Posted by Kevin on August 28, 2013 under Bankruptcy Blog | 
Straight Chapter 7 bankruptcy gives very limited help if you’re behind on your vehicle and need to keep it. And Chapter 13? Provides much more help.
The last blog was about what happens after preventing your vehicle from getting repossessed by filing a Chapter 7 case. Today’s blog is about what happens if instead you file a Chapter 13 case, the payment plan type of bankruptcy.
Back Payments
If you are worried about a vehicle repossession, you are likely a month or two behind on your loan payments. Assuming you need to keep the vehicle, if you were to file a straight Chapter 7 case you would very likely be required to catch up on your back payments within a month or two after filing the bankruptcy case. Since you also need to resume making the regular monthly payments and keep current on them, catching up on the back payments at the same time and this quickly is impossible for many people.
With Chapter 13, in contrast, you either don’t have to catch up on the back payments at all or at least would likely have many months to do so.
“Cramdown”
If your loan is more than two and a half years old, and you owe more on the loan than the value of your vehicle, you can do a “cram down”—re-write the loan to reduce the portion of the loan that must be paid in full down to the value of the vehicle. The remaining amount of the loan—the unsecured portion above the value of your vehicle—is then paid the same as the rest of your unsecured creditors, often at a steep discount in your favor. In some jurisdictions, you may pay little or nothing on this unsecured portion.
As part of the re-writing of the loan in a “cram down,” you can often also lower the interest rate and/or stretch out the payments for a longer term, all of this usually resulting in a significantly reduced monthly payment.
Option to Surrender, Now or Later
Under Chapter 7, you must pretty much know at the time your case is filed whether you want to keep or surrender the vehicle. You sign a document called “statement of intent” which is filed at court usually at the start of your case. And then very quickly after that you need to put that intention into action. If you are surrendering the vehicle, you would need to do so within about a month after filing the case.
In Chapter 13 as well, your court-filed documents indicate your intentions, most directly in your formal plan. The plan states how much you intend to pay, and which creditors are to receive how much, including the vehicle loan creditor(s). It is prepared by your attorney, approved and signed by you, and presented to the court for the judge’s “confirmation.”
If you decide through the advice of your attorney that it’s in your best interest to surrender the vehicle, then your Chapter 13 plan will not propose to pay anything to the secured portion of the debt. Instead after you surrender the vehicle, the creditor will sell it, credit the sale proceeds to the balance, and report to the bankruptcy court how much it is still owed. Just as stated above, that unsecured amount will be added to the rest of your unsecured debt, and paid whatever percentage the rest are being paid. But in most cases the dollar amount being paid by the debtor towards the pool of unsecured debt does not increase. Instead that amount is just divided differently among all the unsecured creditors. For example, if your monthly payment to the trustee is $110 and you have 9 unsecured creditors with $10 going to the trustee, then each unsecured creditor would get a little over $11 per month. If you add a creditor, the payment is still $100. So, after trustee fee, each unsecured creditor now gets $10 per month.
Unlike Chapter 7, Chapter 13 gives you some flexibility if you decide later that you can’t or chose not to maintain the payments on the vehicle. You can change your mind a year or two into the Chapter 13 case, deciding to surrender your vehicle after all.
Posted by Kevin on August 26, 2013 under Bankruptcy Blog |
Bankruptcy stops a vehicle repo from happening. But what then?
Vehicle loan creditors can be very aggressive about repossessing their collateral—that vehicle which happens to be your crucial means of transportation. They are probably so impatient because this kind of collateral is so mobile and easy to hide. Plus the creditors’ decades of experience probably tell them the longer they wait the less likely they’ll be able to find the vehicle, and have it still be in decent condition.
So, most vehicle loan contracts give the creditors the right to repossess as soon as you’re in default on your agreement, which means as soon as you miss a single monthly payment. But for a variety of practical reasons, they don’t tend to pop cars that fast, usually letting you get 30 or maybe 60 or even more days late, depending on a bunch of factors such as your payment history, whether and what you’re communicating with them, and the value and condition of the vehicle.
