Northern California Bankruptcy Lawyer

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The Soap Box

What The Fool Got Wrong About Filing Bankruptcy

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should I file bankruptcyThe famous poem begins, “how do I love thee? let me count the ways”.

But what if it’s not love that we are counting, but loathing?

Let me count the ways I loathe the Motley Fool’s article asking should I file for bankruptcy?

The Fool’s underlying assumption is that people in debt flock to bankruptcy as an “easy way out”, and damage their credit score for seven years or more.

This is so wrong, where do I start?

Who files bankruptcy

No one I’ve met in 40 years as a bankruptcy lawyer arrived in my office on a whim, trying to make their financial life easier with a “get-out-of-jail-free” card.

Instead, they’ve agonized about even considering bankruptcy.  They feel guilty and ashamed. 

Why  creditors want them to feel guilty, ashamed and fearful about bankruptcy.

Often, they’ve delayed learning about bankruptcy so long that they’ve made their situation even worse.  Not only has their financial situation worsened while they tried to find a way to pay, but their health and their relationships have deteriorated.

The most common triggers for financial distress are job loss; illness; business failure; and divorce.  None are exactly choices made frivolously.

Drowning in debt

The premise of the Fool’s article is that you are up to your eyeballs in bills.  If that’s your situation, the remedies the author proposes are band-aids on a gut wound.

  • Get a second job
  • Cut your living expenses
  • Negotiate with your creditors

All of these suggestions are sound, standing alone.  But they are inadequate remedies for someone truly drowning in debt.

If the rising water is at your knees, fine.  These might work.  But if the water’s at your chin, this is fantasy.

And all of them are offered without discussion of the age, health and family situation of the person in debt.  Neither does the author address the size of the debt and the time required to pay off the debt.   Much less, discuss the ongoing interest on the unpaid balance.

Realities of negotiating with creditors

The logic of a creditor settling for less than is owed, rather than get nothing in bankruptcy, is rock solid.  Only, little logic is found in the collection departments of most creditors.

They’ve heard the threat to file bankruptcy before.  It doesn’t phase them.

And the people you can get on the phone to discuss a reduction in the debt generally don’t have the authority to make the deal, much less the vision to see the benefits of a deal.

Debts get easier to settle the older and stinkier they get.  So, stop paying for long enough and some creditors will come to the negotiating table.

But getting all your creditors to reduce their claims is nearly impossible.

And there’s no discussion of where you’re going to get the money to pay off the reduced debt, nor the time to engage creditors in negotiations.

Protecting the credit score

The utter irony of the Fool’s approach is that you should avoid bankruptcy to protect your credit score!  Truly foolish.

Your credit score is an arbitrary and unregulated construct, created by businesses working for creditors, to measure the cost to you of incurring more debt.

Study shows credit scores RISE after filing bankruptcy

Granted, it’s now used in other enterprises for which it wasn’t designed, and, I would argue, not particularly predictive of whether you’ll pay your rent, for instance, or commit insurance fraud.

Isn’t the point of discussing bankruptcy alternatives to get you out of debt?  Not enable you to get into more debt?

Unaddressed is the current impact of repayment strategies on your credit score.  Suppose to get a creditor to negotiate, you have to stop paying altogether, so they see that your situation is dire.

There’s a hit to your credit score, right there.

And the score won’t begin to improve until all that’s behind you.  No discussion by the Fool of how long that may take.

Living on a financial knife edge

Personal finance writers all tout saving.  Whether it’s an emergency reserve or retirement savings, no ethical financial expert proposes that you spend every penny you have, with nothing in reserve.

Yet the Fool omits any assessment of whether the money spent paying off old debts would be better off creating a financial cushion, which would be possible after a bankruptcy discharge.

My bankruptcy clients too often have neither savings, nor health insurance, nor health care.  I suggest that a better future requires those things, not a robust credit score.

