Posted by Kevin on September 1, 2019 under Bankruptcy Blog | 
First, let’s review the different types of debts in bankruptcy.
Secured debts are collateralized usually by your home, your car or your truck, maybe your furniture and appliances. Priority debts are ones that are usually not secured but are favored in various ways in the bankruptcy law. For most consumer debtors, they include child and spousal support, and certain taxes.
The remaining debts are called general unsecured debts. Think credit cards and medical bills. What do all these debts have in common-no collateral attached to these debts and not given a favored (priority) position under the law.
In most Chapter 7 bankruptcies, the vast majority of debts are general unsecured debts. In Chapter 7 bankruptcy, most general unsecured debts are legally, permanently written off. The legal term is “discharged”. That means that once they are discharged—usually about 3-4 months after your case is filed—the creditors can take absolutely no steps to collect those debts.
The only way general unsecured debts can be paid anything is if either 1) the debt is NOT dischargeable or 2) it is paid (in part or in full) through an asset distribution in your Chapter 7 case.
1) “Dischargeability”
A creditor can dispute your ability to get a discharge of your debt. In the rare case that the discharge of one of your debts is challenged, you may have to pay that particular debt. That depends on whether the creditor is able to establish that the facts fit within the narrow grounds for an exception to dischargeability. This usually involving allegations of fraud, misrepresentation or other similar bad behavior on your part. If the creditor fails to establish the necessary grounds, the debt is discharged.
There are also some general unsecured debts that are not discharged unless you convince the court that they should be, such as student loans. The grounds for discharging student loans are quite difficult to establish. Check /http://studentdebtnj.com/ for more detailed information relating to your student loans.
2) Asset Distribution
In order for a debtor to get a fresh start, the Bankruptcy Code allows a debtor to exempt certain property. That means you keep that property. If everything you own is exempt, or protected, then your Chapter 7 trustee will not take any of your assets from you. This is what usually happens—you’ll hear it referred to as a “no asset” case. But if the trustee DOES take possession of any of your assets for distribution to your creditors—an “asset case”— your “general unsecured creditors” may receive some of it. The trustee must first pay off any of your priority debts, as well as pay the trustee’s own fees and costs. Whatever remains goes to the unsecured creditors on a pro rata basis.
Conclusion
In most Chapter 7 cases your general unsecured debts will all be discharged and, most of the time, general unsecured creditors will receive nothing from you. Rarely, a creditor may challenge the discharge of its debt. If the creditor is successful, you will still owe that debt after the close of the bankruptcy. And if you have an “asset case,” the trustee may pay a part, or in extremely rare cases, all of the general unsecured debts, but only after paying all priority debts and his or her fees and costs.
Posted by Kevin on September 9, 2014 under Bankruptcy Blog |
Saving the vehicle sometimes is not the best option, so Chapter 7 bankruptcy gives you a safe way out.
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Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” each provide ways for you to catch up on and keep your vehicle if you’re struggling to keep up on the payments. But in spite of these options, it may simply be the best for you to surrender the vehicle and write off what you still owe along with the rest of your debts.
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Bankruptcy gives you a variety of options to deal with a vehicle that you’ve fallen behind on but need to keep. If you’re only a payment or two behind, under a straight Chapter 7 bankruptcy you would likely be given about two months to catch up and then thereafter keep up on the regular payments once you’ve written off the rest of your debts so that you can better afford to do so. Or if you’re further behind, a Chapter 13 payment plan would give you much longer to catch up, and if the loan is more than two and a half years old may even allow you to both make smaller monthly payments and lower the balance through a “cramdown.” Bankruptcy can usually give you a good way to keep a needed vehicle.
Understandably the focus in bankruptcy is usually on how to save your home, or vehicle, or something else of importance. But one of the advantages of bankruptcy is that it can free you from some of your assumptions. One such assumption is the usually accurate one that if you surrender a vehicle to its creditor you will continue to owe a lot of money. This is usually true because 1) vehicles tend to depreciate faster than their loan balances are paid down, 2) once they are surrendered they are usually sold at auto auctions at bargain basement prices, and 3) your account is charged all the surrender and sale costs, all of which usually leave you owing a shockingly high “deficiency balance” after the surrender. The fact that you would continue to owe a lot on a vehicle you no longer have is obviously a big disincentive to surrender it in the first place. But since a Chapter 7 bankruptcy will reliably discharge (legally write-off) any such deficiency balance, that disincentive can go out the window. You can ask plainly: is it better to hang onto this vehicle with the options that Chapter 7 and 13 provides you, or is it just better to walk away owing nothing. Bankruptcy opens you up to both sets of possibilities.
Posted by Kevin on November 21, 2013 under Bankruptcy Blog |
Here are 5 questions to ask to find out which bankruptcy option is better for you and your vehicle.
