Posted by Kevin on May 27, 2017 under Bankruptcy Blog | 
If you borrowed money to purchase your motor vehicle, you have signed a promissory note which is an obligation to pay the loan debt. You also gave to the lender a lien of your vehicle. In bankruptcy, your lender is known as a secured creditor. Although the underlying debt may be discharged in bankruptcy, the lien passes through the bankruptcy because it is a property right. That means that the lender can always foreclose on the lien if you do not make payments.
The Bankruptcy Trustee Only Cares about Equity Beyond Any Exemption
In a Chapter 7 case you have two people besides you who could be interested in your vehicle. Clearly, the lender is interested. But also, the bankruptcy trustee will become interested if there is equity in the vehicle that exceeds the amount of the exemption. In New Jersey, the vast majority of debtors use the federal exemption which is $3775. There is seldom too much equity if you owe on a vehicle, but check with your attorney to make sure this is not an issue in your case.
Dealing with the Lender-
Surrender
You may not want to keep your vehicle for a multitude of reasons. Or you may not be in a position to make the vehicle loan current within a short time after the bankruptcy filing. If you just surrendered your vehicle without a bankruptcy, you’ll very likely owe and be sued for the “deficiency balance” (amount of loan plus all repo and sale costs minus the sales price). Especially in auction situations, that deficiency balance is often much higher than you expect. Surrendering the vehicle in your Chapter 7 bankruptcy eliminates the deficiency scenario. Indeed, that is a common purpose for filing bankruptcy.
Reaffirm
If you want to keep your vehicle, generally you must be either current on your loan or able to get current within about 30 to 60 days after filing the Chapter 7 case. In New Jersey, you are required to sign a reaffirmation agreement, which legally excludes the vehicle loan from the discharge (the legal write-off) of the rest of your debts. Then you have to stay current if you want to keep the car. Remember, because the vehicle loan was not discharged in the bankruptcy, if you miss payments, the lender can repossess the car, sell it at auction and come after you for any deficiency. So talk to your attorney and think carefully about the risks before reaffirming your vehicle loan.
Redeem
You can keep your vehicle if you redeem by paying to the secured creditor the vehicle’s current replacement value (what you would pay a retail dealer for a vehicle of comparable age and condition). I mention this in passing because in over 30 years of filing Chapter 7’s, I have never had a client who redeemed a motor vehicle. Why? Given the price of motor vehicles these days, it takes thousands of dollars to redeem and most of my clients would not have filed bankruptcy if they had a spare $5-10,000 of cash laying around. But, in theory, you could do it.
Conclusion
Usually “straight bankruptcy”—Chapter 7—works best way if your vehicle situation is pretty straightforward: you either want to surrender a vehicle, or else you want to hang onto it. Chapter 7 gives you these options.
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 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 June 25, 2013 under Bankruptcy Blog |
The Simple Surrender
If you’ve decided to surrender your home, vehicle, or any other collateral that you no longer need or want to pay for, filing a Chapter 7 “straight bankruptcy” is usually the cleanest way to go. The remaining debt on the home is mostly either discharged (legally written off)—including 2nd mortgages, judgments, utilities—or is paid off by the mortgage holder after taking back the real estate—such as property taxes and homeowner association dues. On your vehicle loan, the often large “deficiency balance”—the amount you would owe after the creditor sells the vehicle and applies the sale proceeds to the loan balance—is discharged. You give up the collateral but you are quickly free of the debt.
The Possible Delayed Surrender
If you wanted to keep the property, Chapter 13 allows for that. But what if you know that your job may not last for more than another year, so you’re sensibly facing the reality that at that point you would likely not be able to continue making payments on the home or vehicle? Once again, Chapter 13 is the way to go. It allows you to make usually reduced payments while you have your job so you can keep the home or vehicle. Then, if you lose your job, you can convert to Chapter 7, surrender the property and have the debt discharged. Clearly, Chapter 13 gives you a lot a flexibility under these scenarios.
Flexibility at a Price
But, as with most things in life, there is a cost factor for this flexibility. Chapter 13 costs more in fees than Chapter 7, easily twice the cost, or more. The attorney fees are much higher because it is more work over a longer period of time. Plus the Chapter 13 trustee receives a percentage of what you pay to the creditors. Yes, you may save some money to retain the property in Chapter 13 as opposed to what the regular payment would be; however, those savings you may be partially or even fully offset by these higher fees.
Posted by Kevin on May 21, 2013 under Bankruptcy Blog |
Chapter 13 protects you while you catch up on your vehicle loan, or you may not need to catch up on that loan at all.
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Chapter 7 sometimes gives you just enough of a break and enough time to catch up on your vehicle loan if you’re behind. But usually it only buys you a couple months. Chapter 13 gives you many months, or even a couple years, to catch up. And if you got your loan more than two years and a half years ago, and you owe on it more than the vehicle is worth, you probably won’t even have to catch up on any missed payments. And you will likely pay less per month, and pay less on the loan overall until you own it free and clear.
The Law of Vehicle Loans Arrears
A vehicle loan is in effect made up of two commitments you’ve made to your lender:
- a promise to pay a certain amount each month, plus interest, until the debt is paid off; and
- a lien on the vehicle, giving the lender a right to repossess your vehicle if you fail to keep your promise to pay.
If right before filing bankruptcy you were behind on your vehicle payments, your lender would have the right to repossess your vehicle. But once you file a bankruptcy case, the “automatic stay” stops any repossession. This protection lasts as long as the bankruptcy case is open, unless the lender files a motion to get “relief from the automatic stay” and gets earlier permission to repossess.
Vehicle Loans in Arrears in Chapter 7
If you are not current on a vehicle loan and want to keep that vehicle, a Chapter 7 would be a sensible option if you know you will be able to bring that loan current within about two months of your bankruptcy filing. Certain vehicle lenders might be more flexible and give you more time, but that’s not common. Ask your attorney about the likely practices of you lender when you discuss your vehicle loan options.
Vehicle Loans in Arrears in Chapter 13
If you need more time than two months or so to catch up on your vehicle loan, then Chapter 13 may be the right option for you. In most situations you would be allowed to catch up over a period of many months, potentially even a few years.
In some situations you may not even need to catch up at all. This happens if, and only if, 1) you took out the loan more than 910 days (about 2 and a half years) before you file your Chapter 13 case, and 2) your vehicle is worth less than your debt against it. If so, you will not only NOT need to catch up on the loan, you will usually be able to pay a lower monthly payment, often a lower interest rate, and less on the loan overall, and then you will own the vehicle free and clear at the end of the case.
This is informally called a vehicle loan “cramdown,” and can ONLY be done under Chapter 13, not under Chapter 7.
Even if you are current on your vehicle loan, or could catch up within two months or so, and therefore would likely be able to keep your vehicle under Chapter 7, IF your vehicle is worth significantly less than what you owe on it you should talk with your attorney about how much money a Chapter 13 could save you through a “cramdown.” This might especially make sense if Chapter 13 also helps you in other ways.
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.
