Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Who Gets A Slice Of The Bankruptcy Pie?

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pie-chart-pixabay_opt

“That woman filed a claim in our bankruptcy case, and we don’t owe her any money!”

The next line, or paragraph really, of my client’s email asked what was I, her bankruptcy lawyer, going to do about it.

The short answer was nothing.

Nada.

Not a thing.

I didn’t plan to do anything.

Because when you have a pot plan in Chapter 13, it doesn’t matter who files a claim or for how much.

You pay the same.

Pot or Percentage

When you choose Chapter 13, you get to set the terms of the plan.  The plan  tells creditors and the Chapter 13 how much money you’ll pay the trustee each month and how that money gets distributed.

The claims of creditors are categorized:  secured, priority, co signed, and general unsecured.

You can treat claims of the run-of-the-mill unsecured creditor in two different ways.  You can promise each unsecured creditor a certain percentage of their allowed claim:

Creditors holding unsecured claims shall receive 20% of their claim.

Or, you can propose a “pot” plan.  You fund a pot of a specified number of dollars, to be shared among unsecured creditors according to the percentage of the total claims represented by that creditor’s claim.

When filed claims differ

The difference between the two ways of stating your payment plan comes out when claims are actually filed.  (No creditor gets paid in Chapter 13 without filing a claim.) [Read more…]

Why I Love Chapter 13

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13 reasons to love Chapter 13

How do I love thee, Chapter 13?

Let me count the ways.

Hang on, because it’s a long list.  Thirteen reasons Chapter 13 rocks.

I love Chapter 13 because:

1.    Debtors keep control of their assets. They run their businesses. There is no trustee tasked to sell  their assets.

2.    Repayment to creditors can be little or even nothing.  It depends on the debtor’s income and the value of their assets. 

3.    Chapter 13 plans  can be changed during the case. If income falls or is temporarily interrupted, the plan can be changed to accommodate the change.  

4.    The case can be freely dismissed.  You can get out of bankruptcy if you want, unlike Chapter 7 . 

5.    The automatic stay protects the debtor for the 3 -5 years of the plan.  No foreclosures, no repossessions, no levies. 

6.    Mortgage defaults can be cured over as long as five years. 

7.    The interest rate on car loans can be reduced to today’s market rate. 

8.    Mortgage liens that are totally underwater can be eliminated forever in 13. 

9.    The IRS has to go along with the repayment terms in your plan, without interest. 

10.  Tax penalties are dischargeable, even when the tax is recent. 

11.   Debts to former spouses, other than support, can be discharged. 

12.   Tax liens greater than the value of the debtor’s assets at filing are eliminated. 

13.   Attorneys fees for the case can be paid after filing.  

More advantages to Chapter 13

When you file Chapter 13, you are eligible to file another Chapter 13 case, if you need to, far more quickly than if you had filed a Chapter 7.

In fact, you are eligible to file a second Chapter 13 after two years from the filing of your first case.  (But you can’t have two cases active at once.)

Your Chapter 13 filing generally drops off your credit report three years earlier than if you had filed a Chapter 7 bankruptcy.  It’s gone two years after the Chapter 13 discharge in a five year plan.

Unlike debt settlement arrangements, your repayment plan is enforced by a federal judge. All creditors are required to go along. No creditor can elect not to be involved and opt out of the plan.  Whether a creditor files a claim or not, the creditor’s claim is likely toast at the end of the case.

And there’s no income tax on the debt that’s discharged.

Chapter 13 can be a powerful and affordable tool for getting back on your financial feet.

Chapter 13 Bankruptcy Disrupted by Coronavirus

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chapter 13 case

Has your Chapter 13 bankruptcy case been turned upside down by coronavirus?

You are not alone.

And attorneys, trustees and judges are all working on adaptations and adjustments that will save pending cases.

Practices and procedures in Chapter 13 vary widely around the country.  What follows is what I see here in the Bay Area and hear from around the country.

