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 October 21, 2018 under Bankruptcy Blog |
Debts in Bankruptcy
If you are thinking about bankruptcy there’s no more basic question than what it will do to each of your debts. Will it wipe away all your debts or will you still owe anybody? What about debts you would like to keep like your car or truck loan or your home mortgage? What help does bankruptcy give for unusual debts like taxes, or child and spousal support?
The Three Categories of Debts
At the heart of bankruptcy is the basic rule of treating all creditors within the same legal category the same. So we need to understand the three main categories of debts. You may not have debts in all three of these categories, but lots of people do. A basic understanding of these three categories will help make sense of bankruptcy, and make sense of how it treats each of your creditors.
The three categories of debts are “secured,” “general unsecured,” and “priority.”
Secured Debts
Every single debt is either “secured” by something you own or it is not. A secured debt is secured by a lien—a legal right against that property.
Most of the time you know whether or not a debt is secured because you voluntarily gave collateral to secure the debt. When you buy a car, you know that you are signing on to a vehicle loan in which the lender is put onto your car’s title as its lienholder. That lien on the title gives that lender certain rights, such as to repossess it if you don’t make the agreed payments.
But debts can also be secured as a matter of law without you voluntarily agreeing to it. For example, if you own a home and an unsecured creditor sues you and gets a judgment against you that usually creates a judgment lien against the title of your home. Or if you don’t pay federal income taxes you owe, the IRS may put a tax lien on all your personal property.
For a debt to become effectively secured, for purposes of bankruptcy, certain steps have to be taken to accomplish that. Otherwise the debt is not secured, and the creditor does not have rights against the property or possession that was supposed to secure the debt.
In the case of a vehicle loan, the lender and you have to go through certain paperwork for the lender to become a lienholder on the vehicle’s title. If those aren’t done right, the vehicle will not attach as collateral to the loan. That could totally change how that debt is treated in bankruptcy.
Finally, it’s important to see that debts can be fully secured or only partly secured. This depends on the amount of the debt compared to the value of the collateral securing it. If you owe $15,000 on a vehicle worth only $10,000, the debt is only partly secured—secured as to $10,000, and unsecured as to the remaining $5,000 of the debt. A partly secured debt may be treated differently in bankruptcy than a fully secured one.
In the next blog we will be reviewing general unsecured debts and priority debts.
Posted by Kevin on November 22, 2017 under Bankruptcy Blog |
In the prior blog, we learned that you may be required to file under Chapter 13 because, simply put, you make too much money to file under Chapter 7. Guess what? There are restrictions on filing Chapter 13 also. First, you must be an individual. That means a live person. Second, you must have regular income. That usually means a job, but it can even include social security or public assistance. Third, your secured debts cannot exceed $1,184,200. Fourth, your unsecured debts cannot exceed $394,725. Items three and four are commonly called Debt Limits which are adjusted periodically.
So, what’s a secured debt. It means generally any debt for which you have given collateral. Examples: a home mortgage or a car loan. But, it can also include a judicial lien, a statutory lien or a filed IRS tax lien. A judicial lien comes about when someone gets a judgment against you, and the sheriff attaches a specific item of property like your bank account. A statutory lien comes about by law. An example is your real estate taxes.
Unsecured claims can be credit cards, medical bills, loans that you guaranteed for your business, and priority debts like back child support.
In the prior blog, we learned that a debtor in Chapter 13 can strip off a second mortgage if that mortgage is totally underwater. For example, your home is worth $200,000. The first mortgage is for $250,000 and the second mortgage is for $100,000. The second mortgage is recorded and would otherwise be considered a secured claim except that there is no collateral to attach to it because the first mortgagee is owed more than the collateral is worth. In that case the stripped off second mortgage becomes an unsecured claim.
So, how do you count the second mortgage when you are figuring out the Debt Limits for Chapter 13. In our example, the stripped off second mortgage is counted with the unsecured claims. So, in our case, you have to add the $100,000 to your other unsecured debts even though there was a mortgage.