Bankruptcy misrepresented

Finally, the Fool repeats myths about bankruptcy.

The author claims that “your major assets are sold off” in Chapter 7.

Nonsense. Nearly 98% of Chapter 7’s result in no loss of the filer’s assets.

Between exemptions and the lack of real equity, most people in bankruptcy don’t have assets that are saleable by a bankruptcy trustee.  And those who have assets with non-exempt equity, there’s Chapter 13.

In Chapter 13, you keep your “stuff” and essentially buy it back from your creditors, at a discount, over time.

While Chapter 13 is a repayment plan, but that plan may pay little or nothing to creditors, depending on your income, living expenses, or the equity in your assets after a deduction for exemptions.

How Chapter 13 payments are figured

The very debts that the author warns may not be wiped out in bankruptcy are the debts that are paid first from any money flowing through the bankruptcy estate.  The priorities for payment in bankruptcy see that secured debt, recent taxes, and support are paid before the run of the mill unsecured creditor.

Student loans, the bane of many struggling Americans, are the exception.  They aren’t generally dischargeable in bankruptcy, but they don’t have a priority for payment.  Bankruptcy for a student loan borrower may only wipe out other debts, making it easier to pay off student loans.

What does it cost to stay in debt

The Fool is quick to point out that filing bankruptcy costs money.  That in fact is the first of the downsides of bankruptcy that the author highlights.

There’s no mention of the cost, both monetary and emotionally, of remaining in debt.

While the author notes that bankruptcy appears on your credit report for years and is visible to potential employers and landlords, absent is any evaluation of how a credit report full of delinquent, or even just overwhelming debt, impacts those same parties.

Negative information about a debt  can be reported for seven years.  Not so different than bankruptcy.

Your balance sheet matters

When assessing your financial health, your credit score is secondary.  First of all, look at your balance sheet, not your ability to borrow more money in the short run.

Look at the demands on your income, your age, and your prospects when picking a get-out-of-debt strategy.

Understand that your credit heals with time, and a bankruptcy on your record is not a bar to getting new credit.  A recent bankruptcy affects the price you pay for a loan;  a bankruptcy years ago fades in significance.

And that’s why, for many people, I love the fresh start provided by bankruptcy.

More

What Kenny Rogers tells us about getting out of debt

What bankruptcy should cost

Credit heals

Why I love Chapter 13

Life after bankruptcy

 

 

 

 

 

 

Who Gets Grannie’s Cash – Grannie Or The Bankruptcy Trustee?

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joint accounts bankruptcy

When there’s a joint bank account and a bankruptcy filing, good intentions can quickly go sour.

The bankruptcy trustee sees a pile of money in the bank to which the debtor has access, even though the account also bears the name of someone not in bankruptcy.

If the debtor can get the money, the trustee contends, so can a bankruptcy trustee for the benefit of creditors.

Well and good, if the money belongs to the debtor. But what if it’s really someone else’s money?

Do it yourself elder care

Who doesn’t have a joint bank account with someone they care about?

Most often, it’s the adult child’s name on an elder’s bank account.  It’s simple, convenient, and reassuring that if the elder loses capacity, a trusted party has access to pay the elder’s bills.

But if the trusted party loses a lawsuit, or files bankruptcy, all bets are off.  The elder’s money in a joint account  looks like money that belongs to the child.

And the elder’s funds are at risk of being seized to pay someone else’s debts.

Who gets the cash?

The answer lies in state law, since state law determines what the debtor owns, while bankruptcy law determines what happens to that property.

In California, the answer lies in Probate Code 5100 and the statutes following.

“[a]n account belongs, during the lifetime of all parties, to the parties in proportion to the net
contributions by each to the sums on deposit, unless there is clear and convincing evidence of a different intent.” (Cal Probate Code, § 5301, subd. (a))1
“In the absence of proof otherwise” the net contribution of each of the parties is deemed to be an equal
amount. § 5134, subd. (b)(2).
That’s a vast improvement over the prior law that presumed that the people named on the account owned the money equally.
California’s statute is based on the Uniform Probate Code, which drafts laws for adoption by the states to make law more uniform.
So, the result of the “joint account in bankruptcy” issue may be different in other states.