In your own circumstances you probably have a decent feel for when you should be getting worried about a possible car or truck repo. If you are concerned, you may feel better that one of the most powerful tools of bankruptcy—the “automatic stay”—can stop the repo man in his tracks. That’s the law that automatically goes into effect the moment your bankruptcy case is filed at court to stay—or stop—all collection activity against you or your property, including the repossession of collateral.
But assuming you file a bankruptcy and stop a repo before it happens, what happens next? The two different consumer bankruptcy options each help in different ways. The rest of today’s blog is about how Chapter 7 helps in this situation, and the next blog will be how Chapter 13 does.
Right after filing a Chapter 7 case you have to decide whether you want to and can afford to keep the vehicle, or instead will surrender it. (This is part of what we would discuss with you before your case is filed.)
If you want to keep your car or truck you will likely need to catch up on any late payments very quickly–within a month or two after your Chapter 7 was filed. The vast majority of vehicle loan creditors will only give you that much time. (The exceptions tend to be local lenders, perhaps with less expensive vehicles for which the debt is much higher than the value of the vehicle, so they have more reason to be flexible.)
Part of the reason the creditors are in a hurry to get you current is that this reduces their financial exposure compared to the value of the vehicle.
There is also a very practical bit of timing involved. To keep the vehicle, you will be required to sign a “reaffirmation agreement,” which is filed at the bankruptcy court. That agreement formally excludes the vehicle loan from the discharge of your debts. So understandably bankruptcy law requires the “reaffirmation agreement” to be filed at court before your debts are discharged. And the court order discharging all your debts is entered most of the time about three months after your case is filed. So you can see why your creditor wants you to be current on your loan before that “reaffirmation agreement” is prepared and filed at court.
If you don’t anticipate being able to bring the vehicle loan current that quickly—either with the Chapter 7 filing gaining you enough additional cash flow or from some other source—but you still need to keep the vehicle, Chapter 13 is often an excellent solution, as will be discussed in the next blog.
Assuming for the moment that Chapter 13 is not a viable option, and that you can’t pay the back payment(s) in time, you need to consider surrendering the vehicle. There are certain advantages to surrender—especially in the midst of your Chapter 7 case—that you should fully understand even if at first it doesn’t sound like a good idea.
Surrendering the vehicle:
- gets you out of the monthly payments (and also the cost of the insurance premiums)
- avoids needing to find the money to pay the accrued late payments and related late fees and other possible charges
- discharges any “deficiency balance,” the amount that you would owe if you had surrendered the vehicle without bankruptcy—after the creditor sold it, credited the sale proceeds to the balance, and came after you for the remaining balance.
Please return here in a couple days to read how Chapter 13 can help you keep your vehicle.
Posted by Kevin on August 14, 2013 under Bankruptcy Blog |
The Federalist Papers are a key source for understanding the intentions of the drafters of the Constitution. What do these essays say about the Bankruptcy Clause?
The Bankruptcy Clause of Article 1, Section 8, Clause 4 of the U. S. Constitution gave to the Congress, and thus to the federal government, the power to make laws about bankruptcy. But this Clause gives no clue why that power is so given or how that power should be exercised.
The Federalist Papers would be a sensible place to look for such clues.
These were 85 essays published anonymously in New York newspapers during 1787-88 while the states were debating whether to ratify the proposed Constitution. These widely circulated essays unabashedly lobby for ratifying the proposed Constitution in the place of the existing Articles of Confederation. This is made clear from the first words of the first essay:
AFTER an unequivocal experience of the inefficiency of the subsisting federal government, you are called upon to deliberate on a new Constitution for the United States of America. The subject speaks its own importance; comprehending in its consequences nothing less than the existence of the UNION, the safety and welfare of the parts of which it is composed, the fate of an empire in many respects the most interesting in the world. …Yes, my countrymen, I own to you that, after having given [the new Constitution] an attentive consideration, I am clearly of opinion it is your interest to adopt it. I am convinced that this is the safest course for your liberty, your dignity, and your happiness.