1. Is your vehicle protected by the applicable exemption?
The first thing to find out if whether there is any risk that a bankruptcy trustee could take your car or truck from you if you filed a Chapter 7 case. In NJ, the exemption is only $3675 plus whatever you do not use on your homestead exemption. So, if your car is reasonably new (and not leased), chances are it is not completely protected by exemption. So, you have three possible options:
1) File a Chapter 13 case to protect the vehicle. This way you pay enough to your creditors through a court-approved plan so that your creditors receive over time what they would have received had a Chapter 7 trustee taken and sold your vehicle.
2) File a Chapter 7 case and pay the trustee—usually through a short series of monthly payments—for the right to keep the vehicle. This prevents the trustee from selling your vehicle by paying him or her about as much as would have gone to the creditors had the vehicle been sold.
3) Surrender the vehicle in a Chapter 7 case—assuming you don’t absolutely need it—and allow the proceeds to go to your creditors, an especially sensible option if the debt to be paid first is one you need to be paid anyway, such as income tax or back child support.
2. Are you current or almost current on your vehicle payments but really struggling to keep current?
Either Chapter 7 or 13 can enable you to keep up your vehicle payments by reducing or eliminating your other debts. Bankruptcy is a reprioritization. It empowers you to focus on what’s most important in your financial life. That often is your vehicle, which gets you to work and enables you to take care of your other personal and family responsibilities. Bankruptcy allows you to be wisely proactive, protecting your ability to pay your car payments—and for its necessary maintenance and repairs—before it’s too late.
3. Are you current on your vehicle payments, or if not would you be able to get current within a month or two after filing a Chapter 7 bankruptcy?
If you are not behind on your payments, you will likely be allowed to continue making those payments after filing bankruptcy, regardless whether your other circumstances point you towards Chapter 7 or Chapter 13.
And if you are not current but can catch up very quickly after filing bankruptcy, you can likely file a Chapter 7 case and keep your vehicle. However, if you can’t catch up that quickly, you will likely need the extra power of Chapter 13 to buy more time with your creditor.
4. Is your vehicle worth less than what you owe on it, AND did you buy your vehicle at least two and a half years ago?
If you say yes to both of these questions, you would likely be able to do a “cram down” on your vehicle loan in a Chapter 13 case. This means that through your court-approved plan you would in effect be able to reduce the balance of your vehicle loan down to the value of your vehicle, often also reducing the interest rate and extending the payments over a longer period, usually resulting in a greatly reduced monthly payment. So if you qualify for a vehicle cram down that may be a good reason to file under Chapter 13, because it is not available under Chapter 7.
5. Are your payments so high that surrendering the vehicle to your creditor—or maybe one of your vehicles if you have more than one—is your best choice?
Although bankruptcy can help you keep your vehicle in many ways, it also gives you the opportunity to get out of a bad deal, or one that no longer fits your present circumstances. Usually when you surrender your vehicle to the creditor you are left owing money—the “deficiency balance”—the difference between what you owe and what your creditor sells your vehicle at an auto auction. Bankruptcy gives you the opportunity to get rid of that deficiency balance. Chapter 7 would usually be the quickest way to do that specific task, unless your other financial circumstances pointed you towards filing Chapter 13.
Posted by Kevin on May 29, 2013 under Bankruptcy Blog |
If Chapter 7 strengthens your hand against your secured creditors, Chapter 13 turns you into Superman. It starts with a much more robust “automatic stay.”
The last blog explained how filing a Chapter 7 “straight bankruptcy” gives you certain leverage over secured creditors. In each of these areas, the Chapter 13 “payment plan” gives you many more powers to achieve your goals. Because there are so many Chapter 13 powers, these three areas will be covered in the next few blogs.
Stopping Creditors from Taking the Collateral
The “automatic stay,” which immediately stops your secured creditors from taking any action against the collateral under Chapter 7, gives you that same benefit under Chapter 13. But the “automatic stay” can be tremendously stronger in Chapter 13 for three reasons:
1. Lasts So Much Longer: Chapter 7’s “automatic stay” generally lasts only about 3 months, and sometimes not even that long if a creditor asks the court for “relief from stay” to get permission to go after the collateral. At best, Chapter 7 only pauses the action against you and the collateral. In contrast, a Chapter 13 case itself lasts usually 3 to 5 years, and the protection of the “automatic stay” is in effect that entire time, again unless a creditor is successful in getting “relief from stay.” (usually because the debtor fails to make make multiple payments to that creditor).
2. The “Co-Debtor Stay”: A Chapter 7 case does not stop a creditor from pursuing any co-signer you may have or that co-signer’s collateral. Chapter 13 does. There are limitations to this special kind of “stay,” so how much practical help it provides to you depends on the facts of each case. But at the very least the co-debtor stay immediately protects the co-signer, giving you a chance to get your Chapter 13 plan started and to see whether and/or how the creditor reacts.
