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Cramdown Your Vehicle Loan if Behind on Payments

May 27th, 2019 at 7:00 am

Vehicle loan cramdown doesn’t just likely reduce your vehicle payments and the total you pay. You’d also not have to catch up on late payments.  

 

Our last two blog posts have been about lowering monthly vehicle loan payments through Chapter 13 cramdown. This also often reduces the total that you pay on the loan until your vehicle is free and clear. Cramdown often even reduces the interest rate you pay. So it usually saves you money both every month and long term.

If you’re behind on your payments there’s an even more immediate benefit. If you qualify for cramdown, you don’t have to catch up on any late payments. This frees up the money immediately for other urgent needs. This is a huge monetary benefit at a time when your cash is likely extremely tight.

On top of this financial benefit, you get the peace of mind that your vehicle won’t be repossessed. Vehicle lenders can be quick to repossess when you fall behind, especially if your payment history has been spotty. It’s great to prevent a repossession, and then not have to scramble to catch up on the missed payments.

Today we show how this works.

Qualifying for Vehicle Loan Cramdown

See our last blog post for an explanation about how to qualify for Chapter 13 vehicle loan cramdown. Basically, the loan has to be more than 910 days (about 2 and a half years) old at the time you file your Chapter 13 “adjustment of debts” case. And the value of your car or truck needs to be less than the amount you owe on it. The more your vehicle is worth less than you owe the more cramdown can help you.

(There are some exceptions to the 910-day rule. For example, if the vehicle was purchased for business use, or if the loan was not for the purchase of the vehicle, there’s no time limit. Again, see our last blog post for the details. Also, see the “hanging paragraph” following Section 506(a)(9) of the federal Bankruptcy Code.)

The Missed Payments Are Unsecured

So now assuming that your vehicle loan qualifies for cramdown, see our second-to-last blog post about how cramdown works. Basically, your Chapter 13 payment plan divides your loan debt into secured and unsecured portions. The secured portion is in the amount that your vehicle is worth. The unsecured portion of the debt is the rest of its balance.

For example, assume you owe $18,000 on a vehicle that is worth $12,000. The secured portion of the loan balance is $12,000 and the unsecured portion is the remaining $6,000.

Your bankruptcy lawyer essentially recalculates the monthly payments based on the $12,000 secured portion. Besides being based on this lower amount to be paid, the monthly payments are often stretched beyond the number of months left on the contract, and the interest rate is often reduced (depending on how high the contract interest rate is). All this usually results in a lower monthly payment, often significantly lower.

The reason you don’t have to catch up on your missed loan payment(s) is that that part of the debt is unsecured. Using the example above, assume your monthly payments are $400, and that you just fell behind on a second month. So you’re behind $800. (And there’s a big risk that the repo man is looking for your vehicle.)

That $800 you’re behind does not affect the value of the vehicle. It’s worth $12,000 whether or not you’re current on the loan or not. That $800 (or whatever amount you’re behind) is part of the unsecured portion of the loan balance. It’s part of the unsecured portion of the debt. It does not affect how much you’re going to be paying each month under the cramdown.

What Does Happen to the Unsecured Missed Payment(s)?

As part of the unsecured portion of the loan balance, it’s put into the pool of your “general unsecured” debts. You pay these in your Chapter 13 plan only to the extent you can during the life of the plan. Other kinds of debts—secured ones and special “priority” ones (like child support and recent income taxes)—get paid before general unsecured debts get paid anything. As a result you often don’t pay the unsecured portion of your vehicle loan much, and sometimes nothing.

When DO You Have to Pay on the Vehicle Loan?

To the extent the general unsecured debts—including the missed payments—get paid, this happens later in your case. Depending on the amount of your secured and priority debts, the unsecured debts often don’t get paid until the final year or even final months of your case.

However, you start paying the secured portion, with the new crammed-down amount—the first month of your plan payments. It’s usually part of the amount that you pay to the Chapter 13 trustee. It’s part of the single plan payment that covers all your debts, based on what you can afford to pay. It’s usually due a month after your bankruptcy lawyer files your proposed plan, and must be paid on time.

Summary

Vehicle loan cramdown doesn’t just save you money, immediately and long-term.  If you’re behind on the monthly payments, cramdown enables you to avoid catching up on those payments. For example, if your vehicle insurance lapsed you could use that money instead to pay to reinstate the insurance. Or, not having to catch up could give you the financial break you need to start paying your Chapter 13 plan payments after filing your case. There are many such circumstances where not having to catch up on missed payments would enable you to keep your vehicle.

