debtor

Auto Loans and Bankruptcy: How to Avoid Repossession of Your Vehicle

August 21, 2015 by TomScottLaw

Are you behind in your monthly car or truck payments to the point where you are unable to satisfy your bank or financial institution and they’ve placed the loan in default? If you answered “Yes,” there may be a way out of your tough situation.

If you’re having financial troubles and are desperate to avoid repossession of your car or truck, filing for a Chapter 13 bankruptcy may be the solution that can help you keep your vehicle. In this type of situation, you would be consider the “debtor” and the lender would be considered the “creditor.”

How Your Auto Loan Became Upside-Down

Let’s assume the loan is more than 2 ½ years old (at least 910 days before filing date) and the debt is “upside-down,” which means the unpaid balance of the loan is more than the value of the vehicle. Also, we’ll assume the loan is at a high rate of interest, perhaps 18-21%.

An example of this type situation could be that you bought a new $35,000 car three years ago on a six-year loan. The value of the car has since depreciated to only $12,000. However, because of the high interest rate, you still owe a loan principal amount (i.e., balance before monthly interest is added) of $22,000. In this case the “secured” value of the vehicle is only $12K, because that is the current replacement value if the car was repossessed and sold by the creditor.

Thanks to Chapter 13 of the U.S. Bankruptcy Code, you can force the bank to let you keep your car and, in effect, refinance the loan for the current replacement value. This process is known as a “cramdown” and it is not available in a Chapter 7 bankruptcy.

How a Cramdown Helps You Keep Your Vehicle

In a cramdown, the creditor would need to accept only the value of the vehicle as the principal amount for the refinanced loan ($12K in the example described above), plus only about 4.75% interest per month. This would significantly reduce your monthly auto loan payment.

The lending institution would then discharge the additional amount you owed, as well as the interest due based on the original higher rate. The court will determine the actual interest rate you’ll pay, which will be based on the current prime rate when that is determined.

The remaining amount of the loan principal that is not crammed down will be lumped into the pool of your other nonpriority unsecured debts ($10K in the above scenario). You will only pay back pennies on the dollar of the discharged amount, as part of your monthly payment to your bankruptcy trustee, which is distributed to all of your creditors.

At the end of the Chapter 13 plan, which will last 3-5 years, the creditor must provide you with a lien-free title to your car or truck.

Learn More Auto Loan Cramdowns and Bankruptcy

To learn more about how filing for bankruptcy and pursuing a cramdowm can help you avoid having your car or truck repossessed, and the other ways it can you relieve the pressure of your financial situation, submit the form above or contact us to schedule a free consultation.

Disclosure / Requirements for Debt Relief Agency: Section 527 / Section 528, Overview of Chapter 13 Bankruptcy

December 6, 2013 by TomScottLaw

Series: #3 0f 13
In our previous article of our series, “Restrictions on Debt Relief Agencies: Overview of Bankruptcy: Chapter 13, Section 526“, we looked at the requirements of debt relief agents in terms of the services they provide, and to clarify a few of the issues involved. This time, we take a look at details of sections 527 and 528, which describe both what types of information a debt relief agent is required to disclose to the debtor, and when, including clearly written contracts and fees for service.

Chapter 13; Section 527: Disclosures

Section 527 (titled “Disclosures”) appears clear on its face, but is very tricky to follow in certain circumstances. It requires a debt relief agency to provide very specific written notices to the assisted person “not later than 3 business days after the first date on which a debt relief agency first offers to provide any bankruptcy assistance services to an assisted person.”
Generally the first time an attorney will offer to provide assistance will be on the date that the assisted person calls into the law office (a.k.a. “the debt relief agency”). How is the attorney able to comply with the very strict deadlines if the attorney is unable to meet with the person within the following 3 business days? What happens if a meeting is scheduled within the following 3 business days, but the assisted person fails to attend the meeting? Should an attorney send the notice requirements through US Mail, first-class postage prepaid every time any debtor contacts your office for potential assistance? The notice requirements include the Bankruptcy Court Clerk’s notice under Section 342(b)(1) and the specific notice listed in Section 527. If a debt relief agency does not itself complete the petition schedules and statement of financial affairs, the debt relief agency must provide the specified information to the assisted person regarding how to provide all the information required in Section 521*.

