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New Helpful Bankruptcy Law Change

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The new pandemic relief law includes some helpful changes to bankruptcy law, including some protection of the $600 economic impact payments.

 

The federal Consolidated Appropriations Act (CCA) was enacted on December 27, 2020. It is reportedly the longest single bill ever passed by Congress. Within its 5,593 pages are about 15 pages of temporary changes to the federal Bankruptcy Code. We cover one relatively straightforward and helpful change here today.

Pandemic Relief Payments Protected in Bankruptcy

The $600 pandemic “economic impact payments” are completely protected for you if you file a bankruptcy case.

When filing a bankruptcy case you generally get to keep what you own at the time you file the case. Legalistically, just about everything you own is called property of your bankruptcy estate. Section 541(a) of the U.S. Bankruptcy Code. Then most of the time you can use “exemptions” to protect that “property of the estate.” As long as the exemptions cover everything you own, everything’s protected.

But the law labels certain unusual kinds of property as NOT being “property of the estate.” Section 541(b) of the Bankruptcy Code. These are even better protected for you because they are basically not even under the jurisdiction of your bankruptcy case. It doesn’t need an exemption to protect it. If something is legally defined as not “property of the estate,” it’s effectively not part of your case. It’s totally yours to do with whatever you want.

The new law protects the $600 “economic relief payments” by making clear that they are NOT property of the estate. Specifically, “recovery rebates” are included in the list of property that’s not property of the estate. Consolidated Appropriations Act, Division FF, Title X, Section 1001(a). This means that your bankruptcy trustee can’t touch that money. It’s simply yours, whether you’ve already gotten it or whenever it arrives.

This change in the law expires on December 27, 2021. Most people who get the $600 payments will have received (and spent) them well before then. But those who don’t get them in the form of a payment can get them in the form of a tax credit when filing federal income tax returns. If that’s your situation, talk with your bankruptcy lawyer about this and related timing issues.

$600 Pandemic Payments’ Effect on the Means Test

The CARES Act of last spring contained another form of protection for pandemic relief payments. It was aimed at the original $1,200 payments distributed through that earlier Act.

The CARES Act excluded such payments from your “current monthly income” for purposes of the “means test.” The means test determines whether you can file a Chapter 7 “straight bankruptcy” case. If not you could be stuck with a Chapter 13 “adjustment of debts” case. A Chapter 7 case usually takes 3 or 4 months. A Chapter 13 case takes 3 to 5 YEARS, and almost always costs significantly more.

Without getting too deep into it, excluding pandemic relief payments from the means test makes passing the means test easier. Part of that test is a rather complicated calculation of your “current monthly income.” Essentially that’s the average of the last 6 full calendar months of income from virtually all sources. A single large payment—such as a $600 pandemic “economic impact payments,” or $1,200 for a married couple—could artificially significantly increase your “current monthly income” and make you fail the “means test.”

Unlike the prior CARES Act, the new Consolidated Appropriations Act enacted on December 27 does not include this same kind of protection. Does this mean that you and your lawyer must include the $600 relief payments in calculating the means test? Might receiving this “economic impact payment” effectively disqualify you from filing a Chapter 7 case?

It’s a Matter of Timing

Perhaps not. These payments may well be protected by the CARES Act. It’s means test protection directly designed for the old $1,200 relief payments very likely also applies to the new $600 payments.

CARES excluded the following from the means test:

Payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the coronavirus disease 2019 (COVID–19).

Coronavirus Aid, Relief, and Economic Security Act (“CARES”), Section 1113(b)(1)(A).

The new $600 “economic impact payments” are certainly being made under the same continuing national emergency related to the pandemic. So, while the new Consolidated Appropriations Act does not provide new “means test” protection, the CARES Act’s protections continue. (See our blog post of April 13, 2020 about the Consumer Bankruptcy Changes in the CARES Act.)