Congress takes Chapter 13 action

The CARES Act, passed by Congress on March 27, extends the allowable length of confirmed Chapter 13 plans to seven years. Currently, plans cannot run more than five years.

That presents a problem if your case is driven by the value of your assets or the need to cure mortgage arrears or pay off a car loan.

To qualify for the extended plan duration, the need for a modification of the plan must be traceable to the COVID-19 national emergency, directly or indirectly.

Importantly, only the debtor can move to extend the duration of the plan.  That means that neither the Chapter 13 trustee nor creditors can move to lock you into a longer plan.

So, there’s new flexibility if you have a Chapter 13 plan that was confirmed before March 27, 2020.

Unconfirmed Chapter 13 plans

Suppose, though, that you’ve filed Chapter 13 and the means test “says” you need to pay something to unsecured creditors.  Only the virus emergency says that income is no longer there.

Current law allows the amendment of Chapter 13 plans that haven’t been confirmed to be amended.  I don’t anticipate any judicial resistance to new income and expense schedules that reflect today’s realities.

If your plan payments are driven, not by income, but by the value of your assets, the problem is harder.  The CARES Act provides no relief from the “best interests of creditors” test requiring that creditor get what they would have had you filed a Chapter 7 liquidation case.

If your assets have fallen in value, it may pay to consider dismissing the current case and filing one where today’s asset values control.

Inability to make Chapter 13 payments

Confirmed or unconfirmed, debtors nationwide find themselves suddenly without meaningful income.

Hardship discharges may become easier

The good news is that many others are in the same boat.

In other times, failure to make a monthly payment would trigger a motion to dismiss your case.

Probably, such motions are far less likely in these circumstances.

Plans, confirmed or unconfirmed, can be modified by the appropriate filing in bankruptcy court.

The practical problem is how does anyone reliably project their income going forward.

I see this as an issue that remains to be worked out among all the players.  The courts don’t want to dismiss a heap of cases, only to have to process refiled cases by the same debtors.  I expect there will be accommodations.

For the moment, both courts and trustees’ offices are operating with skeleton crews and no real appetite to toss people out of bankruptcy for non-payment.

Stay tuned.

Rescue payments excluded from income

The amended Bankruptcy Code definition of income now excludes payments made under federal law relating to the pandemic emergency.

This change benefits both those with unconfirmed Chapter 13 cases, and those who file new bankruptcies in the next year.  Governmental help will functionally not be available to your creditors in a bankruptcy case.

Bankruptcy law will revert to the current definitions of “current monthly income” and “disposable monthly income” at the end of a year’s time.

Challenges ahead

Our current economic catastrophe is unprecedented in its suddenness and its scope.  Lots of good minds (and a few not-so-good minds) are pondering work-arounds for family finances.

In the meantime, stay healthy, stay home, and stay strong.  We’ll keep posting as developments appear.

More

See our roundup of posts on the virus and your budget

 

 

 

7 Keys To Keeping Your House: Chapter 13 After You File

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keep the house

Filing Chapter 13 bankruptcy stops the foreclosure.  You’ve protected your home, for the moment.

Bankruptcy gets you a sheltered legal environment to address the problems with your mortgage.

You heave a sigh of relief.

But the fight to keep your house isn’t over, just because there’s a stay.  You’ve just gotten through the first round.

You need to stay on your toes for the balance of the match to emerge with your house safe at the end of your bankruptcy.

Here’s what you need to know.

Mortgage lenders get special consideration

In the bankruptcy context,  the mortgage lender gets privileged treatment.

Anglo Saxon law, from which US law is drawn, has long given particular protection to the claims of property owners.  After all, it was those who owned property who wrote the laws.

The mortgage lender gets that special treatment because the lender’s lien is a property interest in your home.

That lien entitles the lender to regular payments;  if payments aren’t made, the lender can ask for relief from stay to foreclose.