 

The Surprising Benefits: Getting Back Your Repossessed Vehicle

May 28th, 2018 at 7:00 am

It’s much easier to prevent repossession by filing bankruptcy beforehand. But if you’ve already been repo’d, you now have to act very fast. 

 

When Does a Lender Repossess a Vehicle?

When CAN a vehicle lender repossess your vehicle? Just about all vehicle loan contracts let the lender repossess the minute you are late on a payment. There may be a legal grace period, but not usually. This is also true for other breaches of the contract, such as if you let the vehicle insurance lapse.  So usually a lender can repossess, without warning, when you are not in fully compliance with any contract obligations.

But most lenders don’t repossess right away. They’d usually rather have you make the payments so that they earn the interest on the contract. But they have the legal right to repossess, and sometimes act very fast.

So how much time do you have before your lender would actually repossess? That depends on your payment history and the repossession practices of the lender. It’s truly hard to tell how many days you  can be late, or how long your insurance can be lapsed, before repossession.

Much Better to File BEFORE Repossession

Filing bankruptcy stops repossession from happening immediately. It literally stops the repo agent from taking your vehicle even if he or she has already started to do so.

The moment your bankruptcy lawyer electronically files your case the “automatic stay” goes into effect. This “stays,” or legally stops, virtually all collection efforts against you and your property. Specifically, filing bankruptcy stops the enforcement of lender’s liens against your property. A vehicle repossession is an enforcement of a lender’s lien on your vehicle, and so it is stopped. See Subsections 362(a)(4) and (5) of the U.S. Bankruptcy Code about the “stay… of… any act to… enforce any lien” against your property.                                                                                                          

Filing a Chapter 7 vs. 13 Case to Stop Repossession

A Chapter 7 “straight bankruptcy” will stop a pending repossession. It will give you a bit of time to bring your loan current. Usually you’ll have no more than about 2 months, sometime less, seldom more. If your insurance has lapsed you’ll have to reinstate it pretty much right away.

Stopping repossession by filing a Chapter 13 “adjustment of debts” gives you lots more time to catch up on the late payments. Instead of a couple months under Chapter 7, under Chapter 13 you get as much as a few years to catch up. Also you may qualify for “cramdown” of the vehicle loan. If so, after stopping the repo you may not need to catch up at all. Plus you may be able to reduce your monthly payments and pay less overall for the vehicle than you would have under the contract. “Cramdown” is not available in Chapter 7. But even under Chapter 13, you still need to pay to reinstate any lapsed insurance quickly to be able to keep your vehicle.

Getting Back Possession AFTER Repossession

Whether you can get your vehicle back after it’s already been repossessed depends on timing and the bankruptcy Chapter you file under.

As for timing, you DO have to act fast. Otherwise it will be too late to get it back, even through bankruptcy.

Bankruptcy’s “automatic stay” stops the lender, at least temporarily, from taking the next steps after the repossession. That’s because those next steps are at least arguably part of the lender’s enforcing its lien on the vehicle, which bankruptcy stops. This may depend on your state’s laws and local interpretations of bankruptcy law. Your bankruptcy lawyer will talk with you about this in your conversation about the repossession.

The next steps after repossession usually involve selling the vehicle, often in an auto auction. Once your lender sells the vehicle, it’s too late to get back your vehicle through bankruptcy.

Chapter 7 vs. 13 in Getting Back Possession

Assuming you file fast enough, whether you actually getting your vehicle back often depends on whether you file under Chapter 7 or Chapter 13.

A Chapter 7 case will work only if you have a fair amount of money immediately available. You’d have to pay the repossession costs (of likely hundreds of dollars) plus bring the account fully current. If you’re not current on insurance you’ll also have to pay to reinstate it.

Even all that may not be enough. If your lender still doesn’t want to cooperate, it may be able to avoid giving back your vehicle.  Whether or not it can be forced to depends on how your local bankruptcy court interprets the law.

Filing Chapter 13 is much more likely to be effective. That’s because it provides a legal mechanism for you to catch up on the back payments over a much longer period of time. This is done through monthly payments in your court-approved Chapter 13 plan. You will still likely have to pay the repossession costs up front. Plus you’ll have to be current on insurance. Then if your plan shows that you’ll catch up on the back payments, most lenders will voluntarily return your vehicle. If not, the bankruptcy court would likely order the lender to do so.

 

Chapter 7 Buys Very Short Amount of Time to Get Vehicle Insurance

November 3rd, 2017 at 7:00 am

Chapter 7 stops a repossession of your vehicle for lapsed insurance, but almost always the amount of time it buys you is very short. 

