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An Example of Money Saved through Vehicle Loan Cramdown

June 3rd, 2019 at 7:00 am

Here’s an example of vehicle loan cramdown that shows how you can reduce your vehicle payments and be free and clear after paying less. 

 

Our last 3 blog posts have been about Chapter 13 cramdown of a vehicle loan. Cramdown can reduce your loan’s monthly payments, its interest rate, and the total you pay for your vehicle. Often you end up saving a lot both monthly and on the total paid. 

The last three blog posts introduced how cramdown works, how to qualify for it, and how you don’t have to catch up on late payments. But like anything, explaining a bunch of rules only goes so far. Showing how the rules actually get applied can be the best way to make sense of a complicated concept like cramdown. A good example is like a picture: it’s worth a thousand words.

So today, how does cramdown work in real life?

The Facts of Our Example

Let’s say you are a payment behind on your vehicle loan. You’re about to miss a second payment, and you’re feeling desperate. You have made making your vehicle payments a priority but you have other debts that are putting intense pressure on you. Your vehicle is absolutely essential in your life so you know you have to do something.  

You know that to keep your vehicle you have to either get rid of or greatly reduce your other debts. Those other debts are medical bills and unsecured credit cards, all together totaling $75,000. You’re considering either Chapter 7 to write off those other debts or Chapter 13 to greatly reduce those debts.

Assume you bought your vehicle 3 years ago, it’s worth $9,000, but you still owe $15,000 on it. The contractual monthly payments are $550. Your budget, allowing for reasonable amounts for your living expenses, shows that you can afford to pay a total of $350 per month on all of your debts, including the vehicle loan.

Chapter 7 Doesn’t Help Enough Here

You understand that a Chapter 7 case would most likely write off (“discharge”) your entire $75,000 of unsecured debts. But even after that you’d really struggle to pay the $550 monthly vehicle payments. Plus you’d almost for sure have to catch up quickly on the $1,100 in late payments (2 times $550).  

How Chapter 13 Cramdown Helps More

Cramdown essentially allows you to re-write your vehicle loan based on the fair market value of your vehicle.

Cramdown helps you more financially the more that you owe on your vehicle than it’s worth. Plus it’s usually available only if your loan is more than 910 days old—about 2 and half years. (See the unnumbered “hanging paragraph” right after Section 1325(a)(9) of the U.S. Bankruptcy Code.) You qualify in our example because you bought your vehicle 3 years ago. (See exceptions to the 910-day qualification rule in our second-to-last blog post.)

Cramdown would rewrite your vehicle loan based on the $9,000 your vehicle is worth. The term of cramdown payments lasts between 36 to 60 months. Your interest rate is often reduced as well, depending on your contract interest rate. Plus, you don’t have to catch up on any missed payment.

This is contrast to Chapter 7, where almost always you have to accept all the contractual terms of the loan if you want to keep your vehicle. That includes catching up very quickly on any missed payments.  

Paying Less through Cramdown

What would be your monthly payment to pay off the $9,000 value of your car?  (That’s the secured portion of the $15,000 total vehicle debt.) Assume a 36-month Chapter 13 payment plan—the usual minimum length. Amortizing $9,000 over 36 months at 5% interest yields a monthly payment of about $270.

We said earlier that you can afford to pay all your debts $350 per month. (That includes the vehicle loan.) So your monthly Chapter 13 plan payment would be $350.  That would cover all your debts.

$350 monthly payments times 36 months equals $12,600 total paid. The vehicle lender would receive $9,000 of that, plus about $700 of interest over the 36 months. The Chapter 13 trustee gets a percentage—let’s say 4% of the total, so $504. Add up those amounts and we’ve accounted for $10,204 of the $12,600 total you’re paying. This leaves $2,396 remaining.

Assume in this example that you paid your bankruptcy lawyer up front. Otherwise part of his or her fee would be paid out of that remaining $2,396. But here all of that $2,396 would go to your pool of general unsecured debts. That includes the $75,000 of medical and credit card debts, plus the $6,000 unsecured portion of the vehicle loan. (That’s the part of the $15,000 total not covered by the vehicle’s value–$15,000 minus $9,000 = $6,000.)  $75,000 + this $6,000 = $81,000 in general unsecured debts.

The $2,396 left over is spread out pro rata to the $81,000 in general unsecured debts. This means that these debts will receive about 3% of the amount due. The unsecured $6,000 portion of the vehicle loan would thus get only about $180 of it paid.

The Final Numbers

Through the Chapter 13 vehicle cramdown in this example, you would pay to your vehicle lender the $9,000 vehicle value, plus about $700 in interest, plus the above $180, a total of about $9,880. You would not have to catch up on the $1,100 in late payments. This is in contrast to paying the $15,000 loan balance, plus likely about $2,000 in interest, or about $17,000. That’s what you would have to do to keep the car outside bankruptcy or under Chapter 7.