The exception is if the value of the collateral is less than the total of the liens ahead of the lien in question.  Think:  underwater second mortgage.

Follow these 7 keys for keeping your house AND getting a discharge in Chapter 13.

1.  Regular mortgage payments required

Most Chapter 13 plans provide that the trustee pays the arrears on your mortgage, while you make the payments that come due after filing.

Make the payments- that means property taxes and insurance as well.

Too often, homeowners get fixated on paying the arrearages on their mortgage that they overlook, or struggle, with the ongoing payments.

Court are intolerant of borrowers who want the protection of the bankruptcy stay, but don’t take seriously their obligation to pay the monthly payments that come due after filing.

That intolerance spills over into dismissal of  Chapter 13 cases without a discharge when debtors fail to make current payments.

2.  Look for other liens

Chapter 13 isn’t limited to fixing problems with mortgage liens.  Your plan can either avoid altogether or reduce the amount of tax or judgment liens,

Make sure that you check the public record to see if any avoidable liens have attached, unnoticed, to your home.

If you find liens, your plan can cut them down to size.

3.  Pursue modification

Your best bet may be to agree with the lender on a modification of your mortgage.  Nothing in Chapter 13 stops the parties from considering modification.

Northern California bankruptcy judges have decreed that negotiations for a modification do not violate the automatic stay

Frequently, the modified mortgage either folds the arrears into the loan balance, to be paid over the life of the loan. Or, modification designates a portion of the amount owed as not bearing interest, but payable at loan-end or sale.

A modification that cures the arrears may eliminate the mortgage arrears portion of a Chapter 13 monthly payment, thereby increasing the chances of success.

4.  Review the lender’s claim

In order to be paid in a Chapter 13, a creditor must file a proof of claim.  For mortgages secured by the debtor’s principal residence, a detailed attachment is required.

The mortgage attachment must account for payments and charges to the loan from the date of the first, uncured default.

The POC also contains an analysis of any escrowed taxes and insurance, and the adequacy of the monthly payment to pay those expenses.

Dig into these numbers and see if they match your payment records and whether they are otherwise complete.

There’s lots of data there, some of it correct and some woefully wrong.

5.  Keep records of  your payments

Too many mortgage servicers fail the fundamental task of accepting your payments and crediting them properly.

The method of accounting changes with bankruptcy:  payments made after filing are supposed to be credited to a separate accounting for your loan, while the pre bankruptcy record stands alone

Servicers don’t always do that.  Payments sometimes sit for months on someone’s desk, undeposited.

I tell clients to pay with paper checks on their accounts and send the payment by a method that gets you a receipt upon delivery to the servicer.

It’s a hassle, I know, but you end up with a record from your bank that the check was cashed, and you have proof that it was delivered.  The added expense is nothing to the cost of your attorney having to track down the facts showing you paid.

6.  Read payment change notices

If your monthly mortgage payment changes after you file bankruptcy, the servicer must send you a Notice Of Payment Change.

The change may be driven by an interest rate change or a change in the cost of escrowed taxes or insurance.

Even though it comes on a court form, and looks dense, you’ve got to read it and adjust your post filing payments on your mortgage accordingly.

If you’re uncertain, ask your lawyer.

7.  Exploit case-end rules

When you’ve made your last payment to the trustee, bankruptcy rules require a notice to the mortgage servicer about the state of your loan balance.

If the lender claims that either the pre-bankruptcy claim hasn’t been paid in full, OR, that there are unpaid amounts arising after you filed, they must file a reply.

This call-and-response procedure flushes out any difficulties that show in the lender’s books, and provides a mechanism and a judge to sort things out.

The goal is to exit bankruptcy knowing exactly where you stand on the home loan.

Make sure this happens in your case.

If you change your mind

Things change over time.  If you find that keeping the house no longer fits with your financial future, tell your lawyer immediately.

The confirmed Chapter 13 plan obligates you to make the payments you promised as well as obligating your creditors to stand down.