In other words: government by the Articles of Confederation has not worked, and this grand experiment in government by “reflection and choice” instead of by “accident and force” is hanging in the balance. And the new Constitution is the way forward.
The Federalist Papers can be a crucial window into what the drafters of the Constitution intended. These essays explain many provisions of the Constitution in great detail, and were written within weeks or months after The Constitutional Convention. Most of them were authored by Alexander Hamilton and James Madison who were themselves members of that Constitutional Convention.
So what do these detailed persuasive essays tell us about the framer’s intentions about bankruptcy?
Precious little. Just one sentence. In essay no. 42, written by James Madison and first published on January 22, 1788, after a long discussion on “a uniform rule of naturalization” (immigration)—the other power referred to in the same Clause—comes the following sentence:
The power of establishing uniform laws of bankruptcy is so intimately connected with the regulation of commerce, and will prevent so many frauds where the parties or their property may lie or be removed into different States, that the expediency of it seems not likely to be drawn into question.
This sentence makes two main points.
1. Madison, at least, focused on how a uniform national bankruptcy law would help creditors by preventing debtors from hiding themselves or their assets in other states. This simply reflects the pro-creditor attitude of bankruptcy law during this period.
2. Bankruptcy law is a natural part of the general regulation of commerce, so a federal government which has powers to regulate interstate commerce would just naturally have the power to create a uniform set of bankruptcy laws.
So, the U.S Constitution contains one brief but very important partial sentence about bankruptcy, making it the responsibility of the federal government. And The Federalist Papers contains only a single sentence on the topic saying, yes, of course we need a uniform bankruptcy law among all the states since commerce (and fraud) spills over the states’ borders.
Posted by Kevin on August 11, 2013 under Bankruptcy Blog |
The Constitutional Convention adopted the U.S. Constitution. Its Bankruptcy Clause was a quiet but crucial component of a much stronger national government.
Most people know that the U.S. Constitution refers explicitly to bankruptcy. The provision is short and sweet. Included among a long list of legislative powers given to Congress in Article 1 of the Constitution is the power “to establish… uniform laws on the subject of bankruptcies throughout the United States.” (Article 1, Section 8, Clause 4.) Here’s some of the exciting (if you are at all historically inclined) backstory.
The Bankruptcy Clause Goes Right to the Heart of the Constitution’s Purpose
Back when we were kids we learned in school that before we had the Constitution, our new country floundered during its first few years under the loose Articles of Confederation. Each state acted pretty much as a sovereign country, with its own money, independent militia, and laws regulating trade with other states and even with other countries. There was no national court system and no executive branch to enforce the acts of Congress. The national government had no power to pass laws on interstate commerce, including on bankruptcy.
At the heart of the issue at the Constitutional Convention of 1787 and during the following year and a half of its ratification by the states was how strong of a national government to create. During colonial times and under the Articles of Confederation each colony or state could have its own laws of bankruptcy and insolvency, creating intense confusion and conflict among them. A national government with power over interstate commerce would sensibly avoid these problems by providing a bankruptcy law uniform among all the states.
Bankruptcy Almost Left Out of the Constitution
And yet the initial draft of the U. S. Constitution did not contain any reference to bankruptcy. Then towards the end of the Convention the issue went to a committee, which recommended the addition. The clause was adopted by the Convention by a vote of 9 states against one. “The only vote against was by Connecticut, with… concern that bankruptcies could be punished by death [!!], as was still the law in England. Connecticut also had a comprehensive bankruptcy law of its own, which it wanted to preserve free of federal control.” (From “A Brief History of Bankruptcy Law,” by Prof. Charles J. Tabb.)
