Redemption in Chapter 7: Keep Your Car While Lowering the Payments

In Chapter 7, there are three possibilities for dealing with a debt that is secured by collateral, one of which is a “redemption”. Redemptions are usually only done with regard to vehicles, though it would be theoretically possible to do it with other types of personal property too. This article deals with redeeming cars. This is possible in Chapter 7, but not Chapter 13.

First, with the agreement of the creditor, you may keep the car, and continue your obligation to pay for it. This is called a “reaffirmation”. The effect is to leave the car out of the bankruptcy and continue to pay for it, usually under the terms of the original contract. A reaffirmation usually requires that you be current in your payments on your car note.

The second possibility is to “surrender” the collateral. In that case, you lose the car to the creditor, and the debt is discharged. The creditor can’t collect any money later. This makes sense when you can’t afford the debt, or if something is wrong with the collateral so that you prefer to pursue other options. You can certainly surrender the collateral even if you are behind on the debt and a “reaffirmation” is not possible.

The third possibility is a “redemption”. Redemption is a remedy that exists only under the bankruptcy code, and so you have to file a Chapter 7 to take advantage of it. It is perfectly legal, and is easily achieved in the right circumstances. You don’t need to be current in your payments to redeem. This remedy will surprise you, and is not obvious at all.

The Code provides that if a debtor pays the “fair market value” of personal property in a lump sum, that the creditor must accept the money in exchange for its lien rights. The challenge is that debtors do not have enough money to make large lump sum payments. The solution is that a few banks make money by financing a bankruptcy redemption if the circumstances qualify under their guidelines. The practical effect of a redemption is that the debt is refinanced: the old debt is satisfied, and a new, lower debt/loan is created in its place with a new lender. That lender becomes the lienholder in the place of the original creditor.

The right “circumstances” are as follows: 1) the car must be relatively new (10 years or less and less than 150,000 miles), and 2) the debt must not be co-signed, 3) the debt should significantly exceed the value of the collateral securing it, and 4) your provable income should be high enough to make the payments.

The debt might exceed the value of the collateral for several reasons. One is where the debtor rolled a pre-existing debt into the price of his car when he bought it (in other words, the trade-in was not paid off). Another circumstance is where the lender (usually a credit union) has “cross- collateralized” the car note with some other debt, such as a loan or credit card. In that case, the car may be collateral for both the car note and for the other “unsecured” debt based on the language in the loan agreement. Third, high finance charges, late-fees, or other charges may have driven up the pay-off to a figure that is much more than the value of the car.

If your car is relatively new and is worth significantly less than what is owed on it, we can explore redemption options for you. A successful redemption is accomplished by allowing us to contact the potential lender on your behalf by telephone right on the spot. If the lender agrees, we file a “Motion to Redeem” with the Court, which would be granted so long as the we can reach an agreement with the creditor as to the amount of the “fair market value”which may be negotiated.

The beauty of a redemption is that everyone is happy… the payments to you are invariably lower than before, the payoff is lower than before, and the original creditor is happy to receive a lump sum. Our attorney fees are included in the new loan, so you don’t have any out of pocket expense. Whether you meet the necessary guidelines is not hard for us to determine, and many loans qualify.

Call one of our lawyers for an appointment at 770-683-3303 and we can explore this possibility for you.

Tax Refunds, Lawsuit Recoveries, and Inheritances

If the state or federal government owes you money for a tax refund that you have not yet received, this is considered to be an “asset” owned by you similar to money in your bank account. Assets should be disclosed in bankruptcies. You are then allowed to “exempt” or protect those assets within certain dollar limits depending on what the asset is, and depending on how many people own it.

In some Chapter 13’s, but not all of them, you might be required under your plan to pay in part of future tax refunds to pay creditors if they would not be paid in full otherwise. You should ask the lawyer about this if you are filing Chapter 13.

In either Chapter 7 or Chapter 13, disclosing assets is the proper way and best way to protect them. Hiding or failing to disclose assets can result in the loss of protection that you would otherwise have, and creditors and Trustees can make problems for you if they allege that you failed to disclose something that should have been disclosed.

Similarly, if you have a “claim” against someone else, regardless of whether you have filed suit, and regardless of whether you have retained a lawyer, this “claim” is also an asset that should be disclosed and exempted in a bankruptcy. It doesn’t matter if the exact value of the claim is known or not. “Value” can be listed as “unknown”. Personal injury, products liability, worker’s compensation, and employment discrimination are common examples of this type of “claim”. Claims should be disclosed whenever they arise, even after a bankruptcy has been filed.

If you are due to inherit money or property from someone who has died, your share is an “asset”, even if the inheritance has not been distributed. If someone dies within 180 days (six months) after you file, that inheritance is also an “asset”, and your share should be added to the schedules and exempted for your protection.

The disclosure of assets does NOT necessarily mean that you will lose them. Assets can be protected within limits in a Chapter 7 by exemption, and you are not subject to losing assets in Chapter 13 at all (even though it might or might not impact the minimum amount of your monthly payments). A Chapter 13 is a voluntary proceeding. If the burdens of continuing the case outweigh the benefits, you can just terminate the proceeding. Thus, people very seldom lose anything that they don’t want to lose when they bankruptcy, assuming they consult an attorney about the rules in advance to make informed decisions.