There’s nothing wrong with changing your mind, so long as you change your Chapter 13 plan to match.

Far too many debtors recently get to the end of the case and get their cases dismissed, without a discharge, because they stopped paying on the mortgage and didn’t alert their lawyer.

More

Make sure you don’t lose house and discharge

Monitoring your mortgage loan 

Before you list your house for sale

 

How Chapter 13 Cuts Car Loan Down To Size

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car in bankruptcy

Car lenders who make new car loans with an underwater trade-in will face the music in Chapter 13.

The Supreme Court declined to review a 9th Circuit decision that stripped car loans of their protected specially protected status in bankruptcy; as a result, Californians will continue to benefit from the debtor-friendly decision in Penrod, rising out of a San Francisco bankruptcy case.

The question in Penrod

At issue was whether the prohibition on cramming down the debt on a vehicle purchased within 910 days of a bankruptcy filing protected “negative equity” financed in the car purchase.

“Negative equity” is the debt in excess of the trade in’s value. That left-over debt is added to the total of the new car loan and is unrelated to the value of the purchased vehicle.

And BAPCPA, the bankruptcy “reform” act of 2005 prohibited reducing a secured claim on a vehicle purchased within 910 days of the bankruptcy.  But did it similarly protect that part of the loan that wasn’t really related to the cost of the vehicle purchased?

Penrod facts

In Penrod, the Redwood City resident had traded in a car worth $6,000 on which she owed $13,000.  The new car loan included $7000 necessary to pay off the debt on the trade in.

The legal issue is whether that left over debt should enjoy the projections extended car sellers in BAPCPA for purchase money loans on the debtor’s car.

Every other circuit that addressed the question has given purchase money protection to the entire debt including the negative equity portion of the new loan.

The 9th Circuit held the negative equity was not purchase money as to the current car.  The appeals court remanded the case for the bankruptcy court to figure out how to apportion the payments made before bankruptcy between the purchase money element and the leftover debt element.

It’s surprising to me that SCOTUS didn’t accept cert on Penrod, since there is clearly a split among the circuits and it seems to this California bankruptcy lawyer that the Supremes take great pleasure in overturning the 9th Circuit.

But I’ll take a victory however it presents itself and await a decision on how to calculate what can be trimmed from a debtor’s car loan in bankruptcy.

More

How Chapter 13 thwarts repossession

Keeping your car after Chapter 7

10 ways bankruptcy makes you better off

Image  Snackariah under a Creative Commons license

Chapter 13 Dismissed After All Payments Are Made: Self Inflicted Wounds

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Debtors shoot themselvesThere’s been a rash of bullet-ridden feet lately in Chapter 13 cases.

Debtors seem to whip out their pistols and shoot themselves in the foot with increasing regularity.

Just when their goal of keeping the house was within reach, had they paid attention, they lose it all.

It happens when debtors don’t hold up their end of the bankruptcy bargain.

And at the end of the day, or the end of the plan, they get none of the benefits they sought through bankruptcy.

How does that happen?

Chapter 13 saves houses

The overwhelming majority of Chapter 13 cases in the Bay Area are filed to save a house.

The homeowner needs to catch up on payments, or more frequently, needs a loan modification in order to keep the house.

The Bay Area bankruptcy judges have developed procedures to confirm Chapter 13 plans, and get money flowing out to creditors, while a loan modification is under consideration.  If there is anything we know about loan modifications, it’s that they take time and persistence.

Troubles after the loan modification

One of the provisions of the Chapter 13 plan that the debtor proposes for confirmation by the court addresses how the mortgage lender will be paid while we wait on a loan modification.

The plan might provide that the debtor will make the regular payment, according to the loan terms, directly to the lender in the meantime.

Or, the debtor may propose to make an ongoing payment to the mortgage lender calculated according the the HAMP formula, which says that housing costs should be no more than 31% of a person’s gross income.

