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 August 10, 2016 under Bankruptcy Blog |
Words I hate to tell new clients: “If only you’d come to talk with me sooner.”
Consumer bankruptcy attorneys are in the business of helping people put back in order their financial lives. Many times we succeed which makes the practice personally gratifying. However, life is not perfect and some situations are beyond reach even with the strong medicine of bankruptcy. Difficult choices sometimes have to be made.
But the toughest situations are those in which the person took some action—usually not long before seeing me—which may have made some sense at the time but ended up being a mistake, a self-inflicted wound.
The goal of my next few blogs is to help you avoid these.
Here’s what we will be covering.
1) Preferences: If within a certain amount of time before filing bankruptcy, a debtor pays any significant amount of money (or anything else of value) to someone she owes, the bankruptcy trustee could under certain conditions force that creditor to pay to the trustee whatever amount the debtor paid to the creditor. That creditor could be a relative or friend who had lent the debtor money, and the debtor felt a deep obligation to repay it before filing bankruptcy. This relative or friend could be sued by the trustee to make him or her “return” the money (but to the trustee, not to the debtor).
2) Wasting exempt assets: New clients constantly tell me how they’ve borrowed against or cashed in their retirement funds in a desperate effort to pay their debts. Or they’ve sold a vehicle or some other precious asset. Then they learn that whatever they’ve sold or borrowed against would have been completely protected in their subsequent bankruptcy case. And the debts they paid with the proceeds would simply have been “discharged” (legally written off) in that bankruptcy. They have lost something of significant value in effect for no real benefit.
3) Surrendering a vehicle that could have been saved: People often really need a vehicle but owe on it more than it is worth and can’t afford the payments. So they either voluntarily surrender it to the creditor, or wait to file bankruptcy until after it gets repossessed. Instead with a “cramdown,” they could well have been able to keep that vehicle by paying much lower monthly payments and paying much less for it overall.
4) Letting a creditor sue and take a judgment: If a debtor is sued by a creditor and waits until after a judgment is entered, in some situations, that judgment could make the debt harder to discharge in a subsequent bankruptcy case.
5) Selling a home out of desperation: Bankruptcy—and especially Chapter 13—provides some amazing tools for dealing with debts related to a home, including the first mortgage arrearage, the second mortgage lien, judgment liens, income tax and child support liens, and other liens of all sorts. Homeowners may hurriedly sell their home because of pressure from any of these kinds of creditors. But if they do so, they could lose out on the opportunity to hold onto their home by saving tens of thousands—or possibly even hundreds of thousands—of dollars. Or at least they could likely sell it at a higher price with more market exposure and/or sell it when the timing is better for their family.
As you can see, doing what seems right and sensible can really backfire if you don’t get legal advice about these kinds of unexpected consequences. In the next few blogs I explain these in more detail so that these mistakes will make sense to you and you can avoid them.
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.