However, your access to those protections may well depend on the timing of your bankruptcy case. That’s because the CARES Act protections have a fast-approaching expiration date. The means test part of CARES is to be deleted from the Bankruptcy Code effective “on the date that is 1 year after the date of enactment.” CARES, Section 1113(b)(2). CARES was enacted on March 27, 2020. That means that these two changes apply to all cases filed any time before that date but only through March 26, 2021.

It’s possible that this deadline will get extended. But an extension was not in the new law. And the expiration is barely two months away as of the writing of this blog post. So there’s a good chance that time will run out.

See your bankruptcy lawyer about how all this would apply to you, and if there have been any subsequent changes in the law.

 

Newly Reinstated Federal Unemployment Benefits

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The $900 billion pandemic relief law enacted on December 27 extended federal unemployment benefits, plus added a new “mixed earner” benefit.


The Coronavirus Response and Relief Supplemental Appropriations Act (CRRSA), was enacted on December 27. It extended unemployment benefits that were in the CARES Act of last spring, although with changes. One of the most impactful of those benefits had expired. Others were about to expire at the end of 2020. For these, the law came in the nick of time. The new law also created a new “mixed earner” benefit for workers with prior income from both wages and self-employment.

The Reinstated but Reduced Extra Federal Benefit

Under the CARES Act, the Federal Pandemic Unemployment Compensation (FPUC) benefit provided an extra $600 benefit per week. This was in addition to the regular state benefit. It expired way back on July 31, 2020.

The new law reinstates this extra federal unemployment benefit, but reduces it to $300 per week. These benefits are now set to last until March 14, 2021.

To be clear, it applies to

supplemental benefits for weeks of unemployment beginning after December 26, 2020, and ending on or before March 14, 2021. FPUC is not payable with respect to any week during the gap in applicability, that is, weeks of unemployment ending after July 31, 2020, through weeks of unemployment ending on or before December 26, 2020.

U.S. Dept. of Labor Press Release of December 30, 2020.

The Extended Benefit for Formerly Self-Employed and Regular W-2 Employees

The CARES Act’s Pandemic Unemployment Assistance (PUA) expanded benefits in two main ways. First, it extended eligibility to the self-employed, gig workers and such. Second, it applied to those otherwise ineligible for unemployment benefits, providing benefits for up to 39 weeks.  This program had specific pandemic-related eligibility requirements. It was to expire on December 31, 2020.

The new law extends this benefit’s expiration from that date to March 14, 2021. Also:

For individuals on PUA who have not exhausted their benefit eligibility of up to 50 weeks, the program also provides for continuing benefits for eligible individuals for weeks of unemployment through April 5, 2021.

U.S. Dept. of Labor Press Release of December 30, 2020.

The Extended Benefit for Those Who’ve Exhausted Benefits

The CARES Act’s Pandemic Emergency Unemployment Compensation (PEUC) program gave people an extra 13 weeks of unemployment benefits. Individuals usually get up to 26 weeks of unemployment benefits under state law. Some states provide fewer weeks—sometimes much fewer. CARES added up to 13 more weeks for eligible workers, for up to a total of 39 weeks of benefits. Section 2102(c)(2) of CARES.

The new law of December 27, 2020 added 11 weeks of benefits. This raises the total benefit maximum from 39 weeks to 50 weeks.  

The New Mixed Earner Unemployment Compensation

In the new law Congress has tried to fix an unanticipated problem under the CARES Act. People who had prior income from both traditional employment and also self-employment had a tough choice. They had to either apply for traditional unemployment or for the new Pandemic Unemployment Assistance (PUA) for their self-employment income. They could not receive both. This tended to reduce their benefit because some of their income would not count towards the amount of their benefit.

The new law addressed this in a simple but not very precise way. The Mixed Earner Unemployment Compensation (MEUC) benefit gives an extra $100 per week of Pandemic Unemployment Assistance to those who qualify.   To qualify the worker must have earned at least $5,000 in self-employment income in the most recent tax year. One other condition: each state gets to decide whether to sign on to MEUC. So check with your state employment department.

 

Status of the $600 Pandemic Relief Payments

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Congress passed and Trump signed the new pandemic relief law, the increase to $2,000 isn’t happening, so when are the $600 payments coming?  


