Your Vehicle in Chapter 7 and Chapter 13

Posted by Kevin on November 21, 2013 under Bankruptcy Blog | Be the First to Comment

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.

The Kinds of Debts Better Handled through Chapter 13

Posted by Kevin on November 21, 2012 under Bankruptcy Blog | Be the First to Comment

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.