Avoid a fight with the trustee

More important than who wins a legal battle is the chance to skip the fight altogether.

Debtors need to disclose joint accounts to their attorneys.  Don’t fall into the “it’s not my money” trap and keep quiet about it.  As I said, that’s a trap.

Why you don’t want your attorney to fight for you

Attorneys need to quiz their clients about such arrangements and get all the bank account statements.  See what the situation will look like to the trustee.

Know what state law says on the subject.

Consider, if the money in fact is traceable to someone other than the debtor, having that person withdraw it from the joint account before filing.

Make it your goal not to have someone else’s money in an bank account to which the bankruptcy debtor has access.

All involved might consider use of a revocable trust as a vehicle for the elder to empower another to manage their money in the face of incapacity.

This post draws on the always-comprehensive observations of Oakland bankruptcy attorney Larry Szabo.  Thanks, Larry, for your boundless willingness to share.

Image courtesy of Flickr & Duncan Hull

SBA Loans Collectible Long Past Business Failure

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The SBA has eagle eyes and sharp talons when it comes to collecting from guarantors of business loans.

SBA collection tools are ruthless, efficient and ageless.

So I learned when a client consulted me about a business that had failed 12 years ago.

Yet the SBA had never sued him, nor had it filed a lien on his home.

He reported that every time he changed jobs, however, the SBA just appeared and garnished his wages.

At this rate, his exposure on his SBA loan guarantee will live long beyond the next decade.

Statute of limitations

The United States Code 28 USC 2415 prescribes a six year statute of limitations on lawsuits to collect non tax debts owed to the US.

That six year period is reset with each payment the feds receive on the debt.

Understand the liability of a guarantor

So, the SBA has six years from the last payment made to file a lawsuit against a guarantor for a money judgment.  With a judgment comes a slew of collection tools under the law, including liens  and levies.

But, it turns out, the feds don’t need a judgment to exercise powerful collection actions that usually require a judgment.

Administrative garnishment

Like the IRS, the SBA has a right to garnish wages without ever going to court.

13 C.F.R. 140.11  lays out both the limits on how much of each paycheck can be garnished and the procedure for challenging a garnishment.

Chillingly, the regulation provides that the feds have the right to garnish until the debt is satisfied, or until there is a settlement.  So that’s how the SBA kept surfacing for my client at each new job.

Offset into retirement years

Retirement isn’t a reprieve from SBA debt, either.

The government retains the right to offset any money it may owe you, as in tax refunds or Social Security benefits, to pay the debt. 31 USC 3716.

So, the passage of time will bar the initiation of a law suit that could result in a lien or a right to levy your assets, but the right to garnish wages or offset
mutual debts appears to have no time limit.  A guarantor of the debt of a long dead business may be paying on that debt until the guarantor’s death.

SBA debts dischargeable in bankruptcy

If an SBA borrower isn’t able to reach a settlement of the debt with the SBA, any unsecured debt to the SBA  is fully dischargeable in bankruptcy.

Secured debt owed to the SBA is only secured in a bankruptcy case to the extent that there is equity in the asset after liens senior to the SBA are paid. Thus in a Chapter 13, an SBA lien can be crammed down to the value of the collateral.

In the usual circumstances, the SBA is not protected by the provisions of Chapter 13 that bar modification or bifurcation of debts secured only by the debtor’s home:  SBA debts are almost always secured by the assets of the business for whom the loan was taken out.

More

No tax consequences when SBA guarantees compromised

Is a corporate bankruptcy safe for shareholders?

Thoughts on winding down failing business

Filling Out The Bankruptcy Papers

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Filing bankruptcy can make you feel like you are drowning in paper.

