Stronger Medicine for Vehicle Loan through Chapter 13

If you are behind on your car or truck loan and a Chapter 7 case will not help you enough, file a Chapter 13 case instead so that you can keep that vehicle.


I laid out your options with vehicle loans under Chapter 7 in my last blog:

1. Surrender the vehicle and discharge (write off) any “deficiency balance”–the often large amount that outside of bankruptcy you would still owe after the creditor sells off your vehicle for less than the loan balance. The vehicle’s gone but so is all your debt.

2. Keep the vehicle and maintain the regular payments if you’re current. Or if you are behind, pay the full amount of back payments so that you are current within a month or two of filing the bankruptcy case. In both of these situations, you will almost certainly be required to sign a “reaffirmation agreement” renewing your full liability on the vehicle loan.

But what if you absolutely must keep your vehicle, and simply won’t be able to scrape up the money to catch up within a month or two after filing?  Some creditors may be somewhat more flexible—giving more time or even putting missed payments “at the end of the loan.” But these situations are relatively rare, and may not help you enough. Then it’s time to consider the Chapter 13 option with your attorney.

Keep the Vehicle through a Cram-Down

If you meet one straightforward condition, Chapter 13 gives you some tough medicine indeed, way beyond just buying you more time to pay the missed payments. Through the so-called cram-down, you get to re-write the loan—disregarding any missed payments. The balance on the loan is reduced to—crammed down to–the fair market value of the vehicle (assuming that’s less than the loan balance). Sometimes the interest rate can be reduced and often the loan term can be extended. The combined effect of all this is usually to reduce the monthly payment amount, often significantly. The amount of total savings depends on the details of your case, but most of the time you get the vehicle free and clear at the end of the Chapter 13 case after paying significantly less than you would have otherwise.

So what’s the condition you have to meet to be able to do this cram-down?  The vehicle loan must have been entered into more than 910 days (about two and a half years) before filing your Chapter 13 case. If your vehicle loan is not at least that old, no cram down.

Keep the Vehicle without a Cram-Down

You may not qualify for a cram-down because your loan is not old enough, or a cram-down could simply not do any good because your vehicle is worth more than the loan balance. But Chapter 13 can still be helpful, by not being obligated to catch up quickly on the back payments. And in the right circumstances, your monthly vehicle loan payments can be reduced, giving you more money for living expenses or to pay other important creditors.

Surrender the Vehicle

To be clear, although Chapter 13 gives you some big advantages if you are keeping your vehicle, if you don’t need that vehicle you can surrender it just as you can in a Chapter 7 case.

The difference is that instead of the “deficiency balance” being discharged without the creditor receiving anything as in the vast majority of Chapter 7 cases, under Chapter 13 that “deficiency balance” is added to the rest of the pool of general unsecured creditors.

What’s the effect of that? In most cases it doesn’t cost you anything, nothing more than what you would have paid to complete your Chapter 13 case without that “deficiency balance” included. Why? Because in most Chapter 13 plans, you are required to pay a certain amount based on your budget, or a certain minimum amount to the unsecured creditors based on assets you are protecting. So in those cases having an extra chunk of unsecured debt merely shifts how the creditors divide up among themselves the same amount of your money.

But there are some uncommon situations in which adding that “deficiency balance” to your unsecured debts would increase the amount you would have to pay into your Chapter 13 plan. Discuss whether any of those apply to you before deciding whether surrendering your vehicle in a Chapter 13 is in your best interest.

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What Happens to Your “General Unsecured Debts” in Chapter 13?

In most Chapter 7 “straight bankruptcies,” most debts are legally written off, especially debts that are not secured by any collateral and don’t belong to any of the special “priority” categories of debt. But how about in a Chapter 13 payment plan? What determines whether these creditors get paid, and if so how much?

The beauty of Chapter 13 is that it is both flexible and structured. Flexibility allows Chapter 13 to help people with wildly different circumstances. Structure—the set of rules governing Chapter 13—is important because clear rules balancing the rights of debtors and creditors reduces disputes between them. There is only so much money to go around to the creditors, so less fighting means less precious money spent on attorneys and more available for satisfying the creditors. And then getting on with life.

