Posted by Kevin on November 21, 2019 under Bankruptcy Blog | 
The key players in bankruptcy are the debtor, creditors, the bankruptcy clerk and judge, and the bankruptcy trustee and the U.S. Trustee.
Bankruptcy can be confusing. It helps to know the main players and what each does. We’ll cover the first two listed above today. Next time we’ll cover the rest.
Debtor
The debtor is the person or business entity filing the bankruptcy case.
The debtor has to qualify to file bankruptcy. Sometimes qualifying is easy, sometimes it’s harder. The qualifications are different for Chapter 7 “straight bankruptcy” than they are for Chapter 13 “adjustment of debts.” The “means test” is most important in Chapter 7, while in Chapter 13 having “regular income” and not too much debt.
A debtor has a number of “duties.” These mostly involve honestly completing some forms for the bankruptcy court and attending a so-called “meeting of creditors.” You’re also required to “cooperate as necessary” with the bankruptcy trustee and the U. S. Trustee. (We’ll get into this more coming up when we tell you about the different trustees).
Creditors
The creditors are of course the businesses and individuals to which the debtor owes debts.
Creditors participate in your bankruptcy case, or often don’t participate, mostly based on the kind of debt owed.
Creditor’s debts are either secured or unsecured. “Secured” means that the debt is legally tied to something you own. That gives the creditor the right to take that something from you if you don’t pay the debt. A debt can be secured by something you bought at the time you created the debt, like a vehicle loan. It can be secured by something you owned beforehand, like a personal loan secured by your possessions. Or it can be secured by operation of the law, like an income tax or judgment lien. A creditor has more leverage over you if its debt is secured and you want to keep that “security.”
Unsecured debts can be “priority” or “general unsecured.” “Priority” debts are legally favored for various reasons. The main examples among consumer debts are recent income tax debts and any child or spousal support. “Priority” debts generally get paid in full before anything gets paid on “general unsecured” debts under various bankruptcy procedures.
For most people most of their creditors have “general unsecured” debts. Those are all debts that are either not secured or not “priority.” They include most credit card balances, medical bills, personal loans, utility bills, vehicle loan deficiency balances, unsecured personal loans, and countless other kinds of unsecured obligations.
Creditors Getting Involved
Although creditors can be involved in the bankruptcy process in a lot of ways, they tend to be less involved than you expect. Most unsecured general creditors decide that getting involved is not worth their cost or effort. Secured creditors do tend to get involved so that you make appropriate arrangements depending on whether you want to keep their “security.”
Sometimes other creditors have grounds to challenge your ability to “discharge”—legally write off their debts. Your lawyer will inform you if there seem to be any such grounds. Be sure to tell him or her if you have any creditors who may have an emotional stake in your financial life (such as ex-spouses or ex-business partners.) These sometimes get involved in your case, whether doing so would financially benefit them or not.
Posted by Kevin on November 12, 2019 under Bankruptcy Blog |
Whether you want to keep your vehicle or get rid of it, and whether you are current or behind on your payments, Chapter 7 bankruptcy can address the issue.
The “Automatic Stay” Gives You the Chance to Decide to Keep or Surrender
As long as you file your Chapter 7 case before your vehicle gets repossessed, your lender can’t repossess it once you do file. The same “automatic stay” law that stops all your creditors from calling you, suing you, and garnishing your wages also stop your vehicle lender from repossessing your vehicle—at least for a month or so while you decide whether to keep your car or not.
Surrendering Your Vehicle
If you decide to surrender your vehicle, Chapter 7 bankruptcy is often the best way to do so. The reason is because with most vehicle loans even after surrendering the vehicle, you would still owe money to your lender after the surrender. This “deficiency balance” is the amount you owe after the lender repossesses the vehicle, sells it—usually at auction, pays itself its costs of repossession and sale out of the proceeds of sale, and then pays the rest of the proceeds towards your loan’s interest, late fees, and principal balance. Based on how vehicles depreciate and how much is owed on the loan, this scenario almost always creates a deficiency.
Surrendering your vehicle during your Chapter 7 case allows you to legally and permanently write off (“discharge”) that entire remaining debt, including any potential deficiency.
Keep Your Vehicle
If you want to keep your car or truck, whether you are current on your loan, and if not how quickly you can catch up, are crucial.
If You Are Current
If you want to keep your vehicle and are current at the time your Chapter 7 case is filed, and can keep making the payments on time, it’s simple. The Code provides that you can reaffirm the debt. You sign a “reaffirmation agreement” stating that you intend to keep your vehicle and give your consent that the obligation to the vehicle lender will not be discharged. The Court must approve the reaffirmation agreement after a hearing. The downside is that if you default going forward, the lender will repossess, sell the vehicle and come after you for any deficiency because the underlying debt was never discharged.
