Worried about Getting Your Car or Truck Repo’d? How Bankruptcy Could Help

Posted by Kevin on August 26, 2013 under Bankruptcy Blog | Be the First to Comment

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.

Attacking Your Debts with Chapter 7 vs. with Chapter 13

Posted by Kevin on November 19, 2012 under Bankruptcy Blog | Be the First to Comment

The type of debts that you have are a factor in deciding whether to file under Chapter 7 or Chapter 13.

The Overly-Simplistic But Still Helpful Rule of Thumb

Here’s a decent starting point: Chapter 7 handles your simple debts better than does Chapter 13, and Chapter 13 handles your more complicated debts better than does Chapter 7.

There are three kinds of debts:  “secured” for which there is collateral given, e.g., your house; “priority” debts which for most consumer creditors is child support, alimony or taxes; and “general unsecured” debts which include most credit cards, medical debts, personal loans with no collateral, utility bills, back rent, and many, many others.

Simple debts are generally general unsecured debts, and secured debts in cases where a) the debtor is current, their is no equity in the collateral and the debtor wants to keep the collateral or b) the debtor wants to give up or “surrender” the collateral.

Simple Debts- Better Off in Chapter 7

Chapter 7 treats “general unsecured” debts the best by usually simply discharging them (writing them off) forever in a procedure lasting barely three months.  You make no payments and you get to keep the property if it is exempt.

Chapter 13 instead usually requires you to pay a portion of these “general unsecured” debts. When you hear a Chapter 13 plan being referred to a “15% plan,” that means that the “general unsecured” debts are slated to be paid 15% of the amount owed.  Moreover, if your income goes up during the term of the plan, your payments can increase.  So, unless you feel morally compelled to make restitution to your creditors, Chapter 7 is the preferred economic method of disposing of “general unsecured” debts.

As for simple secured debts, in Chapter 7, if you surrender, you give up the property, the debt is discharged and you make no further payments.  If you surrender the collateral in a Chapter 13, however, you may be subject to paying a portion of any deficiency through your plan.  Clearly, in that case, Chapter 7 is the better alternative.

If you want to keep the property which is current with no equity, in a Chapter 7 the trustee “abandons” the property.  That means that it drops out of the bankruptcy and you keep it subject to the secured claim.  As long as you keep paying the secured creditor, you get to keep (and someday own outright) the collateral.  Moreover, the underlying debt  to the bank is discharged, so the bank can never come after you for a deficiency if you default down the line.

Now, you get pretty much the same deal in Chapter 13 ( you keep the collateral and continue with your payments), but you are subject to court supervision for up to 60 months. That can be  a hassle.    Hence, Chapter 7 is a better alternative because it is quicker and cleaner.

The next blog: how not-so-simple debts are handled in Chapter 7 and in Chapter 13.