Can I keep my car...or should I keep my car?

I am constantly asked by clients about whether they should keep their car(s) in a bankruptcy proceeding. This is a serious issue because you need the car to get to work. In determining whether a client should keep his or her car through the bankruptcy process depends on a number of variables.

The biggest concern I have with respect to keeping a car is whether the client is current on the car loan. If not, the lender could repossess the car at any time. If a client is behind in his/her payments, I usually suggest contacting the lender to see if they are willing to negotiate the terms of the loan or give the client an extension of time to bring the loan current. Unfortunately, even in this economy, most lenders will no agree to modify the terms of the loan. This is where bankruptcy can be a benefit.

If my client files a Chapter 7 bankruptcy we have a a few options available. First, the debtor can discharge the debt (give the car back and walk away from the debt...yes you will in most circumstances be able to get another car loan immediately after your bankruptcy case closes). We can also talk with the lender's legal counsel about modifying the loan (I find that while the lender may refuse to modify the loan when I contact them directly their legal counsel can work with me to get the lender on board) or attempt to work out a redemption agreement (I work with third party lenders who can often refinance the vehicle loan and in many instances save my client money by redeeming for the vehicle's fair market value).

If my client files a Chapter 13 bankruptcy, surrendering the vehicle back to the lender is still an option. However, in a 13, most people opt to roll their past due vehicle payments into their plan (payments made over 36 to 60 month period of time to pay back a portion of debt). This option will allow the debtor to keep the car without the fear of repossession. Car payments (past due and current) are usually made through the plan. This can often give us the ability to reduce the balance and interest rate on the loan in a manner similar to redemption. The difference is that in Ch. 13, we do not have to work with a third party lender as a new loan is not required.

Another consideration is the amount of the monthly payment. Since the bankruptcy laws changed in 2005, the Courts have taken a much stronger stance against large car payments. As for what constitutes a large payment, the answer varies case to case taking into consideration the household income and the need (if any) for the vehicle in question (handicapped accessible vehicle or a heavy duty truck needed for work). Obviously, even if your car loan is current, the amount of the payment is still an issue that must be dealt with through the bankruptcy.

Unfortunately, cars lose their value rather quickly. Thus, most of us have little or no equity our vehicles. This is another consideration to look at when deciding whether to keep a vehicle or surrender it. If the vehicle loan is considerably upside down and has not been owned long enough to force the reduction in principal to match the vehicle's value (typically 2.5 years), it may be advantageous to walk away from the vehicle. If you have owned the vehicle more than 2.5 years, you can (as discussed above) redeem the vehicle with a new loan or if you file a Ch. 13 by utilizing the cram down provisions of the code.





At first glance, this situation can seem confusing. However, I can work with you to help you figure out which option best suits your needs.

Housing Crisis Rescue Plan

As I am sure many of you have heard, the Obama administration has recently anounced the details of their housing rescue program. After reading various news stories and watching various new programs on the issue, I thought I would offer a quick and concise take on the available options. There are two main compenents to this plan....the refinance program and the loan modification program. It is estimated that approximately 9,000,000 homeowners will be able to benefit from the $78 billion dollars President Obama has set aside to "fund" this program.

The refinance program is designed to benefit those who are not yet behind on their house payments. However, in order to use this program your loan must be backed by Freedie Mac or Fannie Mae. To find out if your loan is backed by one of these organizations, you should contact your lender. For loans backed by these programs, homeowners are normally able to refinance only if they owe less than 80% of the value of their home. With the dramatic drop in home prices, people who easily owed less than 80% of their home's value a year ago now might owe 125% of their home's value now. Thus, these people are denied from refinancing their homes at a time when interest rates are historically low. Under the Home Affordable Refinance program, these homeowners will now qualify for a new 30 year fixed rate mortgage. Refinance program to the rescue!

The mortgage modification program is designed to help people who are either in danger of falling behind on their mortgage payments and/or are in danger of losing their homes via foreclosure. The program should benefit those impacted by job layoffs and other serious financial hardships. If you qualify for this program, your lender will reduce your monthly payments to no more than 38% of your income. The lender will then further reduce the payment to 31% of your income. They are able to do this by splitting the costs associated with the reduction with the federal government. These "modified" payments will continue for up to five years. As I understand it, the loan repayment term may be extended to up to 40 years under some circumstances. Lenders will be able to reduce the balance owed on the mortgage in addition to reducing the interest and stretching the payment terms to reach the 31% threshold.

While, I think these programs will help many hardworking homeowners, I am afraid it will not do enough to help all who need it. Naturally, there will be high demand for these programs, so please do not hesitate to get in touch with your mortgage company quickly. The phone lines are going to be busy and you may not get to speak with a person for several days but be persistent and patient.

House Passes Mortgage Bankruptcy Bill

The House last Thursday passed a bill designed to reduce the burden on homeowners struggling to make their house payments. This bill gives bankruptcy judges the ability to modify mortgages for people who file for bankruptcy protection, including lengthening the payback period, reducing interest rates and principal payments.

The bill is entitled "Helping Families Save Their Home Act," but it is commonly referred to as the "cram down" bill because it enables judges to cram down the size of the mortgage. The bill as it is currently written requires borrowers and lenders to make a good faith effort to modify the mortgage before homeowners can ask the bankruptcy court to do so.

This cram down concept has been associated with bankruptcy for some time. In years past, it was often used to reduce the balance owed on car loans. Since October 17, 2005, when the Bankruptcy Code was last substantially revised, it has become more difficult to apply this concept to car loans. However, under the right circumstances it is still possible to cram down the balance owed on a car. I will blog more about this at a later date.

Using this concept as it relates to home loans will be a new power given to bankruptcy judges. For many homeowners who will not qualify for assistance under President Obama's Homeowner Affordability and Stability Plan, filing bankruptcy and utilizing this new power (assuming the Senate passes it and it is signed into law) may be the only option left to save their homes.

I will continue to monitor this situation. If the bill becomes law, I will post updates with additional information as it becomes available.

Selling off everything to make ends meet

WARNING: Do Not Make This Mistake

I was listening to talk radio this morning and heard a particularly depressing story about a family that has been selling off everything it owns to try to make ends meet. Both of the parents have been unemployed for over a year and both have been aggressively looking for work. To keep up with their bills they have sold virtually all of the furniture in their house. They are sleeping on mattresses on the floor. They have sold off jewelry, antiques, musical instruments, cashed in insurance policies, and retirement accounts etc. all to keep up with their bills. Now there is nothing else to sell. They are scheduled to meet with a bankruptcy attorney this week as they do not know what else to do.

What I find so depressing about this story is that this family has sacrificed so many assets which the Court would have protected. Here in Indiana, this family could have kept $16,000.00 worth of personal property as well as their retirement accounts. Most likely their whole life insurance policies would have been protected as well. While they will still get the benefit of their debts being wiped out, they now do so without the bulk of the things they worked so hard to obtain over the years.

Yes, they are just things and they can be replaced but the reality is that they did not have to do this to themselves. They could have ended up in the exact same place with most of the items they sold still in their possession. I find people are routinely given inaccurate information about bankruptcy by their friends and family or so called experts on the Internet. This can lead them to make costly mistakes just like this family did. Do not do this to yourself. If you find yourself in financial trouble or even think you might be headed in that direction, it is well worth the time and money to sit down with a bankruptcy attorney to review your options. Knowledge is power...and in this day and age we all need whatever power we can hold get our hands.