So, the HAMP payment to the lender works out to be 31% of monthly income, less property taxes and hazard insurance.

Whichever approach the debtor chooses to deal with the current mortgage payment, it’s set out in the plan, along with the monthly payment the debtor will make to the trustee toward other kinds of debts.

Once a plan is confirmed by the judge, it binds all parties, creditors, trustee and the debtor.  See §1327.

Only some debtors seem to forget their part of this deal.  They don’t make the ongoing payments and don’t modify their plans to match their behavior.

Confirmed plans when loan modification denied

Another variation on our Bay Area plan is the plan provision that says “if I don’t get a loan modification, I will immediately modify the plan or surrender the house”.  I’m paraphrasing the language but the idea is clear:  if I can’t modify the plan, I’ll present an alternative plan to the court.

And then the homeowner doesn’t get a modification, and doesn’t present another plan.

And apparently expects good things to happen despite the failure to live up to his post bankruptcy promises.

Discharge depends on plan performance

The debtor in a Chapter 13 gets a discharge “after completion of all payments under the plan”.  §1328.

The payments “under the plan” include those that the debtor undertook to make directly, rather than through the Chapter 13 trustee.  (In the Northern District of California, we don’t do “conduit plans” where even the post filing mortgage payments are made to the trustee.)

When it comes out that the debtor hasn’t made the on going payments or hasn’t gotten a loan modification, more and more Chapter 13 trustee are recommending that the case be closed without a discharge, since the debtor failed to meet his promises made in bankruptcy.

Ouch!

Candor works

Facing up to a change of heart about a house, or the painful failure to get a loan modification, seems tough at the time.

What debtors seem to be missing is that all the non-house benefits of a bankruptcy discharge are squandered if the Chapter 13 gets closed without discharging those debts.

The other factor that is probably not obvious to the distraught homeowner is that foreclosure does not always follow immediately from the announcement that the debtor elects to surrender the house.

The foreclosure that took forever

Even when we want lenders to foreclose on unwanted property, they don’t.  Or don’t very quickly.

It is not as though the debtor will be immediately homeless if they admit it isn’t working out.

This is my clarion call to debtors:

  • Keep your bankruptcy lawyer in the loop about mortgage payments and loan modifications.
  • Keep a copy of your Chapter 13 plan handy and review what you’ve promised to do in exchange for the protection of the automatic stay and the discharge at the end of the case.

Your lawyer can’t help you if you keep secrets.

More

Roundup of our best advice on keeping your house

 

Protecting Your Co signor When You Can’t Pay

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cosigned loans

Cosigning a loan links you and your cosignor together for the life of the debt.

If you get in financial trouble, your troubles are your co signor’s troubles too.

If you can’t pay your debts, the standard bankruptcy discharge will get rid of your debt, but it doesn’t help your co signor.

Even while you are protected in bankruptcy by the automatic stay, keeping collectors at bay, and by the discharge at the end of the case, anyone who cosigned for you is exposed.

But Chapter 13 isn’t the “standard” bankruptcy.  It has a special protection for people whose debts are co signed.

Automatic stay covers co signors

Unique to Chapter 13, Section 1301 of the Bankruptcy Code extends the protection of the automatic stay to those who are jointly liable with the debtor on consumer debts.

To qualify, the debt must be for a personal or household purpose.  

So a cosigned car loan is covered;

A cosigned business lease is not.

The benefits of the loan must have flowed to the person who filed bankruptcy.  If you co signed a loan made to a friend, your friend isn’t protected by your Chapter 13 stay.

Finally, to keep the stay in place, the Chapter 13 plan must provide for payment in full of the debt.

Co signed debts get preference

Chapter 13 plans are normally required to treat all unsecured, non priority debts the same.  Each of the general unsecured claims gets the same percentage payment through the plan.

But cosigned debts are excepted.  

The debtor can treat the cosigned debt differently and better than other debts.

It’s OK to separately classify a co signed debt and pay it in full, while other debts get little or nothing in Chapter 13.