Sometimes, the stripped off second mortgage can put you over the Debt Limit for unsecured debt. What happens then? Well, if you do not qualify for Chapter 7, your only alternative is Chapter 11. Ouch. Although individuals can file Chapter 11, that is an expensive proposition.
Posted by Kevin on October 28, 2013 under Bankruptcy Blog |
Why Does Chapter 13 Have Debt Limits?
Chapter 7 has no debt limit. But the Bankruptcy Code does impose a limit on the amount of debt that person can owe when filing a Chapter 13 case. Why? Although in conventional consumer situations an average Chapter 7 case is much quicker and easier than an average Chapter 13 case, in fact Chapter 7 can be used with a wide variety of business and consumer arenas, including for corporations and partnerships, including those with many millions of dollars of debt. Chapter 13 is a tremendously flexible procedure, but it is still a relatively streamlined one—especially compared to Chapter 11 reorganization. It was specifically designed for individuals and married couples with relatively straightforward debts.
The primary way that the law tries to limit Chapter 13 to simpler cases is with debt limits. Currently the individual filing one, or the married couple filing together, must have less than $383,175 in total unsecured debts and ALSO less than $1,149,525 in secured debts.
What’s with the Odd Amounts?
These dollar limits do sound arbitrary, and to some extent they are, simply reflecting a Congressional compromise going back 34 years to the original passage of the Bankruptcy Code in 1978. The limits back then were only $100,000 unsecured debt and $350,000 secured debt. These didn’t change until more than doubling in 1994 to $250,000 and $750,000, respectively, with inflationary increases every three years thereafter. The current amounts have been in effect since April 1, 2013.
What Are “Noncontingent, Liquidated Debts”?
The statute specifically says that you “may be a debtor under Chapter 13” only if you owe, “on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525” (with the appropriate current amounts inserted).
To be a bit over simplistic, these two descriptive words are intended to make clear that only real debts count for these limits. “Noncontingent” means that you are presently liable on the debt, not liable only if some event does or does not occur. “Liquidated” means that you owe a specific and determinable amount. A contingent debt would include one that you would only owe if somebody else did not pay it. A noncontingent debt would be one which you owe jointly with someone else but the creditor has no obligation to first pursue the other debtor. An unliquidated debt would include a lawsuit against you for unspecified damages; a liquidated debt could be a lawsuit where the alleged debt amount can be determined, even if it might be disputed.
Conclusion
In most cases, you will either be clearly under both secured and unsecured debt limits or clearly over one of them. But if you are at all close, be aware that these “noncontingent, unliquidated” distinctions are not always clear. And even if you are over the limits, there may be other solutions if you really need the benefits of a Chapter 13. One possibility is filing a so-called “Chapter 20”—filing a Chapter 7 case to discharge much of your debts, followed immediately by filing a Chapter 13 (7 + 13 = 20). The Chapter 7 discharge should get you under the Chapter 13 debt limits, and then although the Chapter 13 cannot discharge any more debts, it could well protect you from your remaining creditors as you pay their debts—such as mortgage arrearage, back child support, or taxes—at your own schedule.
Posted by Kevin on October 19, 2013 under Bankruptcy Blog |
If you don’t qualify for either Chapter 7 or 13, do you have to do a very expensive Chapter 11 reorganization?
Chapter 11 is dreadfully expensive. That’s part of the reason why consumers seldom file them compared to Chapter 7 and 13. The court filing fee alone is $1,233 . The attorney fees can be tens of thousands of dollars. Why so expensive? Because Chapter 11 was designed for large corporate reorganizations, and, in spite of efforts to streamline it for smaller businesses and for individuals, it’s a cumbersome, attorney-intensive procedure. So it is usually sensible to avoid Chapter 11 if either Chapter 7 or 13 will serve your needs.