As with the usual “automatic stay,” an affected creditor can ask for “relief from the co-debtor stay” to get permission to go after the co-signer or its collateral. Unless and until this motion is filed and the bankruptcy court decides to give this permission, your co-signer is protected.
3. Enables the Other Chapter 13 Powers to Work: Chapter 13 gives you many strong powers for dealing with secured creditors, many of which only work because of the long and continuous protection provided by the “automatic stay.” For example, unlike Chapter 7 which provides no mechanism for catching up on unpaid mortgage payments (other than whatever payment schedule the creditor voluntarily agrees to), Chapter 13 effectively gives you the entire length of the 3-to-5-year case to catch up. But this only works because throughout this time the mortgage holder is stopped from foreclosing by the ongoing “automatic stay.”
Another example illustrates well the crucial role of the “automatic stay” in Chapter 13. Most mortgage documents require the homeowner to pay the home’s property taxes either directly to the taxing authority or more often through an escrow account set up for that purpose. If the taxes are not paid by the homeowner, that is a separate violation of the mortgage agreement and separate grounds for the creditor to start a foreclosure against the homeowner. When the homeowner files a Chapter 13 case, this stops BOTH the mortgage creditor’s foreclosure AND any present or upcoming tax foreclosure by the county (or applicable taxing authority). The homeowner’s Chapter 13 plan shows how the back payments to both the creditor and the taxing authority will be paid. As long as you abide by the Plan, the automatic stays continues in effect, and the taxing authority cannot foreclose.
Posted by Kevin on November 21, 2012 under Bankruptcy Blog |
As we said in the prior blog, more complicated debts are usually handled better in the Chapter 13 context.
More complicated debts include those that 1) are not discharged (written-off) in bankruptcy or in a Chapter 7, 2) are in arrears but are secured by collateral you need to keep, and/or where the debtor has significant equity, or 3) are special situations under the Code.
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Debts Not Discharged in Bankruptcy
If you owe a not-so-large recent income tax debt, or are just a little behind on your support payments, you can file a Chapter 7 case and often be able to take care of the tax or support obligation by arranging for monthly installment or catch-up payments. Using Chapter 13 in that situation would likely be unnecessary.
But if the amount you owe or are behind on is too large, or if the creditor refuses to deal, then Chapter 13 would be better. Why? Because it forces the creditor to be lots more patient. It generally gives you up to five years to pay off or catch up on these kinds of debts.
Secured Debt, Lots of Equity
This is truly tricky. Remember, if the property has significant equity, the trustee may sell the property. If you want to keep the property, you will have a problem in Chapter 7. In fact, your only recourse is to make a deal by buying out the trustee’s interest. If this turns out to be too expensive, you may be SOL.
What about Chapter 13? Assuming you meet the debt ceiling, Chapter 13 can theoretically help. What does that mean? To get your Chapter 13 plan approved by the court, it has to pay out to unsecured creditors as much or more than they would have received in a Chapter 7. So, if you have $50,000 equity in the property after the liquidation analysis, that means that your creditors in a Chapter 13 will have to get at least $50,000. Over 3 years that is $16K+ per year, over 5 years-$10K per year. That’s a big nut to meet every month. So, Chapter 13, in theory, may help you, but , in reality, may be too expensive.
Secured Debts Where You Are Behind
If you want to hang onto your vehicle and/or home but you’re not current on the loan, Chapter 13 allows you to spread out the arrearages for up to the term of the plan. If an aggressive creditor objects, so what. You only need the Judge to confirm the plan.
Special Debts Handled Better in Chapter 13
Chapter 13 has some other features which simply are not provided in Chapter 7, much less provided outside bankruptcy.
Under certain circumstances you can “strip” your second mortgage from your home’s title, so that you pay little or nothing on that second mortgage. This can save a homeowner tens of thousands of dollars, and greatly reduce the monthly cost of the home. In New Jersey, stripping a second mortgage is only potentially available in Chapter 13, not in Chapter 7.
A vehicle “cram down”—in which the amount you owe on your vehicle is essentially reduced to the value of vehicle—is also potentially available only in Chapter 13, not Chapter 7.
If you owe any co-signed debts, they can be favored under Chapter 13 while your co-signer is protected. In contrast, in a Chapter 7 case the creditor would likely be able to pursue your co-signer.
The Limits of a Rule of Thumb
Once again, there’s so much more to deciding between Chapter 7 and 13 than looking at what kind of debts you have and whether those debts are “simple” or “complicated.” There are many other factors, and people so often have unusual combinations of circumstances. This rule of thumb—simple debts lead to Chapter 7, complicated debts lead to Chapter 13—is simply a sensible starting point for your own thinking, and for your conversation with an experienced bankruptcy attorney.
