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Example of Reaffirmation Agreement vs. Cramdown of Vehicle Loan
Here’s an example of the reaffirmation of a vehicle loan in a Chapter 7 case vs. “cramdown” of the debt in a Chapter 13 case.
We’re in a series of blog posts about choosing between Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.” Along these lines two blog posts ago we outlined when to reaffirm a secured debt (focusing on a vehicle loan) under Chapter 7 vs. handling it under Chapter 13 instead. Then last time we gave some examples showing which option works better in different situations. That focused on situations in which someone had fallen behind on the payments, and/or had a rough payment history. But we didn’t cover the special situation of Chapter 13 “cramdown.”
Today we’ll give an example when cramdown on a vehicle loan may be a good reason to file a Chapter 13 case.
The Background Facts
Let’s say Christina is current on her vehicle loan. She got far behind on all her other debts because of a serious illness for which she was underinsured. She’s healthy now but being so sick hit her hard financially. She has way more debt than she could ever pay off, and she’s being sued by two of her creditors.
Examples of Reaffirmation Agreement vs. Chapter 13
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.
Reaffirmation Agreement vs. Chapter 13
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:
- Would you be able to keep your collateral/vehicle in a Chapter 7 case?
- 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
Get a New Financial Start with this New Year
Get a new financial start for 2018. Stop creditor pressures immediately, write off all or most debts, and responsibly deal with the rest.
An Overall New Financial Start
Get a new start by discharging (permanently, legally writing off) all or most of your debts. If you have mostly consumer or small business debts you have two main choices about how to make this happen.
A New Start with Chapter 7
With Chapter 7 “straight bankruptcy” you get a new start very fast. As soon as your case is filed most of your creditors can’t collect their debts against you. They can’t go after your money or your property. Then usually about 3-4 months later the bankruptcy court enters an order discharging your debts. As quick as that you become debt-free. The only exceptions would possibly be debts you want to keep and special debts you can’t discharge. Debts you might want to keep could include a vehicle loan or home mortgage. Debts you can’t discharge include recent income taxes, unpaid child and spousal support, and criminal fines.
Rescinding a Reaffirmation Agreement
Unlike most legal contracts, you can change your mind and undo a reaffirmation agreement during a short period of time after signing it.
Reaffirmation Agreements
Our last four blog posts have been about reaffirmation agreements in a “straight bankruptcy” Chapter 7 case. In particular the first of these introduced these special agreements and the second one discussed their risks. (The ones dated December 20 and 22.) You might want to look at those before reading further here.
In one sentence: if you want to keep for yourself the collateral on a debt (such as a vehicle), usually you have to agree to continue owing that debt, which you do by signing a reaffirmation agreement. That agreement excludes that one debt from the discharge (the legal write-off) of your debts provided through your bankruptcy case.
Your bankruptcy lawyer should fully advise you of your options and rights before you sign a reaffirmation agreement. One of the rights you should learn about is your time-limited right to rescind the agreement. This is the subject of today’s blog post.
A Debt Reaffirmed under Chapter 7
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.
Debts Voluntarily Paid in Chapter 7
Chapter 7 is usually much better if one of your high priorities is to favor a debt by paying it. You can do so more easily and flexibly.
Our last blog post was about debts that you still pay after a Chapter 7 “straight bankruptcy” case. These included debts you might WANT to pay as well as those that you are legally REQUIRED to pay.
Today we focus on debts you might want to pay for no reason other than a sense of moral or personal obligation. That is, you’re not paying in order to be allowed to keep some collateral. You’re not “reaffirming” a mortgage or vehicle loan to keep the home or vehicle. (We’ll get into “reaffirmations” next time.)
One reason we’re looking at debts paid out of personal obligation is because how different this is in Chapter 7 vs. Chapter 13. For reasons we’ll show, it’s legally easy to favor such a debt in Chapter 7. But it’s not practical to do so in Chapter 13.
Chapter 7 Buys Time to Redeem Your Vehicle
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.)
Dealing with Recorded Tax Liens through Chapter 13
A recorded tax lien gives the IRS/state a lot of leverage against you and your home. Chapter 13 can gain you back some of that leverage.
Stopping Tax Liens by Filing Bankruptcy
In our last blog post we showed how Chapter 13 can buy you more time and flexibility than Chapter 7. We showed an example how that’s especially true if you owe more than one year of income taxes. Our example assumed that two tax years met the conditions to discharge (legally write off) that debt, while another tax year didn’t.
That example assumed that the IRS/state had not yet recorded a tax lien on your home for either tax year. A bankruptcy filing stops a tax lien’s recording. Then if the tax debt is discharged, the debt is gone so there’s no further basis for a tax lien. Or if the tax debt is paid in full (usually through a Chapter 13 payment plan) again there’s no further debt on which to impose a tax lien.
Good Timing Can Shorten Your Chapter 13 Case by 2 Years
We show how wise timing in your filing of a Chapter 13 “adjustment of debts” case could shorten your payment plan from 5 years to 3 years.
Chapter 7 vs. Chapter 13
Two days ago we showed the importance of timing in the filing of a Chapter 7 case. The timing can affect whether you can qualify to be in a Chapter 7 “straight bankruptcy” case. If your income is too high you may not pass the “means test.” If you can’t pass this test you’d instead have to go through a Chapter 13 “adjustment of debts” case. That requires you to pay for 3 to 5 years into a payment plan, instead of being able to “discharge” (write off) all or most of your debts within about 4 months.
But what if you need a Chapter 13 case? It can be the much better option in certain circumstances. If you have debts that can’t be discharged like recent income taxes or child/spousal support, or debts you want to catch up on like a home mortgage, Chapter 13 buys you time to take care of those special debts. There are many other reasons Chapter 13 may be better for you than Chapter 7.
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