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THE
NEW AND IMPROVED
UTAH BANKRUPTCY LAW HANDBOOK
CAR
LOANS & BANKRUPTCY
ADVANTAGES
CHAPTER 7 OPTIONS
DO YOU
WANT TO KEEP YOUR CAR?
If you are in the process of purchasing a vehicle and want to retain
possession of your vehicle, you can still file a Chapter 7
bankruptcy, eliminate as much of your other debt as possible, and
retain possession of your vehicle. You cannot eliminate the debt
against your vehicle, however, as Creditors who finance automobiles
generally retain title to the vehicle until it is paid in full.
You have three options if you desire to retain any vehicle you are
in the process of paying for:
1.
STAY CURRENT: As long as you are current in payments on
your vehicle, the Creditor providing the financing for your vehicle
cannot repossess it. Therefore, you can file bankruptcy and simply
continue to make the monthly installments against your vehicle on terms
(including monthly payment and interest rate) originally agreed to with
the Creditor.
2.
REAFFIRM: You can execute a new agreement with the car
Creditor under the terms of which you agree in writing to continue to
make payments to the Creditor. Depending on the Creditor, the
Creditor may agree to reduce the balance owing on your car and/or the
interest rate to induce you to execute a reaffirmation agreement.
3.
REDEEM:
You have the absolute right in bankruptcy to purchase your vehicle for
fair market value from the Creditor who is financing your vehicle.
For example, if the fair market value of your vehicle is only $3,000.00
and you owe $6,000.00 on it, you can acquire it from the creditor for
$3,000.00 if you can come up with the cash to purchase it. There
is no bankruptcy mechanism in Chapter 7 to force the car creditor to
finance the redemption. You may be able to borrow funds to redeem
a vehicle and certain lending institutions market to provide financing
to individuals in bankruptcy who desire to redeem their vehicles.
The interest rates tend to be high however (about 21%).
PREVENTING REPOSSESSION - If you are behind in payments on your
vehicle loan, a Chapter 7 bankruptcy filing temporarily protects your
vehicle from repossession. From the instant you file your Chapter 7 case
with the bankruptcy court, a Creditor cannot take action of any kind to
repossess your vehicle without Court permission; and if they have
already repossessed your vehicle, they are prohibited from selling it
without further Court order. If you want to retain your vehicle, you
generally must bring your payments current. However, your bankruptcy
attorney may be able to negotiate with the Creditor (depending on the
Creditor and other factors) to defer one or two payments on your vehicle
to the end of the loan in exchange for your agreement to execute a
reaffirmation agreement.
GETTING
RID OF YOUR VEHICLE & THE DEBT AGAINST IT - If you owe more money
on your vehicle than it is worth, you can rid yourself of the vehicle
and the debt against it through Chapter 7 proceedings by surrendering
the vehicle to the Creditor. Also, if you find that the monthly payments
on your vehicle loan are really more than you can afford, you can
eliminate this obligation in a Chapter 7 case, and surrender the vehicle
to your Creditor. If you desire to surrender your vehicle back to
the Creditor, your must do so within 45 days of the initial bankruptcy
hearing which will be conducted 30-40 days after your case is initiated.
A Creditor can force an earlier surrender of the vehicle by
obtaining Court permission to repossess it.
PRESERVING A
PAID-FOR VEHICLE IN CHAPTER 7 - If have a significant amount of equity in
your vehicle, or if your vehicle is fully paid for, you may still file a Chapter
7 and retain value of $2,500.00 per individual (or $5,000.00 per couple).
If your equity exceeds these values, you can file a Chapter 13 case, restructure
your debt, and retain your vehicle.
AUTOMOBILE LEASES - If you are leasing a vehicle at the time you
initiate a bankruptcy case, you have the option of continuing to make
payments under the lease, or surrendering the leased vehicle back to the
Creditor. If you choose to surrender the vehicle, all penalties
related to the early return of the vehicle and any other obligation
pertaining to the lease, will be eliminated in your bankruptcy.