There’s your paper; there’s the paper your lawyer needs.  And there’s the paper the court insists on.

It’s easy to try to skate. To cut corners.  To shut down.

But that paper is critical.

Nearly every question, benefit, or dispute in an individual’s bankruptcy case starts with the bankruptcy papers.

Those papers are called the schedules.  The schedules form the heart of a bankruptcy case.  They lay out what the person filing the case owns, owes, and spends.

And most debtors (those who file bankruptcy) have little idea how much paper is involved til they see the schedules and sign them in their lawyer’s office.

Before they get to the signing, debtors chafe at the endless questions from their attorney about the nature of the debt, who is liable, and whether the debt is disputed.

Is all this effort really needed?

Bankruptcy schedules matter

Your schedules constitute  the trustee’s first look at you. Well-done schedules project engagement with the process and they tend to limit digging by the trustee.

The creditor schedules control who gets notice of your case and notice of the automatic stay.

Notice to all affected assures that anyone with a right to challenge the discharge of your debt to them is bound by the timelines of the Bankruptcy Code.

Creditors who don’t get notice may reopen the bankruptcy case later to assert that their debt isn’t dischargeable.

Omit assets and you may lose them, as case law limits your right to claim an exemption in an asset you didn’t disclose in the first place.

List it or lose it

Leave out a legal right or pending lawsuit and the defendant in that suit can have your lawsuit dismissed.

Then, there’s the matter of perjury:  the law provides for fines and imprisonment for deliberate untruths on the bankruptcy schedules.  Not something you want to expose yourself to.

What the schedules contain

Seen broadly, bankruptcy schedules list the debtor’s assets; debts; projected budget; and recent financial history.

Asset forms

Secured creditor form

Priority & unsecured creditor form

Since 2005, there’s a schedule for the means test.

You file proof of having taken prebankruptcy credit counseling and statement of your intentions with respect to debts secured by personal property, like your car.

Helping you get them right is part of the job of a bankruptcy attorney.

New bankruptcy forms

The courts are rolling out new versions of the bankruptcy forms which claim to be more “modern” and user friendly.

I find them verbose and impossible to scan easily to get the big picture in a bankruptcy filing.

The new forms read like tax forms and they suggest that you could competently file bankruptcy without a lawyer.  My experience is that, since 2005, it is the rare individual who can correctly file out the forms, much less understand the implications of those forms.

Enlist a professional to assess whether bankruptcy is right for you and whether now is the right time, before you file.  Afterward, it may be too late.

More

How to find the right bankruptcy lawyer

Understand exemptions

What debts don’t get wiped out

Image:  weatbix

When Your Bank Account Is Seized: California Action Plan

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bank levyTime is short when you get a notice that a creditor has levied your bank account.

California has protections that may allow you to recover money that’s been seized.

But success in getting your money back depends on prompt action and following the procedures.

Bank levy basics

A creditor with a judgment is entitled to levy your bank account to collect the money you owe.

All about judgments

You have an offsetting right to keep some money by claiming exemptions.

A levy only catches the money that is in your account when the levy is served.  It doesn’t affect money deposited to the account later.

Your bank has few choices when a levy is served.  By law, it must hold the money in the account on the day the levy is served for the creditor.

And it must deliver to you a notice of the levy and information about your rights to claim exemptions.

What you can keep

Let’s assume that the money in the levied bank account consists of your wages.

California exemption law protects a minimum of 75% of take home pay.  A non-support creditor simply can’t reach the 75% that is exempt. Cal. Code of Civil Procedure 704.070.

If your wages were already garnished before they were paid to you, what you take home is exempt from further levy.

And, you may be able to protect more than 75% of your wages if you show that you need more than 75% to provide for yourself and your family.

California law grants absolute protection to the assets of and distributions from private retirement plans and retirement-focused profit sharing plans.  CCP 704.115.