Each case is different. In the vast majority of cases, debtors safely own assets, disclose assets, and protect them. If it turns out that you are subject to losing something that you don’t want to lose, the best approach is to discuss it specifically with the lawyer ahead of time. The best answer often involves balancing benefits and burdens in that particular case. This will eliminate unnecessary worry about losing assets.

Please call us at 770-683-3303 today to discuss your specific situation.

Pick Your Lawyer Carefully, Then Trust That Person

We frequently receive calls from people who filed their bankruptcy case with another lawyer, and now want to change lawyers. Sometimes it’s because the first lawyer won’t return calls. Sometimes the client just doesn’t understand requirements and procedures. Sometimes they have received objections, and believe their case has been thrown out, or will be thrown out, no matter what they do. Sometimes clients suspect that they are not receiving the best deal possible.

To be successful, bankruptcies require that the paperwork be done accurately. Each case is different, and one size definitely does not fit all. The lawyer needs documentation (paystubs, tax returns, bills, letters, etc.) to fill out the forms at the beginning and on an ongoing basis so that the Trustee or creditors do not object. Debtors often believe that approximations are good enough, and that they are free to pick and choose which debts to file. Approximations work occasionally, but not always. You are always supposed to list all of your debts, even if you are keeping the property or paying for it “outside” the bankruptcy. The general rule is that everything is “disclosed”, even though there may be considerable freedom in deciding how debts or assets are treated in the plan or statement of intentions.

Our experience is that taking time to be accurate on the front end greatly reduces anxiety, and reduces complications in both simple and hard cases. Naturally, hard cases, like business cases or repeat filings, take longer to get right than simple cases. Sometimes clients believe that their case is hard, when really it’s easy, and sometimes they think it’s easy, when it’s complex for reasons they did not anticipate. Either way, it works best when everyone understands the challenges and benefits as early as possible. The best way to make that happen is to be prepared with paperwork. Keep appointments. Listen carefully to questions, and trust that the lawyer really is on your side even if he warns you about constraints. Trust that the lawyer wants you to succeed, and get what you want as badly as you do.

If you are wondering about filing a bankruptcy, call first and ask general questions. Listen for whether you are being treated with respect, and expect to get some meaningful answers to your questions. However, you shouldn’t expect highly specific answers if you haven’t met the lawyer in person and provided all the information needed to write detailed plans and schedules.

After you file, trust the lawyer that you have chosen. The procedures and requirements are too numerous to understand everything at once, especially things that may or may not happen in the future. Sometimes you have to be patient and let your questions come into focus.

After you have chosen to file with a particular lawyer, it’s not proper for a different lawyer to give second opinions and second guess decisions that your lawyer has made. When people who are already represented ask me questions, I may feel like offering my own opinion and solutions, but I almost always refrain. A person who offers a “second opinion” often hasn’t understood everything. It’s disrespectful to both the lawyer and the client to make superficial suggestions without an adequate grasp of the facts.

Please call us at 770-683-3303 to discuss your particular situation. With our help, starting the process will be less stressful, smoother, and more successful than what you might think.

Saving a Title Pawn in Chapter 13

Under the Georgia Code, title pawns are not the same as auto loans. Auto loans are “purchase- money” loans used to finance the purchase of a vehicle, whereas title pawns are similar to the sale of a vehicle to a pawnbroker at the time the “loan” is made… subject to a specific “right of redemption”. As the result, the treatment of a title pawn in bankruptcy is different from the treatment of an auto loan, and poses problems. Read more “Saving a Title Pawn in Chapter 13”

Will I Lose My House If I File Bankruptcy?

In Chapter 7, the Court is not interested in taking and selling property except to the extent that it has equity in it… that is, to the extent that it is worth more than what you owe on it. Thus, the value of your property is very important. You are allowed to protect (“exempt”) equity in your residence up to $21,500.00 per spouse. You may also be able to exempt equity in real estate that you do not live in, but the amount of your allowable exemptions is less in that case. Read more “Will I Lose My House If I File Bankruptcy?”

Starting the Process of Filing for Bankruptcy

General information about bankruptcy is available online, and some people prefer to do preliminary research before making their first contact with a lawyer. However, in bankruptcy, what happens depends on the circumstances of the individual debtor. Also, to some extent, issues are handled differently depending on which judge or which trustee is assigned. Thus, it is not the case that “one size fits all”. Local knowledge and expertise is important to get the best result in your case. Read more “Starting the Process of Filing for Bankruptcy”

Does Filing Bankruptcy Have Any Effect On Obligations Arising in Divorce?

It’s common knowledge that you can’t “bankrupt on child support or alimony”. Obligations “in the nature of support” (even if they are labeled something else in the divorce decree) have never been dischargeable in bankruptcy. This means that you can’t get rid of them without payment. Read more “Does Filing Bankruptcy Have Any Effect On Obligations Arising in Divorce?”

Do I have to include my spouse?