 

Our last blog post went through a list of ways Chapter 7 buys you time with your vehicle lender. Included in that list was that it gives you “a very limited time to reinstate required vehicle insurance.” This deserves more attention.

Vehicle Insurance Required

According to Minimum Car Insurance Requirements by State, a recent article in nerdwallet.com, almost every state’s laws require vehicle owners to have at least a certain dollar amount of liability insurance coverage. That covers damages that you cause in an accident. The one state that doesn’t require liability coverage is New Hampshire. There are other exceptions. In Virginia drivers with a clean driving record can drive without liability insurance by simply paying an annual fee. In Arizona and some other states you can avoid liability insurance by providing a bond, certificate of deposit, or cash to the DMV.

According to this wallethub.com article 15 states also require personal injury protection (PIP) insurance. That covers medical expenses from an accident, for you, household members, and your passengers, regardless of fault. Also, 21 states require uninsured and underinsured motorist coverage. This covers you when you’re harmed by someone with no insurance or an insufficient amount.   

Your vehicle lender or lessor requires two other kinds of insurance to protect your vehicle, its collateral.  Collision insurance covers your vehicle in an accident. Comprehensive insurance covers it in events other than an accident, such as theft and fire.

The Urgency of Vehicle Insurance Coverage

Vehicle lenders and lessors get extremely concerned if your insurance coverage lapses. That’s because then at any moment their collateral could be totaled and turn worthless.

If you miss a payment deadline, the lender/lessor is only out a few dollars. But if you have no insurance it’s potentially out the entire loan/lease balance.

This is why as part of your loan or lease agreement:

  • you must maintain insurance throughout the term of your loan or lease
  • your lender/lessor must be named in your insurance as a loss payee (it gets paid if your vehicle is damaged)
  • the collision and comprehensive coverages must be enough to cover the vehicle’s full value, with limited dollar amount deductibles
  • if your insurance ever lapses the lender/lessor can “force-place” insurance and make you pay for it.

 (For example, see this Wells Fargo Dealer Services “agreement to furnish insurance; also this webpage from the federal Consumer Financial Protection Bureau about force-placed insurance.)

As a result of such contractual requirements your lender/lessor can legally repossess your vehicle whenever your insurance coverage lapses.  

Buying You Time in Chapter 7

The moment you file a Chapter 7 “straight bankruptcy” case through your bankruptcy lawyer your vehicle is protected by the “automatic stay.” See Section 362 of the U.S. Bankruptcy Code. This prevents your lender/lessor from repossessing your vehicle. That’s true whether you’re behind on monthly payments or your insurance has lapsed.

So if your vehicle insurance has lapsed before filing your Chapter 7 case, that filing buys you some time to get the insurance reinstated. But, as the title to this blog post says, it usually only buys you a very short amount of time.

Why’s that? It’s because the lender/lessor’s concern about losing its collateral is a legitimate one. The bankruptcy court respects that concern.  Lapsed insurance will encourage the lender/lessor to quickly file a motion with the court for “relief from the automatic stay.” That is a formal request to be able to repossess the vehicle, in this case for lack of insurance. The court will grant that motion unless you’ve reinstated insurance by the time the court hears the motion. So filing bankruptcy may only buy you a few more days or a couple weeks to get insurance.

Also, in the meantime the lender/lessor can force-place its own insurance on your vehicle. It adds the cost of this insurance to your balance, and it’s astoundingly expensive. Furthermore, force-placed insurance only protects the lender. You’re still violating state law by driving uninsured. And of course driving without insurance is extremely risky. Plus this cost will significantly increase the amount you need to pay to get current.

Conclusion

Filing a Chapter 7 bankruptcy will prevent your vehicle from being repossessed for lapsed insurance. But the amount of time the filing buys before you need to reinstate the insurance is quite short. Plus the force-placed insurance will make catching up on your loan/lease cost you much more. So, stopping a repossession for lapsed insurance can be great, but the amount of time it buys you for this violation of your vehicle loan/lease is very limited.

 

A Fresh Start on Your Vehicle Loan through Chapter 7 “Reaffirmation”

January 8th, 2016 at 2:00 am

A reaffirmation agreement makes you still liable on your vehicle loan so you can keep your car or truck after writing off your other debts. 

 

The Problem

Is it a struggle to make your car or truck payments? Have you been late on the payments and worried about your vehicle getting repossessed? Would it help your peace of mind if you could comfortably make these crucial payments?

A Solution

If you filed a Chapter 7 “straight bankruptcy” case, most or all of your other debts would likely be permanently written off (“discharged”). As a result you could much better afford to make your monthly vehicle payments.