Under Chapter 13 your monthly payments on the vehicle would be $270 instead of $550. Your monthly plan payment would be $350—which includes the $270 to your vehicle lender. After 36 months of paying $200 less than you would have paid on your vehicle alone ($350 vs. $550), you would own your vehicle free and clear and would nothing to any of your other creditors.

 

Qualifying for a Vehicle Loan Cramdown

May 20th, 2019 at 7:00 am

To qualify for a Chapter 13 vehicle loan cramdown, mostly your loan must be at least two and a half years old. There are exceptions to this. 

 

Last week’s blog post was about lowering monthly vehicle loan payments through Chapter 13 cramdown. This also often reduces how much you end up paying on the loan, and often even reduces its interest rate. Cramdown usually saves you money both immediately and long term. And you end up owning your vehicle free and clear at the end of your Chapter 13 case.  

Today we get into how to qualify for cramdown.

Qualifying for Cramdown—Timing

You can only do a cramdown if your vehicle loan is more than 910 days old when you file your Chapter 13 case. 910 day is about two and a half years. If you entered into the vehicle loan less than 910 days earlier, you can’t do a cramdown. You can’t reduce the monthly payments or the total amount paid on the loan.

The Bankruptcy Code says that you can’t do a cramdown if “the debt was incurred within the 910-day [period] preceding the date of the filing of the [Chapter 13] petition.” See the “hanging paragraph” following Section 506(a)(9) of the U.S. Bankruptcy Code.

What’s the reason for this 910-day timing condition? It’s a benefit to vehicle lenders. New cars and trucks depreciate fast. You can’t buy a vehicle, have it depreciate quickly for a year or two, and then take advantage of the fact that the vehicle isn’t worth as much as you owe on it. You have to wait two and a half years before you can do this.

Qualifying for Cramdown—910-day Rule Doesn’t Apply

The 910-day rule applies only to vehicle loans that are for the purchase of the vehicle. Under the language of the Bankruptcy Code, the 910-day waiting period only applies when “the creditor has a purchase money security interest securing the debt.” See the same paragraph” following Section 506(a)(9) referred to above.

So a loan used to refinance a vehicle CAN be crammed down without waiting the 910 days. Also, if you borrowed money for some purpose and gave your vehicle as collateral for the loan, you can do a cramdown without waiting.  

This same 910-day waiting period also does not apply to vehicles purchased for business use. The Bankruptcy Code says the 910-day rule only applies if “the collateral for that debt consists of a motor vehicle… acquired for the personal use of the debtor.” See the same paragraph in the Bankruptcy we keep referring to.

There are open questions about both these “purchase money” and “personal use” conditions. For example, “personal use of the debtor” is not defined in the Bankruptcy Code. What about a pickup truck mostly used for operating a business but also used for personal transportation? Or how about a vehicle bought by a parent for the exclusive personal us of an adult child? Is that not the “personal use of the debtor” so that the 910-day rule does not apply?

The answers to these questions may turn on interpretations of the Code language by your local bankruptcy court. Talk with your bankruptcy lawyer about your own particular situation.

Qualifying for Cramdown—Undersecured Vehicle Loan

In case it’s not obvious, cramdown only works if your vehicle is worth less than the balance on your loan. You’re “cramming” the loan amount down to the secured amount of the debt. The more your loan is upside down the more cramdown can help.

If your vehicle is worth the same or more than you owe, there is no opportunity for cramdown. You might gain some other benefits on your vehicle loan from filing a Chapter 13 case, but no cramdown.

And how do you determine what your vehicle is worth for this purpose? For example, do you use “retail value” or “wholesale” or “trade-in” values? Should you use the Kelley or NADA Blue Book values or some other source? Again, these are questions for your bankruptcy lawyer, based on local law and practice.

Qualifying for Cramdown—Only in Chapter 13

Cramdown is not available under Chapter 7 “straight bankruptcy.” You must file a Chapter 13 “adjustment of debts” case. The payment and payoff terms of your cramdown are part of your 3-to-5-year Chapter 13 payment plan. In it you present the value of your vehicle, which indicates the secured part of your loan balance and the remaining unsecured part, and how much you intend to pay on each part.

(Cramdown is also available under Chapter 11 “reorganization,” which is generally used for corporate and other business bankruptcies. Section 1129(b)(2)(A). This blog post focuses instead on consumer oriented Chapter 13. But if you are operating a business or have unusually large debts, Chapter 11 may be an option to consider.)

 

Keep Your Vehicle through Cramdown

May 13th, 2019 at 7:00 am

If you can’t afford to pay your vehicle payments even after writing off your other debts under Chapter 7, consider a Chapter 13 loan cramdown. 

 

The last two blog posts have been about keeping your vehicle in a Chapter 7 case. Two weeks ago was about the benefits of reaffirming the vehicle’s loan. Last week was about possible ways of keeping the vehicle by making the loan payments but not reaffirming. These all assumed that you would keep on making the full monthly payments in order to keep the vehicle.