In the next blog: what The Federalist Papers, 85 essays written by Alexander Hamilton, James Madison, and John Jay to convince readers to ratify the Constitution, say about the Bankruptcy Clause.
Posted by Kevin on August 7, 2013 under Bankruptcy Blog |
More answers about how Chapter 13 gives you up to 5 years to catch up on your past-due mortgage.
The last blog, and this one, answer questions about how Chapter 13 gives you time to “cure the arrearage.” Check out the last blog for answers to these questions:
- Can you give a simple example how this “curing the arrearage” works?
- If my Chapter 13 plan proposes to catch up my mortgage in 5 years, does my mortgage lender have to go along with this?
- What if, based on my income, I’m allowed to finish my plan in 3 years instead of 5?
Now on to today’s questions:
How are back property taxes handled?
If you are paying your home’s property taxes as part of your mortgage payment, and you’ve fallen significantly behind on those mortgage payments, the lender may well have paid the current year’s property taxes with its own money. If so, the lender will add the amount it advanced for your taxes into the total amount that you are behind. So through your Chapter 13 plan payments you will simply pay to your lender the amount that it paid for your taxes, as you pay the rest of your back mortgage payments.
If you are paying the property taxes directly (not as part of your regular mortgage payments) and have fallen behind on those taxes, your Chapter 13 plan will include payments to the county or other appropriate taxing authority.
What if the mortgage lender and I don’t agree on the amount of arrearage that’s owed?
Chapter 13 has a relatively efficient mechanism for determining the accurate amount of arrearage. Your creditors, including your mortgage lender, are required to file a document in bankruptcy court—a “proof of claim”—stating the total amount owned, the amount of arrearage and how it is calculated, as well as the amount of any additional fees. You as the debtor then have the opportunity to object to that proof of claim. The bankruptcy judge is a convenient and experienced decision-maker in these kinds of disputes.
This area has been a controversial one in the past 5-10 years, mostly because lenders have often been inaccurate and unclear in their accounting, and been simply unable to justify the amounts on their proofs of claim. This particularly became a problem when lenders added fees to the balance without telling the homeowners, so that the homeowners would think that they were current only to learn, often after the completion of their Chapter 13 case, that supposedly they were still behind. Bankruptcy Rule 3002.1 was put into place to solve this problem. This rule requires lenders to give timely notice of the amount owed and any changes to the amount, and provides for serious consequences if they fail to follow these rules.
What happens if my circumstances change and I decide not to keep the house after all during my Chapter 13 case?
One of the great features of Chapter 13 is its flexibility. So you CAN change your mind and surrender your house part-way through your case. Or you can sell it. And at that point you can either stay in the Chapter 13 case or get out of it.
You could stay in it if there were still worthwhile reasons to do so, reasons not related to your house. For example, you could continue the case if you had debts that were best handled in a Chapter 13 case—such as taxes, support obligations, or possibly student loans. Your attorney would work with you to amend your plan to stop payments going to the house and redirect them elsewhere.
But if you filed a Chapter 13 case solely because of your house and now no longer needed or wanted to catch up on the arrearage, your attorney could either “convert” your case into a Chapter 7 one or simply end the Chapter 13 case by “dismissing” it. More likely your case would be converted into a Chapter 7 one to finish taking care of your debts, including possibly debts related to your house.
A big caution comes with all this flexibility. Although it’s good to know when you start your Chapter 13 case that it does not HAVE to be completed as it was originally put together, it seldom makes practical sense to start a case that you don’t intend to finish. You need to have a reasonable chance to complete it. Consider very carefully whether you will be able to make the necessary payments over the whole 3-to-5-year length of your case. If you had trouble making your regular mortgage payment before filing bankruptcy, look at whether Chapter 13, with all of its benefits, will help your cash flow enough so that you will be able to do what the plan requires of you.
