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 on September 6, 2016 under Bankruptcy Blog |
Vehicle Surrender or Repossession Almost Never Good
Whether or not bankruptcy can save your car or truck, surrendering it without having a well-informed plan about what you are going to do next is almost never a good idea. And putting yourself into a situation in which it gets repossessed can really hurt, both immediately and long-term.
Almost always, if you surrender your vehicle, you will owe money on the debt after your creditor sells the vehicle and credits your account the sale’s proceeds. And you will usually owe much more than you think you will.
That’s partly because the vehicle will likely be sold for less than it is worth. The creditor is not trying to be unfair about this, but it’s usually efficient for it to sell repossessed vehicles at an auto auction, where most of the purchasers tend to be used car dealers who can only pay enough for the vehicle to be able to make a profit when they re-sell it. On top of a low selling price, your creditor will tack onto your balance all of its repossession and sale costs, which can really add up. The end result is that you will likely owe a lot of money, and will likely get sued to make you pay it. Once wage and bank account garnishments start, you will probably be forced to consider bankruptcy. As you will see, it’s much better to consider it BEFORE surrendering or losing your vehicle to repossession.
How Chapter 7 Can Help
The main way Chapter 7 “straight bankruptcy” can help is by discharging (legally writing off) all or most of your other debts so that you can more easily afford your vehicle payment. If you are a month or two behind on your payments, filing the bankruptcy case would put an immediate stop to any approaching repossession. You would then have a month or two, sometimes more, to catch up. Chapter 7 allows you to focus your financial energies on your most important debts. If for you that’s your vehicle loan, and if getting rid of your debts would help enough, filing Chapter 7 BEFORE losing your vehicle could well be your best move.
How Chapter 13 Can Help
But admittedly that may not be enough help. You may be able to afford the monthly payments if you had no longer had any other debts, but have no way to make up the missed payments that quickly. Or you might have other important debts that you’re behind on, like taxes or child support, and can’t see hanging on to your vehicle in the midst of all these financial pressures. And you might not even be able to quite afford the monthly vehicle payments even with no other debt obligations.
Chapter 13 may be able to cut through ALL of these problems.
First, Chapter 13 can give up to 5 years to catch up on the back payments. Under some circumstances, you might never even need to catch up on them.
Second, Chapter 13 often allows you to pay your vehicle payment first, before other important debts like taxes and support.
And third, if your vehicle loan was entered into more than 910 days before your Chapter 13 case is filed (that’s about two and a half years), you can do a “cramdown” on the vehicle loan: lower your monthly payment, and likely pay less overall for the vehicle before owning it free and clear. How much the monthly payment can be reduced depends on a bunch of factors, but especially if your vehicle is worth significantly less than you owe on it, the payment can often be made much lower.
And if you qualify for a “cramdown” and you’re behind on your vehicle loan at the time you file your Chapter 13 case, you don’t ever have to catch up on those missed payments. They are just part of the re-written, new “crammed down” obligation.
Take Charge and Choose Your Best Option
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 October 22, 0201 under Bankruptcy Blog |
Chapter 7 puts you in the driver’s seat to either keep or surrender the collateral securing your business debts.
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As you close your business, you may have different intentions about what to do with the collateral securing any of your business loans and debts.
- If the collateral consists of business assets you no longer need, your biggest concern is with avoiding or at least minimizing liability after you surrender that collateral.
- If you need that collateral for your new employment or new self-employment, you hope to figure out a way–in the midst of all your financial pressures, to be able to keep paying for it.
- If you had to sign over your personal assets as collateral for your business debts, you want to have sensible ways either to keep such collateral or surrender it, avoiding bad financial consequences either way.
A Chapter 7 bankruptcy filing will help with each of these.
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Surrendering Business Collateral
Regardless what kind of debt you may have that is secured by any business collateral, the odds are very high that if you were to surrender the collateral to the creditor you would still personally owe a large debt. Whether a simple business equipment or business vehicle purchase, the lease of a business premises secured by the business assets on site, or a business bank loan secured by virtually all assets of the business, the collateral’s value at surrender is almost never enough to pay off the entire debt. Furthermore, as you’ve likely learned, you are required to personally sign or guarantee almost all small business credit obligations; efforts to shield your personal liability behind a business or corporate name seldom work.
So it’s good to know that a Chapter 7 bankruptcy almost always (other than in situations of fraud) discharges (forever writes off) any “deficiency balance”—the amount that you would contractually owe after the surrendered collateral is sold and credited to the account.
Keeping Business Collateral
If you are personally liable on a debt with collateral you want to keep, generally the creditor will allow you to keep it as long as the account is current when your Chapter 7 bankruptcy case is filed (or else quickly brought current) and you agree to remain legally liable on the debt. You would likely have to “reaffirm” the debt—formally exclude the debt from the general discharge of your debts. Whether that is wise depends on the value of the collateral compared to the balance on the debt, the importance of the collateral to you, and your confidence in being able to pay off the debt.
A Chapter 7 bankruptcy will help you bring the account current and then to pay it off, since it discharges all or most of your other debts, enabling you to focus your financial resources on keeping the business collateral you need.
Surrendering or Keeping Personal Collateral
Earlier, when you initially entered into credit obligations on behalf of your business, the creditor may have insisted on securing the debt with your personal assets, such as your vehicle, boat, or even a second mortgage on your home. After your business fails, your practical choices on such secured debts would be not very good. If you were willing to surrender the particular collateral, you would very likely owe a deficiency balance. So, in spite of having given up the collateral, you would still have to pay a part of the debt, and often a very large part of it. If you wanted to keep the personal collateral, you would have to catch up on your payments and then make those payments on time until you paid it off. But that would be either extremely difficult or impossible while burdened with all the rest of your business and personal debts.
But a Chapter 7 bankruptcy, as stated above, would enable you to surrender whatever collateral whose debt you felt was not worth paying for, and almost certainly (again, except in circumstances of fraud) without being required to pay any deficiency balance. And on debts with collateral you want to keep, you would much more likely be able to catch up with, make consistent payments on, and eventually pay off the secured debt if you are discharging your other debts through bankruptcy.