But what if you can’t afford the full monthly payments? Are there any other options if, even after getting rid of your other debt, you can’t pay the vehicle payments?

The answer: you may be able to reduce the vehicle payments through Chapter 13 cramdown. In fact, you may be able to significantly reduce the payments. And cramdown may give you some other huge financial benefits.

Reducing Monthly Payments through Cramdown

Chapter 13 “adjustment of debts” is very different from Chapter 7 “straight bankruptcy.” It takes much longer but Chapter 13 comes with some significant advantages. This includes the possible cramdown of your vehicle loan.

Under Chapter 13 you and your bankruptcy lawyer come up with a court-approved payment plan. That plan just about always significantly reduces what you pay monthly towards your debts. And if you successfully complete the plan you usually pay significantly less overall towards your debts.

Similarly, under cramdown you can often reduce both your monthly payment and the total you pay on your vehicle loan.

How Does Cramdown Work?

Your Chapter 13 payment plan treats secured debts and unsecured debts very differently. In general, secured debts need to be paid in full if you want to keep whatever the debt is securing. Unsecured debts usually only need to be paid as much as there’s money available to pay them.

So what if a secured debt—such as a vehicle loan—is only partially secured? That happens if the vehicle is worth less than the balance owed on the loan. The secured part of the loan is the amount equal to the value of the vehicle. The unsecured part is the rest of the loan balance—the part that effectively has nothing securing it.

Here’s a simple example. Let’s say you’d been paying for 3 years on a vehicle loan, you now still owe $15,000 but the vehicle is worth only $9,000. The secured portion of that vehicle loan is $9,000 and the unsecured portion is $6,000.

Recalculating the Payment Amount

Cramdown re-writes your vehicle loan so that your monthly payment gets calculated on only the secured part of the loan. In our example, your monthly payment now pays down only the $9,000 secured debt instead of the full $15,000 balance. Since the secured amount is less than the full loan balance, the new monthly payments are usually less.

The monthly payment is also reduced when those payments are stretched out over a longer period. They can extend as long as your Chapter 13 payment plan lasts, which is usually 3 to 5 years.

In addition, cramdown sometimes lowers the vehicle loan’s interest rate. That helps if your contract interest rate is high.

Combining all this, cramdown reduces your monthly payment by reducing the total amount it is paying off (the secured part of the loan), sometimes stretching the payment term out over a longer period, and often reducing the interest rate.

As a result, it’s not unusual for monthly payments to be chopped in half, or even better. It all depends on the details of your vehicle loan and on your finances going forward.  

What Happens to the Unsecured Part?

In our example, what happens under Chapter 13 cramdown to the remaining $6,000 unsecured part of the vehicle loan?

It’s lumped in with and treated just like your other “general unsecured” debts. Most of the time a Chapter 13 payment plan pays these low-priority debts only as much as you can pay them, if anything. That is, you pay “general unsecured” debts only AFTER paying the “priority” and secured debts.

There are exceptions, but this usually means you pay the unsecured part of your vehicle loan only if and to the extent you have money left over after paying other debts during the course of your payment plan. At your case’s completion any remaining amount gets “discharged,” permanently written off, along with your other “general unsecured” debts.

Qualifying for Cramdown, Other Considerations

Next week we’ll get into timing and other considerations in qualifying for a Chapter 13 vehicle loan cramdown.

 

Keep Your Vehicle by Reaffirming its Loan

April 29th, 2019 at 7:00 am

If you want to keep your vehicle and still pay on its loan, file a Chapter 7 case to write off other debts and reaffirm the vehicle loan.  

A Vehicle Loan is a Secured Debts

We started this series of blog posts on debts by introducing secured debts as follows:

Each of your debts is either secured by something you own or it is not. A secured debt is backed up by a lien, a legal interest of the creditor in some kind of property of yours. See Section 101(37) of the U.S. Bankruptcy Code.

Usually you know whether a debt is secured. For example, in the case of a vehicle loan the vehicle’s title states that your lender is the lienholder. That lien on the title makes the loan secured by the vehicle. That, together with the security agreement you signed, gives the lender certain rights over your vehicle.

Let’s assume that you have a vehicle that you are paying for through a vehicle loan. If you look at your vehicle’s title, your lender is listed as the lienholder on your vehicle. The loan documents include a security agreement that gives the lender the right to repossess the vehicle if you don’t make the loan payments.

Also let’s assume that you really want to keep your vehicle. One of the main reasons you are considering filing bankruptcy is to write off all or most of your other debts so you can afford to pay your vehicle loan.

Reaffirming the Vehicle Loan

Filing a Chapter 7 “straight bankruptcy” case could well accomplish this. It could permanently forgive (“discharge”) all or most of your other debts. That could free up enough of your monthly cash flow so you’d have money to pay your vehicle loan payments.