Public retirement benefits are also exempt.  CCP 704.110.

Federal law protects Social Security.

Claiming funds exempt

Here’s what you need to do to contest the levy.

When a bank account is levied,  CCP 700.010 requires the levying officer to serve on the judgment debtor these documents:

  • the writ of execution (issued by the court)
  • a notice of the levy
  • a list of exemptions prepared by the Judicial Council

The last item, the list of exemptions, is your key to regaining some part of the bank balance if they are traceable to wages.

The notice of levy contains the critical instructions and the time line:

To claim an exemption, you complete the Claim of Exemption form and give it to the levying officer, typically the sheriff.  If you contend that the levied money is necessary for your support and for the support of your dependents, you also complete the Financial Statement.

The judgment creditor then has a choice.  It can agree that the levied funds are exempt and they are returned to you.  Or, the judgment creditor can set a hearing before a judge to challenge your claim of exemption.

Serve papers on time

The burden is on you as the judgment debtor to complete your clams of exemption and get them back to the levying officer on time.

A successful claim of exemption protects your funds from this levy.  While it may give the creditor some visibility into your finance, it doesn’t solve the bigger problem created by the judgment.

Consider consulting with a credit counseling agency or a bankruptcy lawyer to assess the bigger picture of your finances.  Even if the creditor has a judgment, the debt may still be dischargeable in bankruptcy.

More

Collection lawsuits in California

Property safe from creditors under California law

Myths about bankruptcy

Image © vladimirfloyd

Questions About Bankruptcy Have Few Quick Answers

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The caller to my law office kept telling my assistant: I just want to ask  Cathy a question.

To which my assistant replied:  you need to first fill out our questionnaire and make an appointment.

But I don’t want a meeting, I just want to ask a question.

At which point, both sides of the call are frustrated.

The caller thinks he has a reasonable request.  The law office isn’t getting through to the caller that a quick answer isn’t possible.

And that’s because:  there are no quick answers to bankruptcy questions.

Or rather, there are no reliable quick answers about bankruptcy.

Bankruptcy answers depend on your facts

To provide an answer that is any good, a bankruptcy lawyer needs to get a bunch of facts about your situation.

Have you filed bankruptcy before?

Did you get a discharge?

How long have you lived in this district?  Where did you live before?

What do you own?  What’s the form of title?

How much money do you make?  How many people do you support?

Do you owe taxes or child support?

The list goes on.

A quick answer is risky

Good lawyering is about applying the law to the client’s facts.  Without facts, my advice is likely useless.

Or worse, dangerous.

It’s dangerous to the caller, because the answer, without all the facts, may not be right.

It’s dangerous to the lawyer, who has a legal responsibility to you to provide competent advice.  Even if the advice is free and even if you don’t hire the lawyer to represent you.

The undisclosed facts may lead to an entirely different conclusion.  And I don’t know the facts until I’ve asked a BUNCH of questions.

If I get it wrong, you may be able to sue me.

Legal advice online

Why you don’t want a bankruptcy lawyer who’ll fight for you

The importance of the facts is why relying on the internet for legal advice hold huge dangers.

Post a question to an online forum, and you select the facts that you think are important.  Or as much of the facts as you are willing to disclose in public.

Those facts may not be the ones that are critical to the answer.  And even if you provide good facts about some aspect of your situation, other facts may counteract the result.

Use the internet to get some legal education about bankruptcy as a whole.  Learn the bankruptcy vocabulary.  Figure out what documents a lawyer will need to provide good advice.

But take no action until you’ve laid those facts before a competent bankruptcy lawyer and answered a bunch of questions.

More

Questions to ask a bankruptcy lawyer

Free bankruptcy advice

Considering bankruptcy

 

 

10 Things Tax Professionals Need To Know About Bankruptcy

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accountant-flickr-charlywkarlTax season approaches.

Tax preparers stand a good chance of encountering clients who either have filed bankruptcy, or who may benefit from a bankruptcy filing.