But what if you’re disqualified from those other two? If you really ARE disqualified, then you may have to file under Chapter 11. But you may not be disqualified even if at first you think you are. So let’s look more closely at the qualification rules, especially as they apply to situations where at first it may look like you don’t qualify. Today we’ll give a broad overview about this as to both Chapter 7 and 13, and then in the next two blogs we’ll look more closely at each one.
Chapter 7 and the “Means Test”
The point of the quite complicated means test is to make people pay a meaningful amount of their debts if they have the “means” to do so. So those who do not pass the means test cannot file a Chapter 7 “straight bankruptcy,” or they can be forced out if. Instead they would usually have to proceed through Chapter 13, and be required to pay what they could afford to pay to their creditors over the following five years.
But the means test is often misunderstood. That’s not surprising given its multiple steps and odd combination of rigid formulas and discretionary enforcement. The following may help you understand it and potentially get around it:
- The means test may not even apply to you. It only applies to individuals with “primarily consumer debts,” meaning that you skip the means test altogether if half or more of your debts were incurred for business purposes instead of “primarily for a personal, family, or household purpose.”
- There’s a fixation on the first step of the means test—whether your income is above or below the “median family income” amount for your state and household size. Indeed a large majority of people who file Chapter 7 DO have lower income than the applicable median income. So they can skip the rest of the means test.
- The means test uses an odd and very specific definition of your income, one which focuses on the six-full-calendar-month prior to whatever date your Chapter 7 case is filed. This means that for many people their “income” shifts with each passing month, depending on the changes to their income of the past 6 or so months. So some careful tactical planning may enable you to fit under the median income amount by filing at the right time.
- Even if your income, as appropriately defined, is in fact over the applicable median income, that’s just the beginning of the analysis. There are a number of other steps to the means test, each with potential ways to pass the means test and qualify for Chapter 7. We’ll go through these additional steps in the next blog.
The Chapter 13 Debt Limits
At the time of filing a Chapter 13 case, your total unsecured debts must be less than $383,175, and your total secured debts must be less than $1,149,525.
As you can probably guess, there’s more to this than immediately meets the eye. For a start, the terms actually used by the statute for these limits are “noncontingent, liquidated secured debts” and “noncontingent, liquidated unsecured debts.”
Debtors with relatively high debt are often present or former business owners who signed personal guarantees for corporate debt. When are those guaranteed debts considered contingent and therefore would not count towards the debt limits, and when are they noncontingent so that they would count? And when is an unresolved claim against the debtor considered unliquidated so that they would not count towards the debt limits, and when are they liquidated so that they would count?
What these Chapter 13 debt limits really mean will be the topic two blogs from now.
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 November 19, 2012 under Bankruptcy Blog |
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.
Posted by Kevin on July 9, 2012 under Bankruptcy Blog |
Most experienced bankruptcy attorneys know that there is a moral consideration in filing bankruptcy. We know that many clients wrestle with the idea of whether it is morally right for them to file. Books are written about the bankruptcy filings of famous Americans through the years for the dual reasons of demonstrating that filing bankruptcy does not necessarily make you a bad person, and also to demonstrate the moral ambivalence that confronted these famous people when they filed bankruptcy.
You could consider the choice whether or not to file bankruptcy to simply be a “business decision.” Merely a weighing of the costs and benefits of filing and not filing. For many people, that is as far as it goes (and I do not have a problem with that). After all, corporations of all sizes file “strategic bankruptcies” all the time. Their very smart and well-informed managers decide that bankruptcy is the best way to reduce debt and streamline their operations, so that the business can survive and hopefully thrive into the future.
And who doesn’t want to survive and thrive?
But for you, it may not be that cut and dry. You consider yourself more than a business. More than a corporation. For you, the human costs and benefits have to be added into the equation.
For many people, the decision to file bankruptcy is more than a business decision. For many, that’s where morality comes into the decision. We humans are moral creatures. That means that our important choices include the moral assessment of the situation. If we don’t engage in the moral component of this choice, we may experience something akin to “buyer’s remorse”; that is, after the fact we look back and say to ourselves, “why did I do that”?