Talk with a bankruptcy lawyer to find out which of your own debts would be discharged. Bankruptcy discharges most debts, but there are quite a few exceptions. (See our last 10 blog posts about those exceptions.)  Your lawyer will help you put together your after–bankruptcy budget. From that you’ll see whether you’d be able to pay on your vehicle loan after discharging your other debts.

If so, filing a Chapter 7 case and signing a vehicle loan reaffirmation agreement may be your best option.

Reaffirmation Is a Voluntary Discharge Exception

A reaffirmation agreement excludes the vehicle loan from the discharge of debts Chapter 7 bankruptcy otherwise entitles you to. You enter into it voluntarily in return for getting to keep your vehicle.

It’s voluntary because you recognize that your lender has the right to take your vehicle if don’t make your payments. That doesn’t change when you file bankruptcy. The point of the reaffirmation agreement is to allow you to keep your vehicle.

Voluntarily Deciding Not to Reaffirm

You can file a bankruptcy case and choose NOT to reaffirm your vehicle loan. In a Chapter 7 case that would generally mean that you’d surrender the vehicle to your lender. The bankruptcy discharge would then virtually always write off any remaining debt you’d owe on the vehicle loan.

Think very seriously and open-mindedly about this option before you reaffirm the loan. Bankruptcy gives you a one-time opportunity to get out of the vehicle loan. Consider whether you would definitely be able to afford its monthly payments, insurance, maintenance and other costs. Find out what the vehicle is now worth compared to what you owe. Think creatively about other transportation options. Don’t just reaffirm the loan because you figure you have no other choice. Make it an informed choice, whichever way you choose.

The Risks of Reaffirming

A reaffirmation agreement excludes the vehicle loan from the bankruptcy discharge. So it returns to the lender all of the rights it had over you that it had before your bankruptcy.

That of course includes the right to repossess your vehicle if you don’t make payments on time. But likely also included is the right to repossess if you let the insurance lapse. Or the lender may impose its own insurance and charge you an exorbitant amount for it. The lender may even be quicker about force-placing insurance or repossessing after bankruptcy than before.

So do not enter into a reaffirmation agreement lightly. It would certainly be unfortunate for somebody to go through the efforts of a Chapter 7 case, get a fresh financial start, only to have a vehicle repossession and its resulting debt a year or two later.

Other Options?

Are there any other options if you couldn’t afford the vehicle payments even after discharging your other debts?

Also, would you be able to keep your vehicle in a Chapter 7 case if you DIDN’T sign a reaffirmation agreement but just kept current on your payments and insurance?

We’ll cover these practical questions in the next blog post or two.

In the meantime, reaffirmation agreements are covered by the Bankruptcy Code at Section 524(c).

 

The Surprising Benefits: An Example of Vehicle Loan Cramdown

October 1st, 2018 at 7:00 am

Vehicle loan cramdown can greatly reduce your monthly payment and the total amount you pay on your loan. Here’s a helpful example.

 

Cramdown in Chapter 13

Last week we introduced cramdown as an extremely helpful tool for reducing the cost of your vehicle loan. Cramdown can often:

  1. Reduce your monthly payments—sometimes significantly.
  2. Reduce the amount you pay on your vehicle contract altogether—often by thousands of dollars.
  3. Excuse you from catching up on any back payments on your vehicle.

Here’s an example to illustrate just how good cramdown can be.

The Facts in Our Example

Assume you are making payments on a 2015 Ford Fusion SE that you bought new more than three years ago. You bought from a dealer for $27,000. After adding the various fees and taxes, and subtracting your modest down payment, you financed $27,000. Because your credit was iffy your loan was at the high interest rate of 8.9% on a 84-month loan.

The monthly payment of $433 has been tough to keep up on. You’re now a month late and your next payment is due in a week. You know that you’re close to getting your vehicle repossessed.

After 34 monthly payments of $433 you’d normally owe about $18,000 but with a bunch of late fees and other charges you owe around $19,000. Your vehicle is currently worth $13,000, with 55,000 miles (average for a 2015 vehicle).

Under Chapter 7 “Straight Bankruptcy”

If you filed a Chapter 7 case you’d basically have a choice between keeping the car with its present loan terms or surrendering it and writing off the loan.

Assuming that you absolutely need the transportation, you’d have to “reaffirm” the loan. That means that you’d have to catch up on the missed payments and agree to keep it current. You’d be stuck with the current monthly payment amount. You’d be stuck with the high interest rate (costing you more than $9,000 over the length of the contract). If you ever failed to keep current and the vehicle got repossessed, you’d likely owe a large “deficiency balance.” And your vehicle would be gone.

Savings through Cramdown

In contrast, under Chapter 13 cramdown both your monthly payment and the total amount paid would be reduced.

In our example, you and your bankruptcy lawyer reduce the monthly payment as follows. The $19,000 balance on the contract gets divided into the secured and unsecured portions.

