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Archive for the ‘vehicle loan’ tag

A Creditor Challenge to the Automatic Stay

February 19th, 2018 at 8:00 am

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

 

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

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

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

Creditor Challenges to the Automatic Stay

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

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

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

Most Creditors Don’t Ask for Relief from Stay

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

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

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

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

Secured Creditors Requesting Relief from Stay

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

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

Other Creditors Requesting Relief from Stay

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

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

 

Examples of Reaffirmation Agreement vs. Chapter 13

January 5th, 2018 at 8:00 am

Here are examples of the reaffirmation of a secured debt (like a vehicle loan) in a Chapter 7 case vs. addressing it in a Chapter 13 case. 

 

The last blog post was about when to reaffirm a secured debt under Chapter 7 and when to handle that under Chapter 13 instead. This kind of comparison of options can get a bit dry. So today we’re demonstrating how it really works with some examples. We change the facts a few times to show when each of these two options makes more sense.

The Initial Facts

Let’s say a guy named Trevor just fell two months behind on his vehicle loan. He’s at immediate risk of getting his car repossessed. He really needs to keep his vehicle to get to and from work. He’s always behind on his vehicle loan because he has so many other debts—mostly medical bill and unsecured credit cards. What’s especially killing him is that he got sued on some big medical bills and is getting his wages garnished.

Trevor sees a good bankruptcy lawyer. She tells him that filing quickly under either Chapter 7 or 13 would stop the repossession. Either option would also permanently stop the paycheck garnishment. He tells her that his brother can give him the money to catch up on the two missed payments.  The brother is only willing to do this if he takes care of his other debts with some kind of bankruptcy solution.

Chapter 7 Reaffirmation If Can Bring Secured Debt Current

Much of the time if you want to keep collateral on a secured debt in a Chapter 7 case you must bring the debt current within a few weeks, and then reaffirm the debt on its original terms. This is particularly true with vehicle loans with the larger national lenders. In other words, you have to agree to remain fully liable on the debt. You have to agree to continue being legally bound by all the terms of the contract. (See our recent blog posts about the risks of reaffirming.)

Trevor has a relatively easy way to bring his vehicle loan current, thanks to his brother. So his lawyer recommends that he files a Chapter 7 “straight bankruptcy” case. Shortly after filing he can bring the vehicle loan current and sign a reaffirmation agreement. With all his other debts being discharged (legally written off), he’ll be able to keep current on his car payments. Problems solved.

If He Can’t Catch Up Fast

But what if Trevor didn’t have his brother’s help? He may not be able to catch up fast enough to be able to reaffirm his vehicle loan. In a Chapter 7 case he has about 2 months after filing—3 months at the most—to catch up. That’s because you usually have to get current before the creditor will let you reaffirm. And you have to reaffirm before the bankruptcy court enters the “discharge order” about 3 months after filing.

Assuming that Trevor didn’t think he could catch up in time, and because he absolutely didn’t want to risk not being able to keep his car, his lawyer would likely recommend Chapter 13 “adjustment of debts” filing instead. This would give him many months—maybe even a couple years—to bring the vehicle loan current.

Other Special Debts Encouraging a Chapter 13 Filing

Now also assume that Trevor’s financial pressures had also put him quite a few months behind on his spousal support.  His ex-spouse had actually been quite flexible, letting him skip payments here and there, or send smaller amounts. But once the lawsuit’s garnishments started, his spousal support payments became even more irregular. So, his ex-spouse got fed up and sent the account to the state’s support enforcement agency. Trevor now finds himself $4,500 behind on support, with aggressive collection to start any moment. And a Chapter 7 filing won’t stop the state’s collection of this support.

Trevor’s lawyer tells him that a Chapter 13 filing WILL stop collection for this $4,500 of support. He’d have up to 5 years to bring that current. His Chapter 13 payment plan would be based on what he could afford to pay. That plan would show how he would—over time—catch up on both the vehicle loan arrearage and the support arrearage, while keeping current on ongoing payments.

His lawyer tells Trevor that a possible downside to Chapter 13 is he’d have to pay all that he could afford to his other creditors during 3 years. (5 years if his income is too high based on his state and family size.) But there may be very little—even possibly nothing—going to his other debts if most of his income goes to living expenses and to bring these two special debts current.

Trevor decides on a Chapter 13 case. He will be able to keep his vehicle, catching up as his budget allows. He also has a reasonable way to bring his big spousal support arrearage current. He knows that at the end of the process he’ll be current on these two, and will otherwise be completely debt free.

 

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.

 

The Automatic Stay in Chapter 7 and 13

November 22nd, 2017 at 8:00 am

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


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

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

The Immediate Protection

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

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

How Long the Protection Lasts

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

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

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

Chapter 7 Is Not Designed for Ongoing Protection

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

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

Chapter 13 IS for Ongoing Protection

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

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

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

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

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

Conclusion

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

 

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.

 

Reducing the Cost of Your Vehicle Loan through Cramdown

July 28th, 2017 at 7:00 am

Chapter 13 vehicle loan cramdown solves a number of serious practical problems that even Chapter 7 “straight bankruptcy” can’t.

 

Chapter 13 REALLY Helps with Vehicle Loans

If you want to keep a vehicle with a debt against it, Chapter 13 can really help.

It’s almost as if the more worse off you are with this kind of debt, the more Chapter 13 can help:

  • If you’re behind on payments, you’ll be given a long time to catch up, and may not even need to
  • If the car or truck is not worth as much as you owe, “cramdown” can lower your monthly payments, the interest rate, and reduce the total amount you pay for it
  • If you fall behind later, you’re protected from repossession

Chapter 13 also generally allows you to favor your vehicle loan above most other debts.

