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Your Vehicle Loan Options in a Chapter 13 “Adjustment of Debts” Case

Chapter 13 helps much more than a Chapter 7 case IF you’re behind on payments or sometimes if you owe more than your vehicle is worth.

 

Chapter 7 Reminder:

Let’s start by summarizing your options for your vehicle loan under Chapter 7 as laid out in my last blog:

1. Retain the vehicle: Just maintain the regular payments if you’re current. Or if you are behind, pay all new monthly payments right when they are due, AND catch up on ALL back payments so that you are current on the account within a month or two of filing the bankruptcy case. Either way, you will very likely be required to sign a “reaffirmation agreement” requiring you to still pay the vehicle loan under its original terms, including eventually paying the entire balance. You get to keep the vehicle but with all of its debt.

2. Surrender the vehicle: You get the benefit of discharging (forever writing off) any “deficiency balance”–the often large amount that you would normally 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. You let go of the vehicle but lose its debt.

Limitations of Chapter 7

But what if you need and want to keep your vehicle, but are behind and just have no way of pulling together the money to bring the account current within a month or two after filing the Chapter 7 case?  Or what if you really can’t afford the monthly payments but, again, need the vehicle? Or if you owe on it a lot more than it is worth, and so you are reluctant to “reaffirm” and be stuck with paying off that balance?

Some vehicle creditors may be somewhat more flexible—though rarely—by giving you more time to catch up on late payments, or by wrapping those payments into the loan balance. Even more rarely, a vehicle creditor may reduce the balance somewhat to avoid you surrendering the vehicle so that the creditor would get even less.

But these situations are indeed quite rare, and may not even help you enough. Chapter 13, however, can give you much stronger medicine.

“Cram Down” is a Huge Advantage If You Qualify

Chapter 13 gives you the ability, essentially, to unilaterally rewrite your vehicle loan, often with much, much better payment terms. The process has the informal name, “cram down,” because the secured balance of the loan is “crammed down” to the market value of the vehicle.

To qualify to do a “cram down” in a Chapter 13 case you must have started the vehicle loan more than 910 days (about two and a half years) before filing your case. Sounds arbitrary, but if your loan is at least that old (and, as usual, you owe more than the vehicle is worth), then you can do a “cram down”; if the loan is newer than that, you can’t.

Under “cram down” the secured balance on the loan—the amount you have to pay for sure—is reduced to the vehicle’s fair market value. Sometimes the interest rate can also be reduced, and often the loan’s length can be extended. The combined effect of these changes is usually to reduce the monthly payment amount, often greatly. On top of all this, you don’t have to pay any back payments because they are wrapped into the rewritten loan.  

The part of the loan balance beyond the vehicle’s fair market value—the unsecured portion—is paid the same percentage as the rest of your “general unsecured” debts (credit cards, medical bills, etc.). If you are like most people, adding that unsecured portion of the loan to their pool of “general unsecured” debts does not add anything to what they have to pay during your Chapter 13 case. That’s because those creditors usually just get paid as a pool whatever your budget says you can afford to pay during the term of your court-approved payment plan. So adding the unsecured portion of your vehicle loan to that pool of debts tends simply to reduce what each creditor gets out of the same set amount of money you pay to that pool of debts.

With “cram down” usually you pay significantly less than you would have otherwise, and then receive your vehicle free and clear at the end of the Chapter 13 case.

Chapter 13 Advantage Even without Qualifying for “Cram Down”

If your vehicle loan is not yet 910 days old so that you don’t qualify for “cram down,” or if your vehicle is worth more than the loan balance so that “cram down” would just not do you any good, Chapter 13 can still be helpful if you were behind on your loan payments. Why? Because instead of having to bring the account current in a month or two as you would under Chapter 7, you would have many months to do so.

Surrender the Vehicle

Although Chapter 13 often solves many of the problems that Chapter 7 would leave you with for keeping your vehicle, if you just don’t need it, or still can’t afford even the reduced payments, you can surrender it.

The difference from Chapter 7 is as follows. Remember from the beginning of this blog post that when you surrender a vehicle under Chapter 7 the “deficiency balance” is legally written off, without the creditor almost always receiving nothing. Under Chapter 13, in contrast, that “deficiency balance” is added to the rest of the pool of your “general unsecured” debts. But also remember from the discussion above (about the unsecured portion of a vehicle loan in a “cram down”), that in most cases that would not cost you anything more than if you didn’t surrender your vehicle. That’s for the same reason discussed above: because you usually pay the pool of your “general unsecured” debts the same total amount no matter how much debt is in that pool. The other creditors would just get less to make up for whatever money the vehicle loan creditor would get.

 

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What Happens to Most of Your Debts under Chapter 13 “Adjustment of Debts”?

In most Chapter 7 “straight bankruptcy” cases most debts are written off, so what happens to them in a Chapter 13 “adjustment of debts”?

 

The Advantages and Disadvantages of Chapter 13

Chapter 13 comes with many, many tools not available under Chapter 7. Many of these tools are helpful particularly if you have special debts or issues not deal with well in a Chapter 7 case—if you are behind on your mortgage, vehicle loan, or child support, if you owe income or property taxes, or if you have non-exempt (unprotected) assets you want to keep.

