Posted by Kevin on May 16, 2013 under Bankruptcy Blog | 
Secured Debts
A secured debt is usually one in which your agreement to pay a debt is backed up with some collateral. If you don’t pay, the creditor can take possession and ownership of that collateral. So, a mortgage holder can foreclose on your home, a vehicle lender can repossess your vehicle, and the appliance store can haul away your washer and dryer.
But for the creditor to have rights to your collateral—for the debt to be truly “secured”—the creditor needs first to have gone through the appropriate legal steps to tie the collateral to the debt.
Besides secured debts in which you voluntarily gave the creditor rights to the collateral, there are many kinds of secured debts in which the creditor got those rights by operation of law. This happens without your consent, sometimes even without your knowledge, often as part of the debt collection process. An example is an IRS tax lien recorded against your real estate and/or personal property for non-payment of income taxes.
Power Provided by Chapter 7
A Chapter 7 case can help with both voluntary and involuntary secured debts. It will 1) temporarily or permanently prevent your creditor from taking your collateral; 2) help you keep the collateral; and 3) if you want, enable you to surrender the collateral to the creditor without economically hurting yourself.
Power # 1: Stop the Creditor from Taking the Collateral
The moment your Chapter 7 case is filed, all your secured creditors are immediately stopped from taking possession of your collateral. This is the same power that stops all collection activity by all your creditors again you and your property. You may hear this referred to as the “automatic stay.”
Very importantly, not only does the “automatic stay” stop secured creditors from chasing previously agreed to collateral, also stops unsecured creditors from becoming secured ones, such as by stopping the IRS from getting a tax lien. Since secured creditors have tremendously more leverage, inside and outside of bankruptcy, this is a very helpful power that bankruptcy gains for you.
Power # 2: Keep the Collateral
Whether the collateral on a secured debt is your home, vehicle, appliances, or everything you own (as with an IRS tax lien), if you want to keep the collateral or whatever is included in a lien, bankruptcy can help in a variety of ways, including:
- If you are current on a secured debt and want to keep the collateral—such as with a vehicle loan—you can virtually always do so. . This is also a good way for you to get a head start on rebuilding your credit.
- If you are not current on your payments, you will generally be given a limited amount of time to bring the account current.
- In some situations, the loan terms can be changed to waive payment of any missed payments, to lower the interest rate, and perhaps even lower the balance.
- Select kinds of secured debts—for example, judgment liens on your home—can be “avoided”—stripped off your home title.
Power # 3: Dump the Collateral
Outside of bankruptcy, simply surrendering collateral to the creditor because you do not need or want it any longer, or just can’t afford to pay for it, is often not an economically sensible option. That is because you can end up still owing much of the debt after the creditor sells the collateral for substantially less than the amount of the debt, adds all of its sale costs to the debt, and then sues you for the remaining “deficiency balance.”
And if instead the creditor just forgives that balance, in some situations you can be hit with a serious income tax obligation. The amount forgiven may be considered “cancelation of debt income” upon which you may be required to pay income taxes.
Chapter 7 solves both of these problems. Except in very unusual situations, it would discharge (permanently write off) any “deficiency balance” after the surrender of any collateral. And the discharge of debts in bankruptcy is not considered “cancellation of debt income,” so you don’t have the risk of it is being taxed. As a result, you can freely surrender collateral in a Chapter 7 case if you want to, without worrying about owing the creditor or owing taxes for doing so.
Posted by Kevin on May 8, 0201 under Bankruptcy Blog |
Most of the time, you get to keep whatever you own when you file bankruptcy. These 10 truths tell you how it works.
Truth #1. Exemptions can be trickier than they seem to be: There is much more to protecting your assets than just matching assets to exemptions. Although some exemption categories are straightforward, important ones often are not. Some require knowing prior court decisions, and/or how the local trustees and judges are informally interpreting them.
Truth #2. Federal and state exemption schemes: Congress has left it up to each state whether to use a federal set of exemptions in the Bankruptcy Code for bankruptcies filed in that state, or instead a set of exemptions created by the state, OR even to allow each debtor to choose to use either the federal or state set of exemptions. In New Jersey, we generally employ the federal standards. Why? Because most of the NJ exemptions were instituted about 100 years ago and were never adjusted for inflation.
Truth #3. Which exemption scheme you must use can depend on how long you’ve lived in your present state: If you have not been “domiciled” in your current state for two full years before filing bankruptcy, you cannot use the set of exemptions available to residents of your state. You must use the state you were “domiciled” in during the 6-month period immediately before those two years. And if you were “domiciled” in more than one state during that 6-month period, you must use the exemptions available to the residents of the state where you were domiciled the longest during that 6-month period.
Truth #4. If you have assets that exceed the applicable exemptions, you stand a much better chance of protecting them with pre-bankruptcy planning: This is one of the most important reasons to meet with a competent attorney well before you are pushed into filing bankruptcy. What you do with your assets before filing bankruptcy can be scrutinized by the trustee and/or creditors afterwards, so you must get thorough legal advice beforehand. Doing so can make all the difference in protecting what is important to you.
Truth #5. Some trustees are more aggressive than others, and asset values are matters of opinion: Therefore, do not be surprised if a trustee challenges the value that you assign to an asset.
Truth #6. It is crucial to be thorough in listing assets AND exemptions: Failing to be thorough in listing your assets in your bankruptcy documents can jeopardize your entire case, and in extreme cases even lead to criminal charges against you by the U.S. attorney. Also, failing to list an asset which would have been exempt can result in losing the right to claim that exemption later, and then losing that asset.
Truth #7. Just because you have an asset that’s worth more than the exempt amount, doesn’t necessarily mean the trustee will take it: Trustees can decide not to pursue an asset that is either partly or completely not exempt because 1) the asset is not worth enough to justify the trustee’s efforts to collect or liquidate it; 2) the trustee is not willing to bear the costs to collect or liquidate it (such as the attorney fees needed to pursue a claim of the debtor); or 3) the asset’s detriments arguably outweigh its benefits (such as a parcel of land polluted by hazardous waste).
Truth #8. If you have an asset that you want to keep that is not exempt, you can usually “buy it back” from the trustee as long as you have the money to do so within a few months: It may seem like a bad deal to have to pay a Chapter 7 trustee to keep something you already own (such as a vehicle). But if the alternative is doing without a vehicle, or risking getting an unreliable one, or filing a 3-to-5 year Chapter 13 case to save your vehicle, buying it back from the trustee could be by far the best way to go.
Truth #9: You don’t ALWAYS want to avoid having the trustee claim an asset: Sometimes you may actually want the trustee to take a particular non-exempt asset or two. You may not need them—such as the leftover assets of a closed business—and may appreciate handing the liquation hassles over to the trustee. This could especially be true if the trustee will be paying a significant part of the proceeds of sale to a debt you want paid, such as taxes or back child support.
Truth #10. The difference in exemptions under Chapter 7 and 13: Although the set of exemptions used in filing under both chapters is the same, the exemptions are used for a different purpose. In Chapter 7, the exemptions determine whether you have any non-exempt assets for the trustee to take from you, and distribute their proceeds to your creditors. In Chapter 13, the exemptions are applied in the same way but for the purpose of imagining whether there are any non-exempt assets that a hypothetical Chapter 7 trustee would have taken, and if so paying the estimated amount to the creditors over the life of the Chapter 13 plan.