Last Sunday (on December 27) President Trump signed the pandemic relief law that Congress had passed 6 days earlier. Because between its passage and before signing he’d surprisingly strongly objected to it, his signing was also a surprise. The events of that unusual week were the topic of our last blog post.

The new law includes pandemic relief checks of $600 (instead of the $1,200 amount in last spring’s CARES Act). This past week there were a series of events related to possibly increasing the $600 pandemic relief checks to $2,000. But after all that, now it’s clear that that’s not happening. At least not for a while.

The present Congress ended on Sunday, January 3, 2021, and any laws not passed died with it. “When one Congress expires, all the pending legislation goes with it.” (Congressional Institute). That included any laws in either the House of Representatives or the Senate dealing with the increase to $2,000. The new Congress started on the same day, January 3, and may or may not try to pass additional pandemic relief payments in the future.

But in the meantime what’s going on with the now-approved $600 “Economic Impact Payments”?

Who Gets the $600 Payments?

Many of the rules for distributing the payments are the same as for the $1,200 CARES Act payments of last spring.

The $600 payments are going to all U.S. citizens and resident aliens. Sensibly, married couples who filed income taxes jointly are receiving $1,200 (2 times $600).  

In addition, that same $600 amount is going to all dependent children 16 years old or less. (This is an increase from the $500 per child under CARES.) As stated in a December 29, 2020 IRS news release:

Generally, U.S. citizens and resident aliens who are not eligible to be claimed as a dependent on someone else’s income tax return are eligible for this second payment.

However, dependents 17 years or older aren’t eligible to receive anything.

As with the CARES Act, the payments are reduced for individuals with 2019 adjusted gross income of more than $75,000. For married couples who filed joint returns, that income amount is $150,000. The payments phase out completely for individuals with income of $87, 000 and for couples at $174,000. These phase-out amounts are lower than under the CARES Act (which were $99,000 and $198,000, respectively).

Another change expanded eligibility for this time. The IRS news release puts it this way:

Under the earlier CARES Act, joint returns of couples where only one member of the couple had a Social Security number were generally ineligible for a payment – unless they were a member of the military. But this month’s new law changes and expands that provision, and more people are now eligible. In this situation, these families will now be eligible to receive payments for the taxpayers and qualifying children of the family who have work-eligible SSNs.

The Timing

The U.S. Treasury Department’s recent press release announced the timing of the payments as follows:  

Today [December 29], the Treasury Department and the Internal Revenue Service will begin delivering a second round of Economic Impact Payments to millions of Americans as part of the implementation of the Coronavirus Response and Relief Supplemental Appropriations Act of 2021.  The initial direct deposit payments may begin arriving as early as tonight for some and will continue into next week.  Paper checks will begin to be mailed tomorrow, Wednesday, December 30.

What to Do to Get Your Payment

The same Treasury press release states that “[t]his second round of payments will be distributed automatically, with no action required for eligible individuals.” The more detailed IRS news release of the same date adds the following details:

Some Americans may see the direct deposit payments as pending or as provisional payments in their accounts before the official payment date of January 4, 2021. The IRS reminds taxpayers that the payments are automatic, and they should not contact their financial institutions or the IRS with payment timing questions.

As with the first round of payments under the CARES Act, most recipients will receive these payments by direct deposit. For Social Security and other beneficiaries who received the first round of payments via Direct Express, they will receive this second payment the same way.

Anyone who received the first round of payments earlier this year but doesn’t receive a payment via direct deposit will generally receive a check or, in some instances, a debit card. For those in this category, the payments will conclude in January.

Also, from the same IRS source:

Payments are automatic for eligible taxpayers who filed a 2019 tax return, those who receive Social Security retirement, survivor or disability benefits (SSDI), Railroad Retirement benefits as well as Supplemental Security Income (SSI) and Veterans Affairs beneficiaries who didn’t file a tax return. Payments are also automatic for anyone who successfully registered for the first payment online at IRS.gov using the agency’s Non-Filers tool by November 21, 2020 or who submitted a simplified tax return that has been processed by the IRS.