How much the general unsecured debts get paid in any Chapter 13 case is a reflection of these two themes working together. These are illustrated through the following rules, and their impact on the payout to these creditors.

1. Creditors which are legally the same are treated the same. So, all general unsecured creditors get paid the same percent of their debt through a Chapter 13 plan.

2. For any creditor—including a general unsecured one—to share in the distribution of payments, it has to file a proof of claim on time with the bankruptcy court. A general unsecured creditor which fails to file this simple document stating the amount and nature of the debt will receive nothing through the plan, and the debt will be discharged at the end of the case if it completed successfully.

3. The failure of one or more creditors to file its proof of claim usually, but not always, means that there will be more money available for the other creditors. Two exceptions: a “0% plan,” in which the general unsecured creditors are receiving nothing; or a “100% plan,” in which these creditors are being paid the entire amount of their debts.

4. “0% plans” are those in which all of the money paid by the debtor through the Chapter 13 trustee is earmarked to pay secured creditors, “priority” creditors (such as taxes and child/spousal support), and/or trustee and attorney fees. Some bankruptcy courts frown on “0% plans,” especially in certain situations, such as when there does not seem to be good reason to be in a Chapter 13 case instead of a usually much less expensive Chapter 7.

5. “100% plans” are those in which all of the general unsecured creditors’ debts are paid in full through the trustee. These happen primarily for two reasons. The debtors:

a. are required to make payments based on their budget, which provides enough money over the course of the case to pay off their debts in full; or

b. own more non-exempt assets which they are protecting through their Chapter 13 case than they have debts, which requires them to pay off their debts in full.

6. A major consideration for how much the general unsecured creditors receive is how long the debtors are required to pay into their Chapter 13 case. Generally, if debtors’ pre-filing income is less than the published “median income” for their applicable state and family size, then they pay for 3 years into their plan. If their income is more than that amount, they must pay for 5 years instead. The length of the case obviously affects how much is paid in, and so usually affects how much the general unsecured creditors receive.

7. Payments to general unsecured creditors can be affected by changes which occur during the case—income increases or decreases adjusting the plan payment amount, unexpected tax refunds and employee bonuses paid over to the trustee, and even additional allowed debtors’ attorney fees reducing what is available to the creditors.

8. Once the general unsecured creditors receive whatever the Chapter 13 plan provides for them (and the rest of the plan requirements are met), the remaining balances are legally discharged. The result is that all general unsecured creditors receive the same pro rata share, and that’s the end of the story for them. The exception is the relatively rare creditor which succeeds during the case in convincing the court that its debt should not be discharged at all. This only applies to situations involving a debtor’s fraud or other similar significant wrongdoing, and only if the creditor raises the issue by a very strict deadline just a few months into the case. This creditor still shares in the distribution of payments to all the general unsecured creditors. But at the end of the case, there is no discharge of its remaining debt, which the creditor can then pursue against the debtor.

Clearly, a lot of considerations go into how much the general unsecured creditors will be paid in any Chapter 13 case. There are many interacting rules to be applied to the unique financial and human factors of each case.

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Ten Terrific Tools for Saving Your Home through Chapter 13–Part 2

Here are the other 5 powerful home-saving tools. Chapter 13 isn’t for everyone. But these tools, especially in combination, can often give you what you need to tackle and defeat your mortgage and other home-debt problems.

In my last blog I gave you the first five of ten distinct and significant ways that Chapter 13 can save your home. I’ll summarize those here briefly, and then give you the other five in more detail.

Chapter 13 enables you:

1…. to stretch out the amount of time you are given to catch up on missed mortgage payments, giving you as long as 5 years to do so.

2. … to slash your other debt obligations so that you can afford your mortgage payments.

3…. to permanently prevent income tax liens, child and spousal support liens, and judgment liens from attaching to your home.

4…. to have the time you need to pay debts that cannot be discharged (legally written off) in bankruptcy, all the while being protected from those creditors messing with your home.

5…. to discharge debts owed to creditors which could have otherwise put liens on your home.

6…. to get out of paying all or some of your 2nd or 3rd mortgage ever again—IF the value of your home is no more than the balance of your 1st mortgage. This “stripping of junior mortgages” under Chapter 13 continues being used more and more as home property values continue to head downward in so many parts of the country.