So your plan can say:   pay 100% of the allowed claim on the joint credit card claim of BIG BANK, and far less to everyone else.

After the plan is over

The only sticky point for the co signor, who is protected from collection on the co signed debt during the plan, is that interest that may accrue on the debt over the life of the plan.

At the end of the plan, the principal on the debt and any interest owed when the case was filed, will have been paid.  But the bankruptcy case doesn’t stop the accrual of interest at the contract rate during the plan.

The cosignor will remain liable for that interest despite the bankruptcy.

Power of Chapter 13

The co debtor stay and the ability to separately classify co signed debts is just another reason why, as a bankruptcy attorney, I love Chapter 13.

Consider

The secrets of successful Chapter 13 plans

Interviewing a bankruptcy lawyer

Wipe out tax penalties in Chapter 13

At Risk of Repossession? How To Keep The Car & Pay Less

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car repossessionIf you are one of the  7 million Americans late on your car payments and living in fear that your car will be repossessed, consider how Chapter 13 bankruptcy can save your wheels.

Losing your car can accelerate a torrent of nasty financial consequences.

No car, no way to work.

No work, no income.

So, what can a Chapter 13 bankruptcy do to put you back on the road?

Stop repossession

All chapters of bankruptcy impose an injunction on creditor efforts to collect debts, or enforce liens, automatically when you file.   That automatic stay applies whether or not the creditor knows about it.

So, file bankruptcy and any collection actions taken without court permission are void and legally ineffective.  If they pick up your car after you’ve filed, you can compel its return.

The only exception to the stay applying automatically is if you’ve had two bankruptcy cases dismissed in the past 12 months.  More on multiple dismissals.

Spread out car payments

Chapter 13 allows you to put forward a plan to restructure your car loan.  The remaining payoff balance on your car loan can be spread over 60 months.

Unless your car loan is very new, or the original term very long, that probably lowers what you pay each month through the plan.

Reduce interest rate

You can adjust the interest rate on a car loan paid through the plan to the current day, market rate.  As I write, that interest rate in California is between 4 and 5%.

This power to lower the interest rate is central to a successful readjustment of a high interest car loan.  It’s of little help if your loan is less that today’s market rate.

But Chapter 13 in the states of the 9th Circuit has another trick up its sleeve.

Strip out loan add ons

Part of a Chapter 13 plan can be cutting the car loan down to the portion of the loan that financed the car itself;  you can knock out any part of the loan that paid off an underwater trade-in, or a service contract, or gap insurance.

The 9th Circuit said in Penrod that these additions to the amount financed were not protected by the 2005 bankruptcy amendments that gave special consideration to car lenders.

So, you can pare down the car loan that has to be repaid to just the amount of the loan balance used to buy the car itself, and not all the extras.

Deal with other debts

You don’t just file bankruptcy on one debt; bankruptcy includes all your debts.

Some may be absolutely dischargeable, perhaps without paying anything on them.

Some liens can be wiped out.  Back payments on home loans can be caught up in Chapter 13.

Chances are that there’s more going on in your financial life than just the trouble with  your car loan.

An experienced bankruptcy lawyer can help you look at the big picture and propose a solution to keep you trucking.

More

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Is bankruptcy the right choice for you

Interviewing a bankruptcy lawyer

 

 

 

How One Family Settled Huge Debt For Pennies

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debt settlement
When he started the Chapter 13 trek, he owed $370,000 in personal loans and credit cards.

As he completes his plan, he will have settled that debt for three cents on the dollar.

No tax is due on the forgiven debt and no listed creditor can legally come back to try to collect the difference.

And that’s why I love Chapter 13 bankruptcy.

Chapter 13 in the real world

I’ve talked here lots about how Chapter 13 is structured, how plan payments are calculated, and all the nifty things Chapter 13 can do for those with bills they can’t pay.  It’s sometimes dry and dense, but you see how it works.

