Chapter 13 Vehicle Cram-Down

Many debtors with serious financial problems also own vehicles that are underwater. Fortunately, the federal Bankruptcy Code offers several options for the debtor to consider. One of the most sensible for many debtors is a Chapter 13 cram-down of the vehicle loan. A cram-down is simply the reduction of the amount that is owed to the fair market value of the vehicle. The debt is “crammed down” to what the vehicle is worth. 

The basic rules of a cram-down are pretty straightforward:

1. A vehicle cram-down is only available in a Chapter 13 case (different options exist in other bankruptcy chapters);
2. The vehicle must be for personal use;
3. The debt must have been incurred more than 910 days (about 2 ½ years) before filing the bankruptcy petition ; and
4. The loan must be more than the fair market value of the vehicle. 

A cram-down is accomplished through a court order and confirmed Chapter 13 bankruptcy plan. The bankruptcy court will receive evidence of the amount owed and the value of the vehicle. Once the court approves the cram-down, the amount of the secured claim will be the same as the value of the vehicle. The remaining balance will be ordered as unsecured, and will likely be discharged at the end of your bankruptcy case. 

The new secured balance is paid to the Chapter 13 trustee who pays the creditor. The balance also includes a new court ordered interest rate. The approved rate of interest is directed by the United States Supreme Court in Till v. SCS Credit Corp, and commonly called the Till rate.  The Till rate is often less than the debtor’s original interest rate, and lowers the monthly payment. 

While the federal bankruptcy laws are meant to be uniform across the country, the sweeping changes to the Bankruptcy Code in 2005 left many questions that are still being resolved by different circuits. For instance, recently the Ninth Circuit in the case of In re Penrod broke from the rest of the country and decided that the amount of negative equity in a trade-in that was rolled into a new vehicle loan could be stripped off, even when the loan is less than 910 days old. This case highlights the different interpretations of the new bankruptcy laws and why it is critical to retain experienced counsel for your case. 

If you are considering bankruptcy and own a vehicle that is underwater, speak with an experienced bankruptcy attorney and discuss your options. Your attorney can explain the several options for keeping or surrendering a vehicle during bankruptcy, and help you decide the best course of action for your family.

How to Walk Away From a Mortgage

Realizing that you can no longer pay for your home means that you have difficult decisions to make.  While modification and even lien stripping in bankruptcy may be options for some, if you truly cannot afford to keep your home, you must decide on the best way to walk away. 

Do Nothing

If you do not pay your mortgage payment, the lien holder will foreclose on your property.  Although not paying your mortgage payment and the resulting foreclosure will significantly harm your credit rating, the home finance industry is presently in such turmoil that it may be months to more than a year before the lien holder forecloses on your property.  During this time you live rent free and can save for the future.  Note that if you do not maintain insurance and do not pay real estate taxes, the foreclosure timeline will likely accelerate.  Also note that under the Mortgage Forgiveness Debt Relief Act, which extends through 2012, income normally attributable by the IRS in connection with a foreclosure is not taxable, although you may be liable for a deficiency balance when the home is sold for less than you owe.  A foreclosure is listed as a public record on your credit report and the late payments are also reported. 

Deed in Lieu of Foreclosure

Some financial “experts” have advised distressed homeowners to “just walk away.”  Walking away from a home is easier said than done, since you still own the home and are legally responsible for the property in a variety of ways.  One way to legally “walk away” is to transfer title of the property via a Deed in Lieu of Foreclosure.  Now the lien holder owns the property, which may sound pretty good until the property is sold for less than you owe, triggering a deficiency balance.  You may also end up owing taxes on the difference.  

Short Sale

A Short Sale is a sale for less than what is owed by the seller.  A lender will sometimes agree to allow the property to be sold for less than you owe if it is clear that you are unable to continue paying for the property and the home is upside-down.  In many cases the Short Sale deficiency is forgiven by the lien holder, but that will depend on the lender and on state law.  A Short Sale is identified as a settlement on your credit report and will hurt your score, although not as much as foreclosure or bankruptcy. 

Bankruptcy

A bankruptcy is a legal discharge of your debt.  It is the cleanest and most powerful option to “walk away” from the home with no contract or tax obligation.  A bankruptcy uses the power of federal law to stop further negative credit reporting and collection attempts.  In the end your credit report identifies the loan as “Discharged in Bankruptcy” with a “Zero Balance.”  The bankruptcy record will stay on your credit report for up to ten years, but by surrendering the property you will avoid a foreclosure on your record. 

If you need to walk away from your home and are weighing your options, consult with an experienced bankruptcy attorney and learn how the federal bankruptcy laws can help.  Bankruptcy can provide you time to move without foreclosure and without owing money in connection with the home.

How to Protect Your Credit When You Are Broke

Every so often a client will say, “I am hopelessly in debt, but I don’t want to ruin my credit score with bankruptcy.  It is still very good.”  This statement is just like the old joke, “I can’t be broke, I still have checks!”  A credit score is supposed to be an indicator of your financial health.  Unfortunately, many people assume that their financial health is indicated by the credit score.  Consequently, they continue to misuse credit, in many cases borrowing from credit sources to pay monthly credit obligations.  It is a vicious cycle of debt. 

In today’s economy your credit score is not the only factor a lender considers when issuing credit.  Financial institutions are using new sources to profile their customers.  A recent article by Wall Street Journal writer Karen Blumenthal entitled New Ways Bankers Are Spying on You reports that banks are now examining rent and utility payments, bank deposits, as well as estimating your home’s value in order to gauge your financial health.  Blumenthal writes that in one case a bank customer was denied a credit after the lender reviewed his home loan records, determined that the value of his California home had declined, and noticed that his mortgage principal wasn’t declining—giving away that he has an interest-only mortgage. 

Financial good health is living within a budget, using credit responsibly, controlling debt and excess spending, working towards short and long-term financial goals, and contributing to savings and investments.  It is difficult to manage just one of these aspects when a person is overwhelmed by debt. 

Fortunately, the federal bankruptcy laws provide an answer for individuals living beyond their means and buried in debt.  Bankruptcy offers a legal means to restructure or eliminate your debts while protecting your family’s assets including real estate, vehicles, or retirement accounts.  During bankruptcy creditors cannot contact you directly and the vast majority of debtors do not lose any property. 

If you are drowning in debt, don’t be fooled by a high credit score.  Your financial house is built on sand and it is time to rebuild on solid ground.  Consult with an experienced bankruptcy attorney and discover how the federal law can get you back on the path to financial health.