7…. to take extra time to pay back property taxes, while protecting the home from tax and mortgage foreclosure. This is particularly important if you have a mortgage on your home. That’s because virtually all mortgages require you to keep current on the property taxes. So not only does Chapter 13 protect you from the property tax authority itself, more importantly it prevents your mortgage lender from using your property tax arrearage as a justification for foreclosing on your home.

8…. to favor many home-related debts—such as property taxes, support liens, utility and construction liens– that you probably want to pay. You generally can’t get rid of these special kinds of liens on your home, but Chapter 13 allows—indeed requires—you to pay them in full before you pay anything to your other creditors. So in many situations your regular creditors’ loss is your home creditors’ gain, and thus your gain, too.

9…. to get rid of judgment liens in many situations, so that they no longer attach to your home. Although this can also be done in Chapter 7, it’s often all the more helpful in a Chapter 13 when used in combination with these other tools.

10…. to sell your house without the pressure of a foreclosure sale, either just a short time after filing the Chapter 13 case, or sometimes even three, four years later. You may need to or be willing to sell and downsize, but not until a kid finishes high school or you reach an anticipated retirement date. Chapter 13 may allow you to delay selling and curing part of your mortgage arrearage until then, allowing you to preserve your family home in the meantime.

 

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Special Protection for Your Co-Signers Under Chapter 13

Chapter 7 protects you and your assets with the automatic stay. Chapter 13 goes a big step further by also protecting your co-signers and their assets.

The first three chapters of the Bankruptcy Code—chapters 1, 3, and 5—include code sections that tend to apply to all of the bankruptcy options. In contrast, the code sections within chapters 7 and 13 apply only to cases filed under those chapters. Because the automatic stay—your protection from collection by creditors that kicks in as soon as your bankruptcy case is filed—applies to all bankruptcy cases, it is found in one of the earlier chapters of the code. It’s in chapter 3, section 362.

But the very first section of chapter 13—section 1301—also deals with the automatic stay, and adds another layer of protection that only applies to cases filed under Chapter 13.

The core of section 1301 states that once a Chapter 13 case is filed, “a creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any other individual that is liable on such debt with the debtor.”

This means that a creditor on a consumer debt, who is already stopped by the general automatic stay provisions of section 362 from doing anything to collect a debt directly from the debtor, is also stopped from collecting on the same debt from anybody else who is co-signed or otherwise also obligated to pay that debt.

If you think about it, that’s rather powerful. You are given the ability to protect somebody—often somebody your really care about—who is not filing bankruptcy and so is not even directly in front of the court. The person being protected may not even know that you are protecting them from the creditor.

This “co-debtor” protection does have some important conditions and limits:

1. It applies only to “consumer debts” (those “incurred by an individual primarily for a personal, family, or household purpose”).

2. For purposes of this code section, income tax debts are not considered “consumer debts.” So spouses on jointly filed tax returns or business associates with whom you share a tax liability are NOT protected.

3. This protection does not extend to those who “became liable on… such debt in the ordinary course of such individual’s business.”

4. Creditors can ask for and get permission to pursue the otherwise protected co-debtor to the extent that:

(a)  the co-debtor received the benefit of the loan or whatever “consideration” was provided by the creditor (instead of the person filing the bankruptcy), or

(b)  the Chapter 13 plan “proposes not to pay such claim.”

5. This co-debtor stay evaporates as soon as the Chapter 13 case is completed, or if it’s dismissed (such as for failure to make the plan payments), or converted into a Chapter 7 case.

Choosing between Chapter 7 and 13 often involves weighing a series of considerations. If you want to insulate a co-signer or someone liable on a debt with you from any adverse consequences of your bankruptcy case, that is one consideration that will likely push you in the Chapter 13 direction because of the co-debtor stay.

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Why Chapter 13 is So Nifty

Chapter 7 is short and sweet and to the point. It often gets what you need—a discharge (a legal write-off) of all or almost all of your debts. But in SO many situations, Chapter 13 gives you so much more.

 In my last blog I showed a simple Chapter 13 case works. In my example, two debts that cannot be discharged in a Chapter 7 case—a recent IRS income tax debt and some back child support—were conveniently paid over time by the debtor through a Chapter 13 case, while that debtor was protected from those two particularly aggressive creditors. Chapter 13 buys time and protection that Chapter 7 simply isn’t designed to provide.