Here’s my list of bankruptcy nuggets that a good tax professional should have at hand.

Debts discharged in bankruptcy don’t trigger cancellation of debt income–

One of bankruptcy’s compelling features is that the debts cancelled by reason of the bankruptcy discharge don’t get included in the debtor’s income.  Bankruptcy, found in Title 11 of the U.S. Code, is the first exception on Form 982 to inclusion of forgiven debt in gross income.

IRS and state tax entities subject to the automatic stay  

A bankruptcy filing enjoins tax authorities from continuing collection action.  Thus the stay terminates garnishments and prohibits levies of the debtor’s assets.  It doesn’t, however, prohibit tax audits.

Bankruptcy can discharge income tax debt three years after return due

Taxes can be wiped out in bankruptcy if the return was due, including extensions, three years  or more before the bankruptcy is filed; any late filed return has been on file for 2 years; and the taxes were assessed more than 240 days before the commencement of the case.  More on overview of taxes in bankruptcy.

Chapter 13 is a quick and certain alternative to an OIC–

A  Chapter 13 plan is confirmed within weeks and binds the IRS just like any other creditor. The case discharges for all time the scheduled taxes, penalties and interest upon plan completion.  The plan must pay the priority taxes (those tied to returns less than three years old) and the interest on the priority tax as of the filing.  No new interest or penalties accrue during the pendency of the case.

Tax penalties are dischargeable

Penalties associated with dischargeable taxes are dischargeable;  all penalties are dischargeable in Chapter 13, and penalties associated with events more than three years past are dischargeable in Chapter 7 even if the tax isn’t dischargeable.

Chapter  7 estate, but not 13 estate, is a separate taxpayer

A bankruptcy estate owes the feds a return, and perhaps tax on capital gains it realizes by reason of sale or foreclosure.   Property remains property of the bankruptcy estate until the estate is closed or the property abandoned.

Tax attributes of the debtor pass to the bankruptcy estate  

The debtor’s basis, loss carry forwards, and exclusions are available to the Chapter 7 trustee, and  unused NOL’s revert to the debtor when the bankruptcy estate closes.

Debtor can elect short tax year for the year bankruptcy is filed  

A short year election can make tax attributes available to the debtor when he files the return for the pre bankruptcy portion of the year.  It can also quantify any tax due in the year of filing so that it is a priority claim for payment from the assets to be distributed in the bankruptcy case.

Tax liens generally survive the bankruptcy case

While lien survive as a charge on the assets the debtor owned at the filing of the case, the lien does not attach to assets the debtor acquires after the case is filed.  In Chapter 13, the lien need be paid only to the extent of the actual value of the assets subject to the lien.

Allowable deductions may be found in payments made on debtor’s behalf by Chapter 13 trustee

Chapter 13 plans often pay over time mortgage interest arrears  on the debtor’s home.  State taxes paid through the plan or business expenses including taxes may be deductions the Chapter 13 debtor can claim.

The rules covering federal taxes in bankruptcy are found in Pub. 902.  State taxes are subject to the same treatment in bankruptcy as federal taxes.

For more

For help with strategic use of bankruptcy to solve tax problems, look for a certified bankruptcy specialist in your community.

Some state bar associations and the American Board of Certification  certify lawyers who are specialists in bankruptcy.  Find California bankruptcy specialists by county.

Image courtesy of Flickr and CharlywKarl

Reaffirmation: The Fight You Hope To Lose

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reaffirmation lossIt isn’t often I go into bankruptcy court, hoping to lose.

But when the issue is reaffirmation of a car loan, that’s the strategy.  I desperately want the judge to deny approval of my client’s proposed reaffirmation of his car loan.

And most of my judges will deliver, from the bench, the pitch I’ve made to the client:  you are better off if this reaffirmation is denied.

So, how did we get to this state of affairs?

Like many screwups, it started with Congress.