So what do you need to do to make a good moral decision?
First, accept the choices that you made—good and bad, sensible and short-sighted, intentional and forced—and review the circumstances that got you where you are now. Accept that you made a series of legal commitments to pay your debts, consider how much choice you had at the time about them, and in hindsight what you could have done differently, if anything. Analyse honestly why are you now not able to keep those commitments? Is it because you lost a job or because your spending habits, especially in the area of non-necessities, are out of control? By analyzing choices made, you are not only assessing whether to file bankruptcy, but you are putting yourself on the path not to repeat your mistakes.
Second, consider both the financial costs and benefits of bankruptcy versus the moral costs and benefits of continuing to try to meet those financial commitments. Yes, you can get my debts discharged. But, how will your family, friends, co-workers view you in the future.? Am you being an honest debtor or are you gaming the system? Or will it be viewed that you are gaming the system? Do you have a realistic chance of successfully paying off your debts, and even if so, what would be the likely human costs while doing so? And if you do not have a realistic chance, how do you weigh the benefit of putting up a good fight against the costs that come from just delaying the inevitable?
Third, recognize that you now have both the opportunity and obligation to make a good decision about whether to continue trying to meet those commitments. To just accept the status quo without facing the situation honestly and bravely is making a decision by default, which is likely neither your morally best nor practically wisest move. In other words, you should control your destiny rather than destiny controlling you.
Fourth, get advice so that you know your legal options. You cannot make decisions, whether business or mixed business and moral, without knowing the facts and the law. An experienced bankruptcy attorney not only knows the law, he or she knows what you are going through. More importantly, an experienced bankruptcy attorney can guide you to bankruptcy alternatives if that makes sense for you. You may have the best of all intentions, but with your hours at work cut back, lots of debts, and bill collectors badgering you at work and home, bankruptcy is probably your best and only realistic alternative. On the other hand, you may be a candidate for debt consolidation through a reputable non-profit debt counselor. Or you may have enough equity in your home to get a second mortgage and consolidate your debts. Finally, filing under Chapter 13, where you pay back a portion of your debt, may be economically feasible and fit into your notion of fairness and morality. One size does not fit all. An experienced bankruptcy attorney can put you in a position to make the right decision for you and your family.
Posted by Kevin on July 6, 2012 under Bankruptcy Blog |
Background:
- A creditor which has rights to collateral is called a “secured creditor.” Your obligation to pay what you owe to this creditor is secured by rights it has to take possession and ownership of the collateral if you don’t make your payments on the debt.
- In bankruptcy, secured creditors have a lot more leverage against you because of the collateral than do creditors without any collateral—“unsecured creditors.”
- If you want to keep the collateral, Chapter 7 is sometimes is your best choice, but in many circumstances Chapter 13 can give you more options.
- Secured debts in which the collateral is your home or your vehicle are governed by special rules because of how important those kinds of collateral are to most people.
- But you will not find many blogs talking about secured debts where the collateral is something other than your home or vehicle. The main secured debts of this type are probably furniture and appliance purchases, money loans secured by your own personal assets, and business loans secured by business and/or personal assets.
Cramdown:
- This tool applies only to Chapter 13—it can’t be done in Chapter 7.
- If the collateral securing a secured debt is worth less than the balance on that debt, then you may be able to divide that debt into two parts: the secured part—the amount of the debt up to the value of the collateral, and the unsecured part—the rest of the debt. An example will make that clear. Let’s say you owed $1,000 on a refrigerator, in which the purchase contract gave the creditor the right to repossess that refrigerator if you didn’t make the agreed payments. If the present value of that refrigerator is $600, then the secured portion of that debt would be $600, and the remaining $400 of that debt would the unsecured portion.