Here are just a few of the other extras that come with Chapter 13.

1. You can keep your possessions that are not “exempt,” instead of allowing a Chapter 7 trustee to take them from you. Retain much more control over the process compared to trying to negotiate payment terms with a Chapter 7 trustee. With Chapter 13 you have 3 to 5 years to pay for the right to keep any such possessions, instead of only the few months that the Chapter 7 trustees generally allow.

2. If you are behind on your first mortgage, you have 3 to 5 years to catch up on this arrearage, instead of the few months that a mortgage holder generally allows.

3. You can get a second or third mortgage off your home’s title, and avoid paying all or most of such mortgages, if the value of your home has slid to less than the amount of the first mortgage. You can’t do this in a Chapter 7 case.

4. If you bought and financed your vehicle more than two and a half years ago, then your vehicle payments, interest rate, and even the total amount to be paid on the loan can often be reduced through Chapter 13. This can enable you to keep a vehicle you could otherwise no longer afford. In Chapter 7 by contrast, you are usually stuck with the contractual payment terms.

5. In the same situation—a 2 and a half-year or older vehicle loan—if you are behind on the vehicle loan payments, in a Chapter 13 you don’t have to catch up those back payments. But in a Chapter 7 you almost always must do so.

6. If you owe an ex-spouse non-support obligations, you can discharge those in a Chapter 13 but not in a Chapter 7. These usually include obligations in a divorce decree to pay off a joint marital debt or to pay the ex-spouse for property-equalizing debt.

7. If you have student loans, with Chapter 13 you may be able to delay paying them for three years or more, which can be especially valuable if you have some other debts that are critically important to pay (such as back child/spousal support or taxes). And if you have a worsening medical condition, this delay may buy time until you qualify for a “hardship discharge” of your student loans.

Straight Chapter 7 bankruptcy if often exactly what you need to get a fresh financial start. But one reason you need to talk with an experienced bankruptcy attorney is that sometimes Chapter 13 can give you a huge unexpected advantage, or a series of lesser ones, which can swing your decision in that direction. (There are others beyond the main one listed here.) My job is to give you honest, unbiased, and understandable advice about these two options—or any other applicable ones—so that you can make the very best choice. Give me a call.

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A Simple Chapter 13 Case

If you have debts that can’t be written off (“discharged”) in a Chapter 7 “straight bankruptcy,” such as back child support or recent income taxes, Chapter 13 can be a much better alternative.

 In my last blog I wrote about the discharge of debts under Chapter 7. I ended by saying that if you have debts that can’t be discharged in Chapter 7, “Chapter 13 is often a decent way to keep those under control.” Here’s how.

The best way to show this is with an example. So let’s say you owe $6,000 in IRS debt for 2009 and 2010, $4,000 in back child support, $15,000 in credit cards, and $3,000 in medical bills. You had lost your job in 2009, tried to run a business during 2009 and 2010 that made a little money but not enough to pay its taxes and to make all your support payments. Then you got a new job a few months ago that pays less than the one you’d lost in 2009, but at least you now make enough to pay your ongoing taxes and support, and your living expenses. However, you’re left with only about $400 left over to pay ALL of your debts. That would not be enough to pay the minimums on just the credit cards, much less anything on the rest of the debts.

A Chapter 7 case would discharge the $12,000 in credit cards and the $3,000 in medical bills, but would leave you with $6,000 owed to the IRS and $4,000 in back support—so you’d still be $10,000 in debt. Although the IRS would likely be willing to accept payments of $400 per month, the problem is that the state support enforcement agency is about to garnish your wages for the back support, trashing any possible arrangement with the IRS. Also, you’re still in the probationary period at your new job and the last thing you want is for the payroll office to get a garnishment order for back child support. Filing Chapter 7 would not stop that kind of garnishment.