The secured portion is based on the current value of the vehicle: $13,000. You have 3 to 5 years to pay that amount. Depending on all the circumstances you should be able to reduce the interest rate—assume down to 4%. $13,000 amortized at 4% over the maximum 60 months works out to only about $239 per month.

What about the Unsecured Part of the Vehicle Loan?

What happens to the remaining unsecured portion in the amount of $6,000? (That’s the $19,000 current loan balance minus the above $13,000 secured portion.) It gets lumped into the pool of your other “general unsecured” debts. So what happens to that $6,000 debt?

It depends. In most situations you effectively pay nothing more during your Chapter 13 case as a result of this $6,000 debt. This would happen for two potential reasons.

0% Chapter 13 Plans

First, after paying allowed living expenses and higher priority debt—including the monthly $239 vehicle payments, and also recent income taxes, home mortgage and support arrearage, and such—you may have nothing left over for the general unsecured debts. Under these circumstances you’d be paying 0% on these debts during your Chapter 13 payment plan. Then at the end of the 3-to-5-year plan those general unsecured debts would be discharged—completely written off. This would include the $6,000 unsecured part of the vehicle loan. You’d pay nothing on it (and still keep your vehicle).

Partial Payment Chapter 13 Plans

Second, you may instead have some money during your plan to pay towards your general unsecured debts. But even then, in most Chapter 13 cases the existence of the unsecured part of your vehicle loan does not increase how much you pay into your plan over the life of the plan.

Let’s add a few more facts to our example. Assume that you have $40,000 in other general unsecured debts (credit cards, medical bills, old income taxes, and such). Add the $6,000 unsecured part of your vehicle loan, for a total of $46,000 of general unsecured debts. Assume also that over the course of your Chapter 13 plan you have disposable income (after allowed expenses and higher priority debts) totaling $4,000. You pay that $4,000 over time through your monthly plan payments.

If you didn’t owe the $6,000 unsecured part of your vehicle loan, that $4,000 would result in you paying 10% of your general unsecured debts ($4,000 out of $40,000 owed). When you include the $6,000 unsecured part, the $4,000 paid would result in you paying about 8.7% of your general unsecured debts ($4,000 out of $46,000 owed). But either way you’re paying what you can afford to pay—$4,000 over the life of your case. The existence of the $6,000 unsecured part of the vehicle loan has no effect on how much you pay. What you pay just gets distributed a little differently. The other general unsecured debts get pay a little less so that the $6,000 debt receives a small part of the $4,000.

Most Plans Do Not Pay More Resulting from the Unsecured Part of the Vehicle Loan

This happens in most cases that are not 0% plans (discussed above). The only way that an unsecured part of a vehicle loan would increase the amount you pay in your plan is if you have disposable income larger than your other general unsecured debts. In the example, you’d have to have more than $40,000 of disposable income during your plan. Only then would the addition of the $6,000 unsecured part of your vehicle loan to the general unsecured pool increase what you’d pay. That situation is rare. Most people don’t have disposable income during their case larger than their non-vehicle general unsecured debts.

Qualifying for Cramdown

Remember that cramdown is only available in Chapter 13 “adjustment of debts.” Not Chapter 7. Also, to qualify the vehicle loan must be at least 910 days old (about 2 and a half years) when filing the Chapter 13 case.  And finally, cramdown is beneficial for most purposes only when the vehicle is worth less than the balance on the loan. The more it’s worth less, the greater the likely benefit of the cramdown.

 

The Surprising Benefits: Saving Your Vehicle Better through Chapter 13

September 24th, 2018 at 7:00 am

Chapter 7 is limited in how it can help with your vehicle loan. Chapter 13 can do much more—buy more time and often reduce your payments. 

 

Problems to Solve

Last week we addressed the kind of help Chapter 7 “straight bankruptcy” provides on your vehicle loan. Mostly it clears the deck of your other debts so that you can afford to keep your vehicle. Hopefully Chapter 7 accomplishes that.

But what if you can’t afford the contractual monthly payments even then? What if your vehicle isn’t worth what you owe on it? What if you’re behind on your payments or insurance and can’t catch up fast enough?

If you can’t or don’t want to keep your vehicle Chapter 7 also gives you the option of surrendering it. The benefit is that it legally write off your obligation to pay the “deficiency balance.” That’s the often surprisingly large remaining debt after a vehicle repossession or surrender. Writing off the debt is better than being saddled with it if you don’t file bankruptcy.

But what if you definitely need to keep your vehicle but can’t do so under Chapter 7? What can Chapter 13 do for you better?

Chapter 13 Buys Time—Often much More Time

If you are late on your vehicle loan payments, filing a Chapter 7 case will prevent an immediate pending repossession. But then virtually always you’ll have to catch up on any arrearage within the next month or two. That’s of course on top of keeping up on ongoing monthly payments.

Chapter 13 usually gives you much more time. Instead of giving you weeks to catch up, usually you’d have many months to do so. Exactly how much time you’d have depends on many factors. But generally you’d start paying your regular payments as they became due, and then chip away at the arrearage over the course of at least several months.