Or rather, it started with the car creditor lobbyists and their boat-load of money earmarked for Congress.

Bankruptcy reform crashes

In a nutshell, before 2005’s bankruptcy amendments, you could keep your car after bankruptcy so long as you kept making the payments.  Simply filing bankruptcy was not a default on the loan; default that allowed repossession required a failure to pay.

In bankruptcy lingo, the idea was called “ride-through”;  the car loan rides through bankruptcy as if there hadn’t been a default.

Then along come the lobbyists who “convince” Congress that it’s unfair to them to make them keep accepting payments on a car after bankruptcy.  Their complaint was that after entry of the bankruptcy discharge, all they would be allowed to do was auction off the car.  The discharge would prevent them from suing the borrower for any deficiency.

So, the law was changed to make filing bankruptcy an event of default.  The only way to cure that default after filing was to reaffirm the car loan.

Reaffirmation waives the discharge as to the car loan.  Reaffirm, and the car creditor can sue you personally if you stop paying.  Even if you got a bankruptcy discharge.

Best laid plans

What the lobbyists didn’t plan for was sloppy drafting of the law they wanted.

The “reformed” law on car loans required the debtor to enter into an agreement to reaffirm the loan AND  gave the bankruptcy judge the responsibility to approve the agreement as being in the debtor’s best interests.

And that’s where they blew it.

Courts have regularly held that all that is necessary to entitle the borrower’s car loan to ride through bankruptcy was the debtor’s agreement to reaffirm.  The law provided no requirement that the judge approve the agreement to give the creditor the right to sue the debtor after bankruptcy.  See Moustafi.

The debtor gets the benefits of ride-through by just entering into the agreement, even if the judge refuses to approve it.  And without approval by the judge, the car creditor can’t sue the debtor if they stop paying on the car later on.

Rooting for disapproval

You see why I want the court to disapprove my client’s proposed reaffirmation agreement.  Without the judge’s blessing, there is no deal with the creditor, but the creditor is limited to repossession if the agreement isn’t approved because the debtor did what the law required:  agreed to reaffirm.

How much should you spend on a car

The reaffirmation process requires the debtor to provide a post-bankruptcy budget that shows that he can afford the car loan going forward.  Too many debtors have budgets that really don’t have enough money available for the existing loan.  And judges see that.

Judges are further concerned about the gap between what the debtor owes on the car versus what the car is worth today.  If the debtor finds that he can’t make the payments, he is exposed to a law suit for the difference between the debt and the value of the car, PLUS the lender’s costs of suing him.  Ouch.

I really appreciate the judges before whom I practice who take their responsibility to review reaffirmation agreements carefully and patiently explain to my clients why disapproval of the agreement is in their best interests.

And I grin when I lose this bankruptcy battle.  Because my client just won.

More

Redemption: the cheaper alternative to reaffirmaion

Car loans in Chapter 13

Car loans after bankruptcy

 

 

What You Need To Know About Reaffirmation

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bankruptcy reaffirmation

Decisions, decisions.

Are you going to reaffirm the car loan?

Your bankruptcy filing requires that you state your intentions about reaffirmation right up front.

Translated, that means what are you going to do about the car after bankruptcy.  The car on which you still owe money and need to get to work.

In the midst of all the other information needed to file a Chapter 7, it’s hard to get your head around reaffirmation.

Particularly since reaffirmation got a lot more complicated and unpredictable thanks to Congress and bankruptcy “reform” in 2005.

With my apologies for being dull and dense, here’s my attempt at explaining the issues and the options when deciding whether to reaffirm a car loan.

Liens not discharged

The entire reaffirmation issue comes up because the bankruptcy discharge wipes out your personal liability for your car loan.  But the lender’s lien on the car survives bankruptcy.

After your Chapter 7 is over, the car lender can’t sue you for the unpaid balance of the car loan, but it can repo the car to enforce its lien.

