What To Do With Property Used As Collateral During Your Bankruptcy
In the last article I touched briefly on whether or not you could continue to make payments on property used as collateral without having to reaffirm the debt with the lender. To understand your options with regard to personal property used as collateral, I will be using the example of a car loan.
When you sign for a car loan, or any other loans on personal property, there can be language in your loan paperwork that automatically creates a default on your loan if you file for bankruptcy. However, courts differ on the right of a creditor to have the automatic stay lifted and your car repossessed just because you’ve filed bankruptcy. In general you have three clear options with regard to your car: reaffirmation, redemption, or surrender. I will also discuss what is often referred to as the “pay and drive” option, sometimes thought of as a fourth option.
Reaffirming your car loan during bankruptcy means that you enter into an agreement with your lender that you will still be legally responsible for the debt even after you receive a discharge. Redeeming your car means that you agree to pay the lender the replacement value of the property. When you surrender the car, you turn it over to the trustee. The fourth option to consider is what is referred to as the “pay and drive.”
If you keep current on your payments and all other contract obligations with the lender, you may be able to continue to make payments during and after bankruptcy and keep the car. There are some things to consider if you decide to “pay and drive.” Courts have differed on your right to keep your car if you stay current on your payments.
Are there risks to the pay and drive option? It is possible for a lender to decide to repossess the car during bankruptcy even if you are current on your payments. However, from an economic standpoint, a lender will likely make more money continuing to accept payments on your car loan, as opposed to repossessing and selling the car. Because cars depreciate in value, by continuing to accept payments during your bankruptcy proceedings, lenders will make more over the life of your loan.
Redemption in Chapter 7 Cases
As I mentioned earlier, one of your options with regard to personal property that is used as collateral is the right to redeem the property. In chapter 7 cases, you must either claim the property as exempt when filing or the trustee must abandon it. Abandonment means that the trustee does not sell the property and at the closing of your bankruptcy case, it reverts back to you. The property must be tangible personal property (such as a washing machine) and it must be a debt that is allowed to be discharged in bankruptcy. You can’t use the redemption option with real estate or with liquid assets.
What if you would like to redeem your property but you can’t afford to pay the value of the property all at once? Is it possible to make payments? Generally, your creditor will have to agree to redemption payments. If the creditor does not agree we can pursue other options such as asking for additional time to save up money to pay the redemption amount or financing the amount needed to pay the creditor all at once. If you have a loan that you want to continue to pay during and after your chapter 7 bankruptcy, it is also possible to consider converting to a chapter 13 bankruptcy if a creditor refuses to accept continuing payments.
The other issue that has come up in bankruptcy cases is that some creditors may try to force debtors into a redemption payment plan. Because the courts will highly scrutinize reaffirmation agreements to ensure that the debtor can afford to continue making payments after the discharge, creditors have shifted tactics to push redemption payment plans. If this occurs in your case, make sure and discuss this with us as your bankruptcy attorneys. The redemption payments may not be in your best interests. We will review what is being proposed by your creditor to ensure your rights are protected.
Chapter 13 “Cramdown”
The term “cramdown” is used to refer to your right under chapter 13 bankruptcy to modify the terms of a secured loan even when your creditor does not agree to the change. In a chapter 13 bankruptcy you propose a payment that, once confirmed by the court, must be accepted by your creditors. Of course, your creditors have the opportunity to object as part of the process. A home mortgage cannot be altered unless it falls under an exception.
Curing Your Mortgage Default
A common reason for filing chapter 13 bankruptcy is a looming foreclosure on a home that the family would like to keep. Chapter 13 gives you the time you need to “cure” your default. If you are behind on your mortgage payments, filing bankruptcy will automatically stop any foreclosure proceedings by the bank. You will then propose an overall payment plan that includes catching up on any past due mortgage payments, while continuing to make current mortgage payments. If you plan to keep you home, you are required to “cure” your mortgage default over the payment plan period.
As you begin making mortgage payments during your chapter 13 bankruptcy, the mortgage company accepts those are current payments, and at the same time you are continuing to make additional payments for any amounts you had not paid prior to filing bankruptcy. The mortgage company is not supposed to charge any late fees or other charges for payments once you have filed chapter 13 bankruptcy. If you notice this happening, then we will work together to rectify this situation.
Second Mortgages or Home Equity Line of Credit
There are times when clients have a first and second mortgage on their homes. Because home values have declined significantly over the last several years, many clients owe more than they homes are worth. There is a possibility of eliminating (or “stripping”) your second mortgage because of the lower home value. For example, you currently have a home that you use as your principal residence. The home is valued at $150,000. You still owe $175,000 on your first mortgage. You also have a second mortgage or home equity line of mortgage on which you owe $50,000. Because the value of your home is less than your first mortgage, the second mortgage would be considered an unsecured loan in your payment plan, thus moving it from the secured to unsecured loan category.
Car title loans have shown up quite a bit in our bankruptcy cases. These loans target those who are struggling financially. They are usually small loans that have extermely high interest rates. Using the same right to “cramdown” that I discussed above, we may be able to eliminate the fees and high interest rates associated with these loans. We might also be able to use your right to redemption by paying the value of the car title lender’s claim.