You’d enter into a “reaffirmation agreement” with your vehicle lender, through which you’d agree to exclude its loan from the discharge of your debts so that you would remain liable on it. And you’d agree to make future payments on time. In return your creditor would allow you to keep the vehicle and would report your on-time payments to the credit bureaus so that you could start rebuilding your credit right away.   

You’d have a fresh start on your vehicle loan.

What’s a “Reaffirmation Agreement”?

A reaffirmation agreement on your vehicle loan is a document that legally excludes that loan from the “discharge” (write-off) of all or most of your other debts that you get through your Chapter 7 bankruptcy case. You have a choice about whether to discharge your vehicle loan or not.

If want to keep your vehicle you would almost always need to remain liable on your vehicle loan. And if you want to remain liable (by not discharging that debt), then you would sign a reaffirmation agreement.

Why Remain Liable on Your Vehicle Loan?

If you stop making payments on a vehicle loan the lender will have the right to repossess it. That’s true even in bankruptcy. The lender is a lienholder on your vehicle, and bankruptcy does not change a lienholder’s right to its collateral if you don’t pay the debt.  

But while the lienholder’s right to repossess the vehicle for nonpayment survives bankruptcy, your obligation to pay the vehicle debt can be discharged. In fact that obligation IS discharged unless you sign a reaffirmation agreement excluding it from discharge.

So the reason for a reaffirmation agreement is for you to reassure the lender that you will continue to be liable on the vehicle loan in spite of filing bankruptcy, so that the lender will not repossess your vehicle.

Is There Any Reason Not to Sign a Reaffirmation Agreement?

Two reasons.

First, bankruptcy gives you a one-time opportunity to get out of a bad vehicle purchase, or one that is no longer worthwhile. The vehicle may have turned out to cost too much to maintain or repair, or costs more than you can afford in monthly payments and insurance. Or the car or truck may now simply be worth way less than what you owe on it. So it’s important to understand that filing bankruptcy gives you the opportunity to give back a vehicle and just discharge whatever you owe on it.

Keep in mind that after surrendering a vehicle you would usually still owe on the debt, sometimes thousands of dollars. That’s the so-called deficiency balance: the debt with all the late fees and various costs of repossession and resale, minus the proceeds from the lender’s sale of the vehicle (usually at an auto auction). The deficiency balance owed after surrendering the vehicle is often much more than you’d expect. Bankruptcy gives you the rare opportunity to surrender a vehicle and owe nothing. So even if you think you should keep and pay for your vehicle, stop to think about whether surrendering it (and getting a cheaper vehicle) would be wiser.  

The second reason you might not want to sign a reaffirmation agreement is the risk that you would not be able to keep up the payments in the future. If so your vehicle could be repossessed and you be left owing a lot on the deficiency balance as mentioned above.

If that were to happen you may have wished that you hadn’t signed a reaffirmation agreement. That’s because without that, the lender could not pursue you for a deficiency balance. Without a reaffirmation agreement, the debt on that loan would have been discharged in the Chapter 7 case. You would have been making payment only to keep the creditor happy month to month, and eventually perhaps pay off the lien.

This paying-on-the-lien-without-reaffirming-the-loan is called the “ride-through” option. You’d just keep making your monthly payments on the loan, keep the insurance current, and once you paid off the loan you’d receive free and clear title to the vehicle. But if at any time before that you could not make the payments, or decided the vehicle was no longer worth keeping, you could just surrender it, and would not owe anything.

With the Advantages of the “Ride-Through” Option, Why Sign a Reaffirmation Agreement?

Simply, you take the reaffirmation agreement option because most vehicle lenders make you do so if you want to keep the vehicle.

Why do the lenders require a reaffirmation agreement? Because it’s to their advantage that the risk of owing a deficiency balance is hanging over you. That will give you more incentive to keep making the loan payments through to the end of the contract no matter how your circumstances change.

The lenders also have the law on their side on this issue in much of the country. In most place but not necessarily everywhere, a vehicle lender has the right to repossess a vehicle as soon as the bankruptcy is completed EVEN if the debtor is current on monthly payments and has appropriate insurance in force, IF the debtor did not sign a reaffirmation agreement. So if you want to keep your vehicle and not worry about it being repossessed at any time, you generally have to reaffirm the debt.

But be sure to discuss this thoroughly with your attorney. You may have more leverage to do a “ride-through” in your part of the country. And certain vehicle lenders—more likely local ones—may be more flexible.  You may be able to have your cake and eat it, too: keep your vehicle and keep up the payments, but not enter into a reaffirmation agreement in order to avoid the risk of a future deficiency balance.

 

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