But here’s how it worked for one real family now completing their plan.

They confirmed a Chapter 13 that resolved their debt for 3% of what they owed when they filed.

They got five years to pay that 3%, interest free.

The payments through their plan cured any pre bankruptcy arrears on their house, in full and without interest or penalty.

They were protected from the taxing authorities while they cured delinquent property taxes.

And in our insane real estate market in the Bay Area, their home appreciated about 50%.  Appreciation that is theirs, rather than their creditors’.

Plan payment driven by asset value

Not all unsecured creditors are as lucky as the creditors in this case, who got something on their claims, even if it was only three cents.

Because the couple had some stock and other assets that weren’t exempt, their plan had to guarantee unsecured creditors a share of the $11,500 value of those non exempt assets.

Based on their income and the infamous means test, general unsecured creditors wouldn’t have gotten anything.

So, the take-away is that just what you have to pay in Chapter 13 is decided by the interaction of the kind of debts you have; the income that the law says is available to pay those debts; and the value of your non exempt assets.

But seen from the top of this mountain, Chapter 13 is powerful.  And the view of life after bankruptcy is stunning.

More

Life after bankruptcy

How Chapter 13 plan payments are calculated

Little known alternative to bankruptcy

 

$7000 Off The Price Of The Car In Chapter 13

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When the client finally got me a copy of the car finance contract, it saved them $7000 on the price of the car.

They’d tried just giving me the monthly statement.

But that statement on the car loan didn’t show the bombshell that I found when I finally examined the contract:

Included in the loan for the new car was the unpaid balance on their old trade in!

In bankruptcy-speak, that’s negative equity, and negative equity isn’t entitled to payment in full in Chapter 13.

So in our Chapter 13 plan, we can reduce what they  pay for the car by the $7000 of the loan that paid off the trade-in.  It really was worth the effort to find the contract.

Sleuthing in bankruptcy

I know, the amount of paper a diligent bankruptcy lawyer wants from you is daunting.

There’s loan documents, deeds, IRA statements, bank balances, insurance policies, pay stubs, and tax returns.

It can seem overwhelming and sometimes pointless.  I get it.

Some of what we’re gathering is defensive:  to show that the information in your bankruptcy schedules is correct.  After all, disclosure is the price of getting a bankruptcy discharge.

But some of the paper we need supports our offense:  having found the portion of the car loan that related to the trade in rather than the new car, we can slice $7000 off of the debt.

Same thing about getting payroll tax returns.  Not everything a small-business employer owes the IRS is a must-pay.  But we’ve got to get the right paper to figure that out.

Just believe that we are asking for documents for a real reason.  Like reducing the loan by $7000.

Car loans in bankruptcy

The auto side of this story is worth the telling, too.  The ability to manipulate car loans is one of the appealing features of Chapter 13.

Only purchase-money:  After the 2005 bankruptcy amendments, car lenders got a windfall on cars purchased in the three years, more or less, before the bankruptcy.  “Reform” entitled car lenders to more than their collateral was worth. (The lenders had a bigger lobbying budget than consumers when the law was passed).

But the 9th Circuit judges have held that the negative-equity part of a car finance transaction isn’t part of the purchase money loan.  Thus we can strip out the  payoff of the trade-in from the loan balance that must be paid.

Likewise, a debtor can reject gap insurance, maintenance contracts and other add-ons that aren’t part of the value of the car itself.

Interest rate changes:  Regardless of when a car loan was made, Chapter 13 can alter the interest rate that the lender gets on the loan through Chapter 13.  So the 10-15% car loan may pay something closer to 4-5% under the Chapter 13 plan.

Term extended:  A Chapter 13 plan can extend the remaining term of a car loan to match the length of the bankruptcy case.  Spread over more months, the monthly bite of a car loan in your budget can be reduced.

And that’s just a part of the reason that I love Chapter 13.

More

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Phone: (650) 694-4700

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