The Court must approve the reaffirmation agreement after a hearing. The Court can withhold approval of a reaffirmation agreement if it is not in the best interests of the debtor.
Prior to the 2005 revisions to the Bankruptcy Code, a debtor could retain and pay without reaffirming the debt. Although not specifically written into the Code, it was allowed by the courts and pretty much accepted practice. In that case, any potential deficiency was discharged and you just continued paying. So, if you defaulted in the future, the lender could repossess but not come after you for a deficiency.
That very pro debtor situation was pretty much written out of the 2005 amendments to the Code. Now, that option is usually available only if the lender consents. Or, if the Court refuses to approve the reaffirmation agreement because it is not in the best interests of the debtor. Although the Code does not specifically state what happens in such a situation, NJ bankruptcy judges do not allow a repossession if payments are kept current. Moreover, if you default down the road, the underlying debt is discharged so all the lender can do is repossess the collateral.
If You Are Not Current
If you want to keep your vehicle and aren’t current on the vehicle loan at the time your Chapter 7 case is filed, your options are more limited. You would usually need to get current very quickly to be able to keep the vehicle—usually within a month or two. Moreover, you would need to reaffirm the debt going forward.
Much greater Flexibility through Chapter 13
But that is for a later blog.
Posted by Kevin on November 2, 2019 under Bankruptcy Blog |
Potentially save thousands of dollars on your vehicle loan by filing bankruptcy when it qualifies for cramdown.
Chapter 13 Vehicle Loan Cramdown
What’s a “cramdown”? It’s an informal term—not found in the federal Bankruptcy Code—for a procedure provided under Chapter 13 law for legally rewriting the loan to reduce, usually, both the monthly payment and the total you pay for the vehicle. A cramdown, essentially reduces the amount you must pay to the fair market value of your vehicle, often also reducing the interest rate, and also often stretching out the payments over a longer period. These combine to result often in a significantly reduced monthly payment, and an overall savings of thousands of dollars.
Qualifying for Cramdown
First, this only works if your vehicle is worth less than the balance on the loan.
Second, emphasizing again, it is ONLY available in a Chapter 13 case, not Chapter 7.
And third, your vehicle loan must have been entered into more than 910 days (slightly less than two and a half years) before your Chapter 13 case is filed.
Vehicle Cramdown
It’s of course that last condition that creates the timing opportunity. When you first go in to see your attorney, bring your loan vehicle paperwork (or as much information you have) to see if and when you qualify for cramdown, and whether and how much difference it can make for you.
Here’s an example of the dollar difference that a difference in timing can make.
How Good Timing Can Work for You
Let’s say you bought and financed your car 890 days ago—that’s almost two and a half years. The new car cost $21,500. You did not get a very good deal; your previous car had died and cost way too much to repair, and you had to quickly get another car to commute to work. You put down $500 (from a credit card cash advance), then financed the vehicle for $21,000 at 8% over a term of 5 years, with monthly payments of $425.
Now almost two and a half years later you owe about $11,500. If you wanted to keep the car, and filed either a Chapter 7 or Chapter 13 case before the 910-day mark, you would have to pay the regular monthly payments for the rest of the contract term. With interest, that would cost a total of about $12,650 more.
Consider if instead you waited until just past that 910-day mark and filed a Chapter 13 case then, and could “cram down” the car loan. Assume that your car is now worth $7,500, and again you owe $11,500. The loan is said to be secured to the extent of $7,500. The remaining $4,000 of the loan is not secured by anything. So the $7,500 secured portion would be paid through monthly payments in your Chapter 13 plan. The $4,000 unsecured portion is treated as general unsecured debt and paid prorata with the rest of those creditors. It does not constitute extra money paid into the plan.
Under cramdown, you pay the $7,500 secured portion at an interest rate which is often lower than your contract rate. Paying a reduced amount—$7,500 instead of $11,500—at a lower interest rate results in a lower monthly payment. That payment is often reduced substantially further by extending the repayment term further out than what the contract had provided, up to a maximum of five years (from the date of filing the Chapter 13 case).
In this example, assuming an interest rate of 5% and a repayment term of five years, the payment on the $7,500 would be less than $142 per month. The total remaining payments on the loan, with interest, would be about $8,492, in contrast to paying $12,650 under the contract. That is a savings of $4,158.
Note that under cramdown, even though the repayment term stretches the payments about two and a half years longer than under the contract, the amount of interest to be paid is often less. That’s both because the interest rate is often lower, and it’s being applied to a lower principal amount (here 5% interest instead of 8%, and $7,500 instead of $11,500).
So, by tactically holding off from filing a Chapter 13 case until after the 910-day period expires, in this example you would reduce the monthly payment from $425 to $141.50, and save more than $4,000 before owning the vehicle free and clear.