It’s not unusual for your husband or wife to be opposed to filing bankruptcy with you for one reason or another. The good news is that you are not legally REQUIRED to file a joint case with your spouse. Many cases are filed singly, regardless of marital status. However, depending on your circumstances, you might need to file together, because otherwise, you would not qualify for the benefits that you are seeking.

A bankruptcy discharge will only the cover the person who files the case (the “debtor”). If a debt is owed jointly, the non-filing spouse will not be covered by the debtor’s discharge. Where a debtor and the non-filing spouse owe a joint debt and a Chapter 7 is filed, the debtor would be discharged of the debt. However, the non-filing spouse would continue to owe it, and would continue to be subject to collection activity.

In a Chapter 13, the debtor may protect the non-filing spouse on a jointly-owed consumer debt. The debtor does this by providing in the plan that the debtor will pay the debt in full through the plan. While this protects the non-filing co-obligor, it might make the plan more expensive because plan payments have to be high enough to pay the debt. Otherwise, if the debtor will not pay a joint debt, the court will “grant relief from the automatic stay” to allow the creditor to be paid by the non-filing co-obligor.

Suppose you owe a car note jointly with the non-filing spouse, and you intend to pay for that car through your Chapter 13 (whether the spouse files with you or not). You can do this even if you file by yourself. However, in order to fully protect the other party, you would have to pay the full contract interest on the car. This can make a big difference if the contract interest rate is high. By contrast, if you choose to file a joint case, you may reduce the contract interest rate and receive a discharge without paying that high interest.

Suppose your spouse doesn’t owe any debt, or can handle his or her debt without filing with you. In that case, he or she does not have to file. However, you still have to include the spouse’s income and expenses in your budget. (A non-filing spouse’s name and social security number are not included in the bankruptcy petition, even though the Trustee can and does require “proof of income” from the non-filing spouse. This information is not published publicly). Thus, the bankruptcy should not affect the non-filing spouse’s credit so long as debts are not owed jointly.

The budget includes household income and expenses even in a single filing. If you think about it, your ability to pay debt is very much affected by your spouse’s income, because he or she pays some of the bills. In a Chapter 13, your budget must show that you have the ability to pay what your plan requires you to pay. Otherwise, the plan is “infeasible”. Similarly, in a Chapter 7, your budget must show that you can afford to pay for the debts that you want to “reaffirm”, such as your car or your house. Without your spouse’s income, you probably couldn’t afford to do that.

Please call us at 770-683-3303 to discuss your particular situation with our lawyers. 

Garnishments and Frozen Bank Accounts

If a person borrows money and is late in repaying it, the lender may choose to sue to collect the debt. A lender starts a suit by filing a “summons and complaint” in state court. The summons and complaint is “served” (delivered to) the borrower. The method of service should be reflected on the “return of service” noted in the court’s file.

A suit that has been properly served requires that the defendant/borrower file an “answer” within 30 days of having been served with the suit. The answer should state a cognizable reason why the borrower is not legally obligated to pay as alleged by the creditor.

If the borrower files his answer on time, a hearing will be assigned. If he wins the argument at the hearing, a judgment will be entered in his favor. Otherwise, if the borrower fails to answer, or if an answer is inadequate to dispute the default, then the creditor will win. The creditor may then use the judgment as the basis for a “garnishment” or “levy” to collect the money owed to it.

A “garnishment” is a proceeding where the creditor requires the borrower’s employer to pay a percentage of the debtor’s wages into the court until the judgment is satisfied. A garnishment is served on the employer, not on the employee. Thus, it is not necessary for the creditor to “serve” (notify) the borrower of the garnishment, and it may hit the borrower unexpectedly.

Alternatively, a garnishment can also take the form of a “levy”. Here, the creditor may cause the debtor’s bank account to be frozen, and have the bank pay the monies over after a brief waiting period. Again, the borrower does not need to be directly notified, and is often surprised to find that his funds have been frozen. A levy may attach to a joint account even if the other owner(s) of the account have nothing to do with the debt owed to the creditor.

Bankruptcy is commonly used as a defensive action to stop lawsuits, garnishments, and levies. If bankruptcy is filed before a judgment is entered, the bankruptcy will prevent the suit from going forward. If a judgment has been already entered, then at state law, the debt becomes “secured” by a “judicial lien”. In bankruptcy court, a judicial lien may be “avoided” if the lien “impairs exemptions” to which the Debtor would otherwise be entitled. A judgement usually “impairs exemptions” where the Debtor does not own significant equity in property. (This subject is beyond the scope of this article, and would have to be discussed specifically with the lawyer).

If monies have already been taken under a garnishment or levy, it may still be possible to get the money back. Basically, the monies taken must be capable of being “exempted” in the individual case. Further, the amount must still be in the possession of the employer, bank, or court, or alternatively, if the monies have been remitted to the creditor, they must have been garnished within 90 days of the bankruptcy filing, and must exceed $600.00 in amount. These matters are frequently (but not always) resolved in favor of the Debtor. Resolution depends on the facts of the individual case.

Please contact one of our lawyers at 770-683-3303 to discuss how this applies in your particular situation.