Today we’ll show you how this works with a hypothetical example.

The Facts

Emily got laid off and it took her a couple months to find another job, which she just started. She’s now a few days away from being 2 months late on her vehicle loan. She absolutely needs her vehicle to get to and from her new job. She has no way to get a reliable replacement vehicle.

Her first paycheck doesn’t arrive for 2 weeks, and she has to use it to pay rent, utilities, and groceries. Her car payments are $450 per month, so she’s about to be $900 behind. Emily has absolutely no savings, nothing worth selling to raise money, and no one to borrow from. She knows her car’s on the brink of being repossessed, but sees no way to catch up. She’s really scared.

She owes $13,500 on her car, which is worth only $8,000. It’s a relatively high interest loan, because her credit was not great when she bought the car. She wishes the monthly payments weren’t so large.

Emily also owes $80,000 in a combination of credit cards and medical bills, most of which are past due.

So she goes to see a bankruptcy lawyer to see if she has any sensible options.

Chapter 7’s Shortcomings Here

The lawyer tells Emily that a Chapter 7 case would very likely discharge—permanently write off—her $80,000 in other debts. But it wouldn’t provide much concrete help with the vehicle loan.

She could surrender the car to her lender, and she’d owe nothing. But she’s committed to keeping the car. To do so in a Chapter 7 case she’d have to “reaffirm” the debt—agree to remain liable on it.

The immediate problem with that is that Emily would have to catch up on the late payments. And do so pretty fast—within a month or two after filing her bankruptcy case. Even after not having to pay her other debts, she just doesn’t have the cash flow to scrape together the money that fast.

The other problem is that reaffirming the car loan would be risky for Emily. The payments are too high for her. She owes substantially more than it’s worth. If a year or two down the line she couldn’t make the payments and the car would get repossessed, she would almost for sure still owe a lot to the vehicle lender. She’d owe the balance owed at the time minus whatever the lender would sell the car for at an auto auction. So Emily would have no car but would still owe a substantial debt.

The Chapter 13 Solution

Emily’s lawyer advises her to file a Chapter 13 case instead. Because the car is worth less than its debt, she can do a “cramdown” on the loan. As a result:

  • She doesn’t have to catch up on the missed payments at all.
  • The loan is effectively rewritten based on the value of the car at the time, $8,000.
  • Her monthly payment is reduced from $450 to $295.
  • The interest rate is reduced.
  • The unsecured part of the debt—$13,500 minus the $8,000 car value, or $5,500—is lumped in with the $80,000 of credit card and medical debts, and Emily pays these “general unsecured” debts only to the extent that her budget allows. Whatever remains unpaid at the end of the Chapter 13 case is discharged, written off.

So, Chapter 13 solved all of Emily’s concerns: she avoids repossession, gets to keep her car without having to come up with the missed payments, and reduces both the monthly payments and the total paid for the vehicle before it’s hers free and clear.

 

Keeping Your Vehicle in Chapter 7 through Redemption

July 17th, 2017 at 7:00 am

If your vehicle is worth less than you owe on it, under Chapter 7 you can keep it by “redeeming” it—paying its present value in full.


If you want to keep your vehicle in a Chapter 7 “straight bankruptcy,” your main options are “reaffirmation” and “redemption.”

Reaffirmation is much more common. It involves entering into a formal agreement to repay the loan as if you had not filed bankruptcy. You’re recommitting to pay the loan, “reaffirming” that you want to pay it. We covered reaffirmation a couple blog posts ago.

Redemption is much less common, especially in certain areas of the country. But in the right circumstances it can save you lots of money.

What is Redemption?

In a couple respects redemption is the opposite of reaffirmation.

Instead of-promising to pay the vehicle loan in spite of your bankruptcy, with redemption you are getting rid of that loan.

Instead of agreeing to pay the full amount of the loan, with redemption you pay only the current fair market value of the vehicle.  

Instead of paying the debt in regular payments, with redemption you must pay off the vehicle’s value “in full at time of redemption.” That means that 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 one-sentence Section 722 of the Bankruptcy Code about redemption.

Paying Off the Redemption Amount

Even if a vehicle is worth much less than its loan balance, that’s likely still a lot of money for a person to come up with in the middle of bankruptcy. Where does that money come from? Here are three ideas:

1. Consider some creative ways to come up with the necessary cash out of your own assets. You generally should protect any retirement money you may have, and especially not use it to pay for a depreciating asset. But if your vehicle is worth much less than you owe, using this source might possibly be worthwhile. Generally, be creative. Don’t immediately assume you don’t have any way to find the money.

2. Consider asking relatives or friends to lend (or give!) you the money you need for redemption. Explain to them that this will allow you to hang onto your necessary transportation for much less money. The friend or relative can become the lienholder on the vehicle (replacing your original lender). This provides more assurance that you’ll pay the loan.

3. Get a redemption loan from a bank, credit union, or other financial resources. Some are set up to do this specialized kind of financing. Because there will be little or no equity cushion with this type of loan, you will likely pay a high interest rate. So you and your bankruptcy lawyer need to carefully review the terms. Calculate whether the decreased loan balance significantly reduces how much you pay overall in spite of a likely higher interest rate. Under the right circumstances you may reduce your monthly payment or the term of payments, or possibly both.

Advantages

Depending on the difference between your loan balance and the vehicle’s value, redemption can save you a lot of money. Wiping out the entire balance and paying only what the vehicle is worth may save you thousands of dollars.

Reaffirmation usually involves paying off the vehicle loan on its original terms. That makes more sense when the vehicle is worth as much or more than the loan balance. Redemption, in contrast, makes all the more sense when the vehicle’s value is less than the loan balance.

 

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.

 

“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.

 

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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