Chapter 13 “Cramdown” May Reduce Monthly Payments—Sometimes Significantly

You don’t always have to pay your regular monthly payments as they come due after filing under Chapter 13. If you qualify for “cramdown” you would likely pay less per month on the vehicle loan—possibly much less.

Cramdown is an informal term for the Chapter 13 procedure for legally re-writing the loan if your vehicle is worth less than you owe. To qualify your vehicle loan must be more than 910 days old at your Chapter 13 filing. (That’s slightly less than two and a half years.)

The loan payments are reduced because the loan is restructured based on the value of the vehicle. You pay that secured portion of the loan through monthly payments. Those payments are usually much less because they are based on the vehicle value instead of the contract balance.

Also, the payments are further reduced under Chapter 13 if the amount to be paid is to be paid out over a period longer than the time left on the contract.

Finally, if your vehicle loan has a relatively high interest rate, you can often also reduce that rate.

Each of these helps reduce the monthly payment on the loan.

You May Not Need to Catch Up on Missed Payments

If you qualify for cramdown you usually don’t have to pay any missed payments after filing a Chapter 13 case. You just pay going forward, at the reduced monthly payment.

Not having to scramble to pay missed payments is a huge benefit. You can concentrate on your most important obligations, such as the crammed down monthly payment.

Catching Up on Lapsed Vehicle Insurance

If you’d fallen behind on your vehicle insurance, that would be an extremely important obligation to focus on. You DO have to reinstate lapsed insurance quickly in order to keep your vehicle—in either Chapter 7 or 13. So the fact with cramdown you may not have to pay any missed payments or else be allowed to catch up more slowly means that you’d have more money available to reinstate your insurance.

Examples, Please

No doubt the benefits listed above sound great. It’s great to have much more time to catch up or to not need to catch up at all. It’s great to have reduced monthly payments, to pay less overall on a vehicle until it’s yours free and clear.

But these benefits would make more sense and be even more impressive if we showed how they work in practice. We’ll do that in our blog post next time.

 

The Surprising Benefits: Saving Your Vehicle Better through Chapter 13

The Surprising Benefits: Saving Your Vehicle through Bankruptcy

September 17th, 2018 at 7:00 am

Bankruptcy can get you out of the dilemma that a vehicle loan can put you in. Chapter 7 works if you can afford the loan payments afterwards.  


Here’s the Problem

You’re paying on a car or truck. You absolutely need this vehicle for getting to work, and to keep your life going. You can’t do without it.

But you’re having trouble keeping up on the loan payments. You owe lots of other debts, so keeping current on the vehicle loan is a big challenge. It’s a big stressor every month.

On top of that there’s a good chance that you owe more on your vehicle than it is worth. You know that if you somehow found other reliable transportation and surrendered your present vehicle—or if it was repossessed—you could easily still owe thousands of dollars of “deficiency balance.” That’s the amount you would owe on the loan after the surrender or repossession.

The amount you’d owe would very likely be much more than you expect. That’s because repossessed vehicles are usually sold at auto auctions, resulting in less credit to your account than you’d expect. Plus the costs of repossession/surrender and sale, and late charges and such would all be added to the balance. So giving up the vehicle doesn’t seem to make any sense.

As a result you feel stuck. You really need the vehicle but you can’t afford pay for it. And even if you could somehow do without it, you’d likely still owe thousands of dollars from letting it go.

Chapter 7 Regular Bankruptcy Gives Limited Help

Chapter 7 bankruptcy accomplishes two things regarding your vehicle loan. First, if you want to keep the vehicle, Chapter 7 would likely get rid of most of your other debts. Maybe then you could afford the vehicle payments. Or second, if you surrendered the vehicle, Chapter 7 would likely discharge (legally write off) the deficiency balance. If you had a way to get another reliable vehicle, or could do without, this might solve your problem.

What Chapter 7 doesn’t do is give you the power to change the terms of your vehicle loan. It’s “take it or leave it.” If you want to keep your vehicle, you’re virtually always stuck with the contract terms. That includes the monthly payment amount, the interest rate, etc.

Plus, you’re almost always required to “reaffirm” the debt. This legally excludes the vehicle loan from the discharge of your debts. You continue to owe it in full in exchange for keeping the vehicle.

This is economically risky. You’re paying for something that isn’t worth what you’re paying. And if you later surrender the vehicle or it’s repossessed, you would owe a deficiency balance. You’d owe it in spite of your prior Chapter 7 case because you reaffirmed the debt.

If You’re Behind on Your Vehicle Loan, or on Insurance

It’s worse if you aren’t current on your loan payments at the time of your Chapter 7 bankruptcy filing. Almost always your vehicle lender would require you to quickly catch up—within a month or two of filing. This would be on top of keeping current on the ongoing monthly payments. Or else you’d lose the vehicle in spite of filing bankruptcy.