CHAPTER 13 ADVANTAGES
LIEN
STRIPPING
- Chapter 13 offers powerful options for dealing with
secured debts based on the concept of lien stripping. The most common
application of lien stripping is the reduction of car loan liens to the present
value of the car. In a Chapter 13 case, Debtors must fully repay secured loans
only to the extent of the value of the underlying collateral. In many, if not
most cases, the actual value of a Debtor's car will be less than the debt
against it; and under the Bankruptcy Code, the Creditor's lien can be stripped
down to the actual value of the car.
For
example, if a Debtor owes $12,000.00 against their vehicle, yet the actual value
of the vehicle is only $8,000.00, in a Chapter 13 case, the car loan lien is
stripped down to $8,000.00 and the Debtor must fully repay only $8,000.00
against their vehicle over the life of the Chapter 13 Plan (three to five
years). In this example, the debt against the vehicle has a secured and an
unsecured portion. The debt is secured to the extent of the value of the vehicle
($8,000.00); and unsecured as to the $4,000.00 balance. In a Chapter 13 case,
the Debtor would generally re-pay only a fraction of the $4,000.00 unsecured
portion of the debt.
REDUCE
INTEREST RATES - Another significant advantage of dealing with vehicle
loans in Chapter 13 is that the interest rate may be reduced (depending on the
contract interest rate at the time the vehicle was purchased). A Chapter 13
Debtor must pay interest on the secured portion of the debt only. In the above
example, if the original interest rate on the vehicle loan was reasonable (9-10%
or less), the Debtor would opt to pay interest on the $8,000.00 at the contract
rate under the terms of their Chapter 13 Plan. If the contract interest rate is
excessively high, however, it could be reduced to a reasonable rate under the
terms of a Chapter 13 Plan. Caveat: If the value of the vehicle
equals or exceeds the debt against it, interest may not be reduced and the
Debtor must pay the contract rate.
CONSIDER THIS CHAPTER 13 ADVANTAGE -
In a Chapter 13 case, almost all of a Debtor's debts (with the exception of
long-term liabilities such as home mortgages and certain other debts), are
consolidated and paid through the Chapter 13 Plan in one single monthly payment.
This single monthly payment includes any secured vehicle loans, reduced as
explained in the above example. Very often, the amount of the SINGLE MONTHLY
PAYMENT paid by a Debtor in a Chapter 13 case, is
LESS THAN THE MONTHLY
INSTALLMENT THE DEBTOR WAS PAYING ON THEIR VEHICLE ALONE BEFORE THEY FILED
BANKRUPTCY.
For
example, a Debtor's monthly payment on their 1996 Toyota Camry $365.00 per
month; yet under the terms of their Chapter 13 Plan, the Debtors make a single
monthly payment of only $300.00 to pay off all of their debts, including the
debt against their Camry. The Debtors in this example have only $300.00 left
each month after paying their reasonable living expenses; and therefore have
only $300.00 per month to apply toward repaying their Creditors.
VEHICLE LEASES IN
CHAPTER 13 CASES -
Obligations for leased vehicles cannot be consolidated in a Chapter 13 Plan
and must be paid outside of any Chapter 13 Plan you formulate with your
bankruptcy attorney. You have the option in Chapter 13 of assuming the
vehicle lease and continuing to pay for it, or rejecting the lease. If
you reject a vehicle lease in a Chapter 13 case, the creditor will sell the
leased vehicle, apply the sale proceeds to all obligations pertaining to the
lease, and file a claim in your bankruptcy case for the lease deficiency.
Such lease deficiencies are treated as non-priority unsecured claims
and would be paid the same percentage as all of your other unsecured
creditors in this category (usually 15 to 20 cents on the dollar with no
interest).
DISCLAIMER
NO INFORMATION OR MATERIALS CONTAINED HEREIN ARE INTENDED
TO CONSTITUTE LEGAL ADVICE, AND IS NOT APPLICABLE TO ANY SPECIFIC SET OF FACTS,
ESPECIALLY AS TO ANY INDIVIDUAL'S PERSONAL SITUATION. THE INFORMATION
CONTAINED HEREIN NOR THE PERUSAL OF IT DOES NOT
ESTABLISH NOR CONSTITUTE AN ATTORNEY-CLIENT RELATIONSHIP WITH EVELAND &
ASSOCIATES OR ANY OF ITS ATTORNEYS.
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