Chapter 13; Section 528: Requirements for Debt Relief Agencies

Section 528* has the final list of requirements with which the attorney may or may not be able to comply.
The first such requirement is that the debt relief agency must execute a written contract which clearly and conspicuously explains the services that will be provided and the fees that will be charged; and that the DRA provide a “fully executed” completed contract to the assisted person.
The difficulty with this requirement is that the contract must be fully executed “not later than 5 business days after the first date on which such agency provides any bankruptcy assistance services to an assisted person, but prior to such assisted person’s petition under this title being filed.” The presumption might be that the five business day requirement starts after the debtor has actually agreed to retain the law office, but that is not what the statute says.
The term “any bankruptcy assistance services” could be interpreted to mean advice on the bankruptcy chapters in general and the risk and benefits of filing. The statute requires then that the fees be disclosed oftentimes before the attorney knows what bankruptcy chapter the debtor is filing or complex facts which the debtor may not have disclosed at the time the first assistance was provided. In addition, a strict reading of the statute required the assisted person to execute the contract within 5 business days or else that person may not be a client.
FINALLY, 11 U.S.C. § 528(a)(3) requires the debt relief agency to clearly and conspicuously disclose in any advertisement of bankruptcy services or of the benefits of bankruptcy directed to the general public (whether in general media, seminars or specific mailings, telephonic or electronic messages, or otherwise) that the services or benefits are with respect to bankruptcy relief and clearly and conspicuously use the following statement in such advertisement: “We are a debt relief agency. We help people file for bankruptcy under the Bankruptcy Code.” As the Code fails to describe “advertisement,” my seminar may discuss benefits of filing for bankruptcy, and these seminar materials may fall into the hands of the general public, I have used the requisite language at the beginning of this materials. Have all the other debt relief agents?
Next: Chapters 7 and 13 – Initial Interview and Deciding Which Chapter to Use

* Source: Cornell University Law School Legal Information Institute

Income & Assets: Basics of Bankruptcy – Chapter 13 vs. Chapter 7 – Part 1

October 13, 2013 by TomScottLaw

In this second installment of our series “Basics of Bankruptcy,” we discuss reasons to file a Chapter 13 bankruptcy rather than the less complex Chapter 7 bankruptcy.

WHY FILE CHAPTER 13 ANYWAY?

When considering to file bankruptcy, the first decision that probably should be made is whether you should file either a Chapter 7 or Chapter 13 bankruptcy. There are several reasons why a debtor should (or must) file a Chapter 13 bankruptcy, including (but not necessarily limited to):

Not eligible for a Chapter 7 discharge
Above-Median debtor
Debtor does not want to liquidate assets
Curing a mortgage
Cramming a mortgage
Stripping
Cramming a car
Cramming other personal property
Lowering interest rates on cars (and other collateral)
Liquidating tax debts
Protecting a co-debtor

In this post, we will look at the first three reasons above to choose Chapter 13. The remaining reasons will be covered in parts 2-4 of this series.

Not Eligible for a Chapter 7 Discharge.

Summary: A person cannot file for Chapter 7 bankruptcy within eight year of previously filing for Chapter 7 or Chapter 11, or within six years of filing for Chapter 12 or Chapter 13 protection.

Pursuant to US Code, Title 11, Chapter 7, Subchapter II, Section 727(a)(8)*, you (the debtor) are not eligible for a Chapter 7 discharge if you were granted a discharge in a Chapter 7 or Chapter 11 bankruptcy in a case that began within eight years before the date of the new bankruptcy filing.
Further, Section 727(a)(9) states that the debtor will not be eligible for a Chapter 7 discharge if the debtor was granted a discharge in a Chapter 12 or Chapter 13 bankruptcy filed within six years of the new filing (unless the plan payments paid 100% of allowable claims or paid 70% of such claims and the plan was proposed in good faith and was the debtor’s best effort).
Thus, an individual who received a discharge in a Chapter 7 bankruptcy six years prior would either have to wait two more years or file a Chapter 13 bankruptcy.

Above-Median Debtor

Summary: The court may dismiss an individual consumer debtor’s case filed under Chapter 7 if the debtor’s household income is greater than the median income for a household of the same size.
Filing Chapter 7 would create abuse.
Pursuant to Section 707(b)*, the court may dismiss an individual consumer debtor’s case filed under Chapter 7 if it finds that the granting of relief would be an abuse of the provisions of Chapter 7.

If the debtor’s household income is greater than the median income for a household of the same size, then the court shall presume abuse exists if current monthly income minus the means test standardized expenses leaves at least $182.50/mo (or $10,950.00 for 60 months).
If the net result is greater than $109.58/mo ($6,575.00 for 60 months), but less than the $182.50 figure, then there shall be a presumption of abuse if the net figure times sixty is at least 25% of the debtor’s general unsecured debts. In other words, if the debtor has incurred large amounts of debt, then the debtor may actually be more likely to get a discharge in a Chapter 7.
The presumption of abuse may only be rebutted by demonstrating special circumstances “such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative” [See Section 707(b)(2)(B)(i)].

Debtor does not want to Liquidate Assets

Summary: Debtor may protect those assets that they do not want to have liquidated by filing for Chapter 13 bankruptcy protection rather than Chapter 7.
Under a Chapter 7 bankruptcy, the duty of the trustee is to “collect and reduce to money, the property of the estate for which the trustee serves” [Section 704(a)*].
If, after utilizing all applicable exemptions for your client, there remains an asset that may be properly liquidated and your client desires to retain such assets, your client may protect those assets by filing for Chapter 13 bankruptcy protection.
As stated in Section 1325(a)(4)*, the court shall confirm a plan if the value of property to be distributed under the plan is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under Chapter 7 of this title.
In our next post, we will discuss mortgage curing, cramming, and stripping, methods employed to help reduce debt.

* Source: Cornell University Law School Legal Information Institute