But these advantages come with what can be a significant disadvantage: you would usually have to pay something on your “general unsecured” debts—your run-of-the-mill ones without any collateral. That’s instead of paying nothing, as you likely would in a Chapter 7 case.

In some rare Chapter 13 cases you have to pay your “general unsecured” creditors in full—a so-called 100% plan. But on the other extreme, you may not have to pay those creditors anything—a 0% plan. Most of the time you have to pay them something, but often very little—only a few cents on the dollar.

How Much Do You Need to Pay Your “General Unsecured” Debts?

You must pay these debts whatever money is left over and available based on your budget after paying certain secured debts (home mortgage and vehicle arrearage, for example) and “priority” debts (recent income taxes, for example). So how much you have to pay on the debts that in a Chapter 7 case would be just discharged (written off without any payment) depends on your income, allowed expenses, and other debts, and sometimes also on the value of assets that you are trying to protect.

Here is a list of considerations in greater detail about how this works under Chapter 13.

1. Debts that are legally the same are treated the same. So, in a Chapter 13 plan all “general unsecured” debts are paid the same percent of the debt as are other “general unsecured” debts.

2. For any creditor to get paid anything out of what you are paying into a Chapter 13 plan, it has to file a “proof of claim”—stating the amount and nature of the debt—with the bankruptcy court, and do so by the stated deadline. If a creditor with a “general unsecured” debt does not file a “proof of claim” it will receive nothing through the plan. The debt will then be discharged at the end of the completed case.

3. If, as is often the case, other creditors do not file proofs of claim that usually, but not always, means more money available for the other creditors.

4. “0% plans” are those in which all of the money paid by the debtor into the plan is earmarked to pay secured and “priority” debts, plus trustee and attorney fees, leaving nothing for the “general unsecured” ones. Some bankruptcy courts frown on “0% plans,” either in general or especially when there does not seem to be good reason to be in a Chapter 13 case instead of a Chapter 7 one.

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

a. have enough disposable income (income minus allowed expenses) 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, requiring them to pay off their debts in full in order to keep those assets.

6. How much “general unsecured” debts are paid depends in part on 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.

7. Payments on “general unsecured” debts can also be affected by changes that happen during the case, such as income increases or decreases affecting the monthly plan payment amount, and unexpected tax refunds and employee bonuses paid into the plan.

8. Once the “general unsecured” debts are paid whatever the Chapter 13 plan provides for them (and the rest of the plan requirements are met), the remaining balances of those debts are discharged.

 

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What Happens to Most of Your Debts in Chapter 7 “Straight Bankruptcy”?

Your debts that are not secured by collateral and are not “priority” debts are discharged (written off) and paid nothing. Mostly.

 

In my blog post last week I introduced the three main categories of debts: “secured,” “priority,” and “general unsecured.”

Secured and priority debts tend to be the ones with issues worth talking about. Secured debts often have liens against your important property and possessions—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 law. They include child and spousal support, certain taxes, and such.

It’s worth paying a lot of attention to secured and priority debts because they raise questions that are likely important to you. Such as, how does bankruptcy help you keep your car if you are behind on payments? If you file a Chapter 7 case do you have to keep paying on your furniture loan to keep your bedroom furniture, and if so how much? How can filing bankruptcy enable you to get and/or keep current on your child support? Will you be able to write off any of your overdue income taxes?

We will look into these questions and more about secured and priority debts in upcoming blog posts. And yet, you probably have more of the third category of debts, “general unsecured” ones, than either secured or priority debts. So first let’s look at what happens to your general unsecured debts, covering today what happens if you file a Chapter 7, and then in my next blog post what happens under Chapter 13.

General Unsecured Debts  

First a reminder from last week: general unsecured debts are those that don’t belong in the other two categories. They are unsecured in that they have no lien on any of your property or possessions. They are “general” simply in that they are not one of special “priority” debts that the law has selected for special favored treatment.

General unsecured debts include all sorts of obligations. Besides the most common ones like (most) credit cards and medical bills, they include personal loans without collateral, checking accounts with a negative balance, bounced checks, most payday loans, claims against you for property damage and personal injury, for breaches of contract—again, just about any way that you can owe money without collateral.

What Happens to Most General Unsecured Debts in Most Chapter 7 Cases

All these kinds of general unsecured debts are usually just legally, permanently written off—“discharged”—in a Chapter 7 bankruptcy case. That means that once they are discharged—usually about 3 months after your case is filed—the creditors can take absolutely no steps to collect those debts.

The only way those debts are 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. Very few general unsecured debts are challenged and so they get discharged. In the rare case that the discharge of one of your debts is challenged, you may have to pay some or all of that particular debt. That depends on whether the creditor is able to establish that the facts fit within some quite narrow grounds. That would 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.

2) Asset Distribution

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, but often don’t 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. The unsecured creditors get a pro rata share of the pool of whatever, if anything is left over.

Conclusion

In most Chapter 7 cases your general unsecured debts will all be discharged and most of the time will receive nothing from you. Rarely, a creditor may challenge the discharge of its debt. And if, again rarely, you have an “asset case,” the trustee may pay a part or—extremely rarely—all of the general unsecured debts, but only after paying all priority debts and his or her fees and costs.  

 

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