As bankruptcy lawyers say, the lien “rides through” the bankruptcy.

If you keep paying

Before 2005, a provision of the Bankruptcy Code said that if you kept payments current on a loan after filing, you were not in default.

Put another way, just filing bankruptcy and discharging your personal liability didn’t breach the contract for the car loan as long as you paid as agreed.

That provision was wiped out in bankruptcy “reform”.  Now, even if you are current on the car loan payments, just having filed bankruptcy puts you in default.  You are now at risk of having your car repossessed.

You can eliminate the risk of repossession by reaffirming the car loan.

Effect of reaffirmation

If you “reaffirm” the original loan deal, your bankruptcy is no longer a breach of the contract.  You give up the benefits of your bankruptcy discharge as to the car loan.  So, the car lender emerges from your bankruptcy in the same position that it was when you filed.

You, however, are once again at risk of not only repossession of the car, but also a lawsuit for any deficiency if you can’t pay in the future.

The greater the spread  between what you owe on the car and what it’s worth, the greater the risk to your pocketbook in the future.

What the car lenders got from Congress

The car finance industry was one of the big winners when Congress amended the Bankruptcy Code.  They got the right to intimidate debtors with the loss of their wheels if they didn’t give up the benefits of bankruptcy as to this one creditor.

And the fear factor of losing your car, even if you’re paying, is huge.

As it has played out since 2005, most car lenders have elected not to automatically repossess cars when the loan isn’t reaffirmed.  They decided that they’d rather have the stream of income that post bankruptcy payments provide than get the used car worth less than the loan balance.

Ford Motors is the exception.  Ford has aggressively repoed cars where the debtor didn’t reaffirm the debt.

Reaffirmation is voluntary

You get a choice about reaffirming a car loan.  You don’t have to reaffirm.

In fact, the form that you file with your bankruptcy papers allows you to elect to surrender the car.

Surrender may be the best thing if the car is simply too expensive or isn’t reliable.

You can choose to keep the car and continue paying without reaffirming.  You take your chances that the lender will repossess the car, but you also keep the benefits of the bankruptcy discharge.

Getting reaff approved

Because reaffirmation presents risks, the required form for reaffirming lays out the value of the collateral, the amount owed on the loan, and the interest rate.  The facts get laid out in black and white.

A form I reviewed recently made clear that while the debt to be reaffirmed was $22,000, the value of the car involved was only $11,000.  You had to ask whether it was a good deal to pay $22,000 for something worth half of that.

Sometimes, the lender will reduce the interest rate or extend the payments as part of the reaffirmation.

The form also calls for the debtor to lay out his income and his other expenses.  The question is:  can the debtor really afford to keep paying on the car.

Often, there isn’t enough income to pay the expected costs of living and pay the car.  The form contains no way to express the fact that some living expenses are essential, and get paid even if other expenses are deferred.

Because the issue is so fraught with risks and uncertainties, the reaffirmation agreement has to be approved by the bankruptcy judge.

The judge is tasked with assessing whether the debtor understands the risks, and can pay the reaffirmed loan without hardship.

And the question the law doesn’t address is what can the debtor do if he loses the car.

In my experience, lawyers hate having to advise clients about their “options” when the options are so unappealing.  Judges, too,  hate trying to predict the debtor’s future, with or without the car.

Does ride-through survive?

Out of this cauldron of uncertain and bad options, a line of court decisions has developed that may provide a middle course.

Some courts have held that a debtor who attempts to reaffirm a car loan and has the judge deny approval is still protected from repossession.

Those courts read the law to say that all that is required to preserve the right to “keep and pay” is the willingness to reaffirm.  So, even if the judge withholds approval of the reaff, the lender can’t repossess as long as the payments are kept current.

In my view, all of this is enough to end our love affair with cars.  But there are your choices.

More

Tax liens after bankruptcy

What a bankruptcy judge actually does

To Do list for after your discharge

 

 

 

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