptcy lawyer to make sure this highly unlikely situation does not apply to your lease.

“Assuming” a Vehicle Lease

In the very likely event that your trustee would have no interest in your lease, you can usually “assume” it. You start by formally informing your lessor of your intention. Through your lawyer you complete a “Statement of Intention,” checking the box that you want to “assume” the lease.

By doing this you say that you want to be bound by all the terms of the lease contract. That of course includes your obligation to pay the monthly lease payments. But it also includes all the other terms, including various potential extra fees for high mileage and such.

Your lawyer files the Statement of Intention at the bankruptcy court and mails a copy to your lessor.

Your Lessor’s Acceptance

Your lessor has to consent to you “assuming” the lease. (Section 365(p)(2) of the Bankruptcy Code.) It will likely consent, especially if you are current on the lease, or can get current quickly. Vehicle leases are usually profitable for lessors, and they’d rather keep making money instead of ending the lease.

But again, the lessor is not legally obligated to allow you to assume the lease. Be sure to talk to your lawyer about your particular lessor’s practices so you know what to expect.

Warning

Make sure you are clear about the risks of “assuming” the lease.

If you ever can’t make the monthly lease payments after “assuming” the lease, the lessor can take back the vehicle.

If you continue to owe anything under the lease, which is very likely, the lessor would almost certainly sue you for it. The amount owed would likely be large, including various penalties and charges added to your account.

Even if you paid off the required lease payments, you could still owe a bunch of money. At the end of the lease term, the lessor could well charge you for excess mileage or vehicle “damage.” You could owe thousands of dollars, and be sued if you did not quickly pay it.

Conclusion

For sure sometimes keeping a leased vehicle in bankruptcy makes sense. But make sure it really does. Don’t give up the opportunity to get out of a dangerous deal without being well informed.

Review the lease contract carefully with your lawyer if any of it isn’t clear. Figure out as much as you can whether you would owe anything at the completion of the lease term. For example, compare your current mileage with the amount allowed in the contract, projecting out your likely mileage amount at the end of the lease, and see if that results in a likely penalty.

Last thing: if you aren’t current or close to current on your payments, consider Chapter 13 as potentially better option. Again, that’ll be the topic of our next blog post.

 

Secured Creditors’ Proofs of Claim in Chapter 13

November 23rd, 2016 at 8:00 am

If you want secured creditors to be paid in your Chapter 13 plan, they must file proofs of claim. Let’s use the example of a vehicle loan. 

 

Secured Debts

A debt is secured if the creditor has a lien on something you own. The lien gives the creditor rights against that thing you own. That usually includes the right to repossess it if you don’t pay the debt.

Let’s focus on what’s probably the most common kind of secured debt: a vehicle loan. When you finance your purchase of a car or truck, your lender becomes its lienholder. To secure the loan the lender requires you to give it a lien on the vehicle. That lien is a “charge against or interest in [your] property to secure payment of a debt or performance of an obligation.” (Section 101(37) of the Bankruptcy Code)

Bankruptcy discharges—legally writes off—most debts, including secured debts. But that just discharges the personal liability on the debt itself. The lien—the lender’s right to repossess—is not erased by bankruptcy. If you want to keep a vehicle when you go through bankruptcy, you have to deal with the lien.  Generally, unless you’re surrendering the vehicle, the way to deal with the lien is to pay the debt owed.

(With “cramdown” you can pay less than the full debt, based on the value of the vehicle. But you still have to satisfy the lien. “Cramdown” only applies to loans at least 2 and a half years old,)

Chapter 13 Plan

Let’s say you bought a used vehicle two years ago (so no “cramdown”). Because of other financial pressures you’d recently fallen two payments behind, totaling $850. Part of the reason you filed a Chapter 13 case is to stop the vehicle from being repossessed. Keeping it is a huge priority for you. You definitely need the vehicle to commute to work and to get your kids everywhere—to keep your life together.  

Assume your Chapter 13 payment plan says that you’ll resume regular monthly payments and will catch up on the $850 through 10 monthly payments of $85. Almost for sure your lender would not allow you that much time to catch up otherwise. Chapter 13 law usually requires them to give you this amount of time. As a result you have more money to live on and maybe to pay other urgent creditors.

The Crucial Role of the “Proof of Claim”

Your Chapter 13 plan could explicitly state that your vehicle lender is going to be paid. The bankruptcy judge could formally order that the plan is approved (“confirmed”). You could pay the plan payments perfectly to the Chapter 13 trustee. But your lender still would not receive anything from the trustee without one more step. The lender must file a “proof of claim” with the bankruptcy court.

A “proof of claim” is a rather simple form on which your lender states how much you owe and usually provides some documentation showing the basis for the debt. (Section 501 of the Bankruptcy Code)

Lenders want to be paid and so would normally file proofs of claim to have that happen. But they sometimes mess up. They usually have 90 days from the date of your “meeting of creditors” to file proofs of claim. Since that “meeting” is about a month after your bankruptcy lawyer files your case, the deadline is a specified date about four months into your case.

You get a formal notice—as do your creditors—giving that exact deadline. Your lawyer should review the filed proofs of claim right after that deadline. Be in touch with the lawyer to find out if your auto lender filed an appropriate proof of claim. (At the same time you can discuss the proofs of claim filed or not filed by other important creditors.)

You have 30 days after the creditors’ deadline to file a proof of claim on behalf of any creditor that messed up and did not file one on time. Your Chapter 13 trustee has the same right. Different trustees have different practices about whether not they file proofs of claim for creditors, and if so when, so talk with your lawyer about this.

Conclusion

To keep a vehicle, you have to satisfy the vehicle lender’s lien on that vehicle. That means you have to arrange to pay that lien. Your Chapter 13 trustee cannot pay the lender under the terms of your court-approved payment plan without a proof of claim. If the lender neglected to file one on time, make sure that either you or the trustee files a proof of claim for the lender.

 

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