If you’ve also let your insurance lapse, it’s even more problematic.  Your lender knows how dangerous lack of insurance is for itself, so it would “force-place” insurance on your vehicle. Your contract almost certainly allows it to do this. Force-placed insurance tends to be very expensive while at the same time provides you very little coverage. Under Chapter 7 you would likely have to pay for any such insurance, plus reinstate your own insurance. And you’d likely have to do this very quickly, not long after filing your Chapter 7 case.  

Chapter 13 Can Solve These Problems

Chapter 13 “adjustment of debts” can solve these problems that Chapter 7 can’t.

First, Chapter 13 can buy you much more time. A Chapter 13 payment plan would likely give you much more time to catch up on any missed loan payments. It would also likely give you lots more time to pay for any force-placed insurance.

Second, if you qualify for “cramdown” you would likely pay less on the vehicle loan—possibly much less. Cramdown is an informal term for the Chapter 13 procedure for legally re-writing the loan in situations in which the vehicle is worth less than you owe. With cramdown you could both pay less monthly and pay less overall before the vehicle became yours free and clear. And if you’re behind on loan payments, you would not need to catch up at all on any of those missed payments.

Next week we’ll tell you how Chapter 13 could both buy you time and save you money on your vehicle loan(s).

 

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.

 

Reaffirmation Agreement vs. Chapter 13

January 3rd, 2018 at 8:00 am

When is it better to reaffirm a secured debt (such as a vehicle loan) in a Chapter 7 case vs. handling it instead in a Chapter 13 case? 

 

The last 5 blog posts in December were about keeping the collateral you want by “reaffirming” the debt. “Reaffirmation” applies only to Chapter 7 “straight bankruptcy”cases. (We’ve focused mostly on reaffirming a vehicle loan.) Today we get into keeping collateral (such as a vehicle) instead in a Chapter 13 “adjustment of debts” case. Our main question today: when is Chapter 13 a better way to keep your collateral than Chapter 7?

Rule of Thumb: Chapter 7 unless Need More Help

There are basically two questions:

  1. Would you be able to keep your collateral/vehicle in a Chapter 7 case?
  2. Even if so, would you get a significantly better result in a Chapter 13 case?

1. When You’re Able to Keep the Collateral in Chapter 7

If you are current on your debt payments, you would very likely be able to keep your collateral/vehicle under Chapter 7. You usually have to formally reaffirm the debt. That means you exclude that debt from the discharge (legal write off) that Chapter 7 provides. You continue to be fully liable on that one debt.

Creditors are usually very happy to be singled out this way. You are much better of a credit risk once you no longer owe all or most of your other debts.

Even if you are not current a Chapter 7 reaffirmation works if:

  • you are able to bring the debt current within two or so months after filing, or
  • the creditor is willing to work out the missed payments—give you more time to catch up, put the missed payments at the end of the contract, or even forgive the payments altogether

Chapter 7 also works well in those situations that a creditor is willing to lower the monthly payment and maybe even the total owed. This seldom happens with vehicle loans, except maybe if the vehicle is worth much, much less than you owe.

2. When Chapter 13 Can Give You a Better Result

Even if you CAN keep the collateral in a Chapter 7 case that doesn’t necessarily mean that you should if Chapter 13 would give you a much better result.

If you’re not current on payments, Chapter 13 would give you much more time to catch up. Consider if your creditor is making you catch up immediately before reaffirming, or within a few months after reaffirming. Let’s say you COULD catch up but it would take extraordinary effort to do so. Chapter 13 could give you many months—or maybe even a few years—to catch up. If that would greatly help you that extra time to catch up which Chapter 13 gives you could make its much longer procedure worthwhile. This may be especially true if you have other very pressing debts (child or spousal support, income taxes, etc.).

Whether or not you are current on payments, Chapter 13 can give you a much better result if your collateral is worth significantly less than you owe on it. You can do a “cramdown” when your collateral is NOT real estate but instead “personal property.” Personal property is essentially anything that isn’t real estate, including vehicles, furniture, appliances, electronics, etc.  Without going into detail here, “cramdown” allows you to re-write your loan based on how much your collateral is worth. You can usually reduce the monthly payment and the total you pay, sometimes very significantly. “Cramdown” is available only under Chapter 13, not Chapter 7.

Especially Bad Payment History

As we said earlier, it’s usually in a creditor’s best interest to allow you to reaffirm a debt whenever you are willing to do so. But in rare circumstances a creditor may refuse to allow you to reaffirm the debt and keep the collateral. This may happen if you’ve had an especially bad payment record—consistently been very late on your payments, for example. Or if you’ve failed to maintain insurance. At some point a creditor may just prefer to repossess the collateral, sell it, and to end the relationship. Talk with you bankruptcy lawyer about whether this may be an issue for you if your history sounds like this. He or she likely has experience with your creditor about such matters.