But Chapter 13 would. So you file a Chapter 13 case, keep up your ongoing regular child support payments, and put together a plan to pay to the Chapter 13 trustee $400 per month for 36 months. During that period of time neither the IRS, nor the support agency, nor your ex-spouse—nor any of your other creditors—would be able to take any action against you or any of your assets. That is they couldn’t as long as you consistently made your $400 payments, and kept current on your ongoing tax and support obligations. Over those three years you’d pay to the trustee $14,400 ($400 X 36 months), which would pay all the $4,000 of back support and the $6,000 in taxes—usually without any additional interest or penalties from the date of the filing of your Chapter 13 case. The Chapter 13 trustee would also get paid, usually about 5-to-10% of what you’re paying into the plan, as would any attorney fees you did not pay to your attorney at the beginning of your case.  If there is still any money left over (not likely very much in this example), that gets divided pro rata among the credit card and medical debts. After the 36 months of payments, any remaining balances on those debts are discharged, leaving you owing nothing to any of your creditors, and current on your taxes and support payments.

So that’s how a simple Chapter 13 case works.

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Don’t Give Up Your Vehicle Before Knowing Your Options

Why? Because you may be able to keep a vehicle you thought you couldn’t afford to pay for. Chapter 13 allows you to pay smaller monthly vehicle loan payments, under certain conditions. You may be able to pay off the debt and own the vehicle free and clear for a lot less than the loan balance.

This blog is one of a series on the mistakes people make before seeing an attorney about filing bankruptcy. These decisions often seem sensible from a certain angle. But almost always they are made without knowing all the options.

If you need a vehicle but just can’t afford the monthly payments, you probably figure that you are going to lose the vehicle and don’t have any choice about it. You know the contract requires you to make the payments or you lose the vehicle. You may have been trying hard for months to keep or get the payments current, putting up with late fees and constant notices or phone calls from the creditor threatening repossession. You would have already let the vehicle go except you’ve got to have a vehicle for work and/or other family obligations, and have no way to replace it. You feel stuck, with no good options.

On top of everything else, you might have heard that a bankruptcy can’t help much, at least for hanging onto the vehicle—that you still have to either make the payments, and catch up if you’re behind, or else lose the vehicle.

That’s true, in a “straight bankruptcy,” a Chapter 7.

But it’s not necessarily true in a Chapter 13 case. If you meet two conditions, you can likely do a “cramdown” on the vehicle loan: lower your payments and likely pay less overall for the vehicle. You may well also be able to lower your interest rate.

The two conditions to be able to do a “cramdown”:

1) Your vehicle loan was entered into more than 910 days before your Chapter 13 case is filed (that’s just about two and a half years before); and

2) At the time your case is filed, the value of your vehicle is less than the balance on your loan.

If your vehicle loan meets these two conditions, we can essentially re-write your loan.  We can reduce the total amount you must pay down to the value of the vehicle, “cramming it down” to that lower amount. That’s called the “secured portion” of the debt. We then calculate a new monthly payment—the amount needed to pay off that smaller balance, often at a lower interest rate, and often on a longer remaining term, resulting often in a radically reduced monthly payment.

What happens to the “unsecured portion”—the part of the debt beyond the value of the vehicle? It gets lumped in with the rest of your unsecured debts, usually not requiring you to pay anything more to all your unsecured creditors regardless of your vehicle loan.

And what if you’re behind on your vehicle loan at the time you file your Chapter 13 case—when do you have to pay that arrearage? You don’t. It’s just part of the re-written, new “crammed down” obligation.

So you can see that you might NOT want to surrender a vehicle or allow it to be repossessed if instead you could keep that vehicle while immediately having it cost you much less to do so. Often, having a reliable vehicle is essential to achieving a successful re-start of your financial life.  Before you lose that essential part of your financial plan, come see me to find out your options.

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Keep Your Vehicle In Spite of Paying Less Every Month

What if you really need to hang on to your car or truck, but can’t afford the monthly payments? Or if you’ve fallen behind and just can’t catch up?

“Straight bankruptcy”—Chapter 7—won’t help you here. Most of the time, you have to either quickly catch up or you lose the vehicle. And very few vehicle lenders will negotiate about the payment amount in a Chapter 7 case. With rare exceptions, it’s take it or leave it.

BUT, if you meet two conditions, you may have the option to KEEP your car or truck, NOT make up any missed payments, all while LOWER your monthly payments. This even REDUCES the total amount you must pay before the vehicle is yours free and clear.