- In a Chapter 13 “cramdown” you pay not the total debt, but only the secured part of the debt. You pay the unsecured part of the debt only at the percentage that all the rest of your regular unsecured creditors are paid. That is usually less than 100% and can sometimes be a low as 0%. In the above example, the $1,000 total refrigerator debt is crammed down to $600, and the remaining $400 part of the debt is lumped in with the rest of your unsecured creditors. So if in your Chapter 13 plan your unsecured creditors are receiving 10%, then you would pay only the $600 secured portion, the remaining unsecured portion would get $40 spread out over the term of the plan, and would be discharged (written off) at the end of your Chapter 13 case.
THE cramdown rule with collateral other than your home or vehicle:
- “[I]f the debt was incurred during the 1-year period preceding [the bankruptcy] filing” then you cannot do a cramdown on collateral that is neither your home nor your vehicle. See the last sentence of Section 1325(a) of the Bankruptcy Code (tucked in right after subsection (a)(9)). This means that if the debt is any older than 1 year, you CAN do a cramdown.
So, if you have a debt, more than 1 year old, secured by something other than your home or vehicle(s), in which the collateral is worth less than the debt, you can cram down the debt to the value of the collateral. If so, then because this can only be done under Chapter 13, that would be one factor in favor of filing under Chapter 13 instead of Chapter 7. Talk to your attorney to see if this applies to you, and to find out all the other Chapter 7 vs. Chapter 13 factors to weigh in your situation.
Posted by Kevin on June 27, 2012 under Bankruptcy Blog |
Under Chapter 7, you can pay your vehicle loan mostly by getting rid of all or most of your other debts. Under Chapter 13, you can pay your vehicle loan ahead of most of your other creditors.
Bankruptcy law is about balancing the rights of debtors and creditors. When you file bankruptcy you gain some leverage against most of your creditors. But exactly how much leverage depends on the kind of debt. With a vehicle loan, you get much less leverage than with some other types of debts because the lender has a right to its collateral–your car or truck. But if you want to keep your vehicle (and you need a vehicle in Northern New Jersey), you may be able to use the lender’s rights over your collateral to your advantage.
Let’s see how this works under Chapter 7 and then under Chapter 13.
Favoring your vehicle loan in a Chapter 7 “straight bankruptcy”
Between you and the vehicle lender, your leverage is that you have the right to simply surrender your vehicle to the creditor and pay nothing. The bankruptcy discharges (writes off) any remaining debt. Usually the lender does not get paid enough from selling the vehicle to cover the full balance on the debt.
This means that sometimes we can use the threat of surrender to improve the vehicle loan’s terms, maybe even reduce the balance to an amount closer to the current fair market value of the vehicle.
But unfortunately, many major vehicle lenders don’t see it that way. They made a decision at some point that they make more money by requiring all their Chapter 7 customers to pay the full balance on the vehicle loans, and then take losses on those who aren’t willing to do that and instead surrender their vehicles. But it may be worth a try.
Favoring your vehicle loan in a Chapter 13 “payment plan”
Between you and the vehicle lender, your leverage is both lesser and greater under Chapter 13 than under Chapter 7.
You have less leverage in threatening surrender if your Chapter 13 plan is paying anything to your unsecured creditors. That’s because the vehicle lender would recoup from you at least some of its losses upon surrender, instead of none.
And if your vehicle loan is two and a half years old or less, if you want to keep the vehicle you must pay the full balance of the loan, regardless of the value of the vehicle compared to the loan balance.
But you have more leverage in two ways. With any vehicle loan, including those two and a half years old or less, you do not have to cure any arrearage, and can change the monthly payment, as long as the balance is paid in full by the end of the case.
And if the loan is more than two and a half years old, you can do a “cramdown”—reduce the amount you pay to the fair market value of the vehicle, plus whatever percentage you’re paying to the pool of unsecured debt, if any.
Clearly, Chapter 13 gives the debtor more leverage, if not more options, when it comes to a vehicle.
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.