In situations when a creditor may not be willing to let you reaffirm, Chapter 13 may be worth seriously consideration. In a Chapter 13 case the creditor has much less say about whether you get to keep collateral. You and your lawyer put the secured debt into your payment plan, leaving the creditor with limited grounds for objection. It’s true that your prior history may result in some greater restrictions. For example, if you’ve let a vehicle’s insurance lapse before, you can’t let that happen during the Chapter 13 case or you may lose your vehicle.  Also you DO have to comply with the plan that you propose and the court approves. But as long as you do so you’ll be able to keep the collateral and will own it free and clear by the end of the case.

 

Chapter 7 Buys Time to Change to Another Vehicle

November 8th, 2017 at 8:00 am

Filing a Chapter 7 case stops repossession of your vehicle temporarily. If you are getting another vehicle, that can be valuable time. 

 

A week ago we went through a list of ways Chapter 7 buys you time with your vehicle lender. Included was that it “gains you some time to get another vehicle before surrendering your present one.” We’ll show you how this works.

Transitioning to Another Vehicle

The two different types of consumer bankruptcy give you a number of ways to keep a vehicle that you’re having a hard time making the payment on.

Chapter 7 stops a repossession if you’re behind on payments or insurance. It discharges all or most of your other debts so that you can better afford your vehicle payments. This can also help you afford insurance, vehicle repairs and maintenance, and the other costs of ownership. If you’re a little behind on payments it gives you a month or two to catch up.

Chapter 13 does most of these and more. If you’re behind on payments you get many months to catch up. You can fit that in with other urgent debts—such as child/spousal support and income taxes—on  a flexible schedule. If you qualify for “cramdown” you can even lower your monthly payment and significantly reduce the total you pay for the vehicle before it’s yours free and clear.

But what if AFTER getting well informed about these options you still want to surrender your vehicle and get another one? Real life situations in which this might happen include:

  • You’ve learned that the vehicle you’re paying for is a lemon, unreliable, and will cost too much to keep repaired.
  • Your life circumstances have changed and you don’t want or need a vehicle that’s so expensive.
  • You simply have a way to get another cheaper vehicle, and need to get out of your vehicle loan obligation.

Buying Time by Stopping a Repossession

If you behind on your vehicle loan at all, your vehicle is at risk of repossession. How fast your lender will repossess depends on its policies and on the history of your relationship. Usually you have to be a full month late, sometimes even two months. But you can’t assume this—it can happen whenever you are behind.

If you let the vehicle’s insurance lapse—even without being late on loan payments—that’s separate grounds for repossession. Lenders can be very aggressive about this, because they risk losing their entire collateral. And you are showing yourself to be irresponsible in their eyes.

In these situations your Chapter 7 bankruptcy filing will not buy you much time, but the time it buys could be extremely helpful. A repossession is often very, very disruptive. One minute you have your car or truck and the next it’s gone. You have no transportation to work and to everywhere else you need to go. Preventing that huge disruptive surprise is a big benefit.

Buying Time Even If You’re Current

Even if you’re not behind on vehicle loan payments or insurance, Chapter 7 gives you an orderly process for surrendering your vehicle.

It also gives you a chance to calmly consider whether you should or shouldn’t keep your vehicle and its debt. You sit down with a bankruptcy lawyer who has only one job: to help you decide what is best for you and your future. You look at what your budget will look like after filing the Chapter 7 case. You think about whether there’s room for that vehicle payment. You have a bit of time to figure out whether and how you could get ahold of replacement transportation.

Procedure and Timing

Whether you’re current or behind, how much time will filing Chapter 7 buy? Partly it depends on the aggressiveness of your lender, especially if you’re behind.

In every Chapter 7 case you have to specifically state what you intend to do with collateral on all secured debts. You do so with a document called a “Statement of Intention.” This is usually filed at the bankruptcy court along with the rest of your Chapter 7 documents. But for tactical or other reasons it can be filed later. The document itself states:

You must file this form with the court within 30 days after you file your bankruptcy petition or by the date set for the meeting of creditors, whichever is earlier, unless the court extends the time for cause. You must also send copies to the creditors and lessors you list on the form.

(See also Section 521(a)(2) of the U.S. Bankruptcy Code about this.)

On the Statement of Intention you declare, under penalty of perjury, your “intention about any property… that secures a debt…  .” You declare whether you want surrender or retain the vehicle. If you want to retain it you say whether you want to redeem the vehicle or reaffirm the debt. (These two options are discussed in recent blog posts.)

Practically speaking you usually have to surrender your vehicle between about 30 and 45 days after your Chapter 7 filing. If your lender is unusually lax you may get a little more time than that.

The Surrender Itself

Arrangements for the surrender itself are made between your lawyer and the lender or its lawyer. The surrender is almost always done in a way that’s convenient to you. Usually you either drive the vehicle to an agreed location or give the keys to the lender whose representative picks up the vehicle from wherever you agree to leave it.  This in infinitely better than a repossession. 

 

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