The two conditions you must meet:

1. You got your vehicle loan at least two and a half years ago.

2. You owe more on the vehicle than it’s worth.

If so, through a Chapter 13 vehicle loan “cram-down,” we can re-write the terms of that vehicle loan. First, we can reduce the balance down to the fair market value of the vehicle. This can sometimes shave thousands of dollars off the balance. That in itself would reduce the monthly payment. But then also, depending on how many months of payments remained on the vehicle loan compared to the projected length of your Chapter 13 Plan, we may be able to stretch out the term of the loan. If so, that would lower the monthly payment even further.

An example will make this clearer. Say you were 4 years into a 6-year vehicle loan (meeting the 2-and-a-half-year condition), with a balance of $11,000 but the vehicle worth only $7,000 (meeting the owe-more-than-it’s-worth condition). Further, say the regular monthly payments were $498, with 24 months of them to go. Under a cram-down rewriting of the loan under a 3-year Chapter 13 Plan, the balance to be repaid would reduced to $7,000, and the term stretched to the 36 months of the Chapter 13 case. So now the monthly payment would be reduced to about $220, less than half the $498 regular monthly payment. Even though in this example it’s taking three years instead of two to pay it off, you’re saving close to $4,000. Plus we’re reducing the monthly payment to something much more affordable.

The difference in the balance on your vehicle loan contract and the reduced amount you would pay through your Chapter 13 Plan (the $4,000 or so in the example) would be treated as unsecured debt. It would be lumped in with the rest of your unsecured debts, and would be paid through your Plan at whatever percentage all your unsecured creditors were being paid. This can be a low percentage and sometimes even nothing. It would usually be determined by how much your budget says you can afford after living expenses.

So if your vehicle loan meets the two conditions above, you will likely be able to reduce both your monthly payment and the total amount needed to pay off your vehicle. All without having to cure any previously missed payments, and without risk of repossession as long as you fulfill the terms of your Chapter 13 Plan.

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The Chapter 13 Trustee — A Trustee of Many Hats

Your Chapter 13 trustee plays a huge role in the success or failure of your Chapter 13 case. Except he or she actually has at least a half-dozen different roles. Some of which are contradictory. Let me explain.

1) The trustee serves as the gatekeeper of your case, forcing us to play by the rules before allowing your Chapter 13 Plan to be approved by the bankruptcy judge.

2) As part of that role, the trustee’s job is to make you pay as much as possible to your creditors. Because each individual creditor often doesn’t have all that much to lose or gain compared to the cost of each of them hiring an attorney, the trustee is the creditors’ advocate in your case.

3) The trustee is your disbursal agent, taking in your money and paying it out exactly as your court-approved Plan specifies.

4) During the course of your case, the trustee is your Plan overseer, monitoring your Plan payments and your other obligations, and complaining to the court if you’re not in compliance.

5) The trustee is also your income monitor throughout the course of your case, mostly through annual tax returns that you must file on time and provide to his or her office, and sometimes through additional documentation. If your income rises significantly in a way not provided for in your Plan, the trustee can propose an “Amended Plan” to account for the increase.

6) Through all of this, believe it or not, the trustee is also legally required to be your helper through the Chapter 13 process. The Bankruptcy Code specifically says that the “trustee shall—advise, other than on legal matters, and assist the debtor under the plan.” Different trustees do this quite differently, taking on this helper role more or less seriously. At different points in your case, my staff and I may well suggest that you interact with the trustee’s office in certain specific ways. Always remember that they have a bunch of other roles besides helping you. But also note that on a personal level, the trustee genuinely wants you to have a successful Chapter 13 case, and can sometimes be a good resource to help get you there.

Here’s a good final word on this, from the website of one of the Chapter 13 trustees:

“The role of the chapter 13 trustee is unique. The trustee does not take into his or her possession or control property of the estate. The trustee does not operate the debtor’s business. Rather, the trustee receives payments from the debtor, and disburses those payments to the debtor’s creditors pursuant to the debtor’s plan. The chapter 13 trustee does, however, counsel with and advise the chapter 13 debtor on all matters relating to the plan other than legal matters. In short, the chapter 13 trustee is an amalgam of social worker and disbursing agent.”

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