If You’re Eligible But You Don’t Get the Payment…

The following applies both to the prior CARES payments and the new $600 ones. Both sets of payments are actually special income tax credits that the U.S. Treasury is paying in advance. Usually we receive tax credits after we file our income tax returns. But not these. These Economic Impact Payments are advance payments of the “Recovery Rebate Credit” on our upcoming tax returns.

So if you’re eligible for but for any reason do not receive either the CARES or the new $600 payments, claim it as a tax credit on your next income tax returns and receive payment that way.

To Get More Information about Your Payment…

The U.S Treasury Department and the IRS were both saying on Tuesday, December 29, that “later this week, you may check the status of your payment at IRS.gov/GetMyPayment.”

Unfortunately that has proved to be inaccurate. As of late-evening, Sunday, January 3, 2021, that webpage was not yet working. A note there said “Get My Payment is Temporarily Offline” and would be up “in the near future.”

 

Trump Signs Pandemic Relief Law After All

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After unexpectedly not signing the new pandemic relief law since Congress passed it last Monday, President Trump did sign it on Sunday night.

 

Late last weekend (on December 20) Congress announced it had a deal on a new pandemic relief law. That agreement was the topic of our blog post last week.

Since our last blog post of last Monday morning (December 21), things went as expected, and then did not.

What’s Happened Since Last Week—As Expected

As expected, later on Monday evening both the House of Representatives and the Senate passed the relief bill. The votes were 359-53 in the House, 92-6 in the Senate. These strong bipartisan votes in favor could have become very important because of what happened thereafter.

What’s Happened Since Last Week—As Not Expected

On Tuesday evening, December 22, President Trump released a video saying he objected to the bill. He said the $600 stimulus payouts should be $2,000 per person. He called the bill a “disgrace.” This in spite of prior assurances by his chief negotiator, Treasury Secretary Steven Mnuchin, that the President supported the bill. This increase would have added about $370 billion to the $900 billion or so bill. Many Republican legislators objected to this increase.

The President did not specifically say in his video that he planned to veto the bill.

Then on Thursday, Christmas Eve, Democratic Representatives tried to pass a bill agreeing to this increase to $2,000. Because many legislators had left for the holidays this could be only be done by “unanimous consent.” This meant every Representative had to agree to it. Republican Representatives objected, so it did not pass.

That day Democratic House Speaker Nancy Pelosi issued a statement saying: “On Monday [December 28] I will bring the House back to session where we will hold a recorded vote on our stand alone bill to increase economic aid payments to $2,000.”

After that, for days President Trump neither vetoed nor signed the pandemic relief bill. He continued tweeting his objections to it but did not say what he’d do.

In the meantime, on Saturday, December 26, the Pandemic Unemployment Assistance program expired. It affects about 9.5 million self-employed, gig-workers and such who don’t normally qualify for unemployment benefits. Millions of other Americans were on hold for receiving weekly $300 federal supplementary unemployment benefits. Also, eviction protections were set to expire on December 31.

Also, the federal government was scheduled to shut down as of midnight on Monday, December 28. The pandemic relief bill was part of a major government spending bill which prevented this shutdown.

What’s Happened on Sunday—Now Also Not Expected

On Sunday afternoon (December 27) the President sent an ambiguous tweet at 3:21 PM EST: “Good news on Covid Relief Bill. Information to follow!” Soon after, he signed the bill. He did so without an increase in the stimulus payments, or any of the changes he’d insisted upon. He did not give an explanation why he signed a bill which days before he’d called a “disgrace.”

See our blog post of last week about what is in the bill that has now been signed into law. And please contact us, your bankruptcy lawyers, if you need help regardless of all this political back and forth.

 

New Pandemic Relief Law Agreement

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The leaders of both parties in Congress have finally agreed to new pandemic relief: $300 per week unemployment benefits and $600 stimulus checks.  


On Sunday evening, December 20, 2020, the U.S. Senate Republican and Democratic leaders announced that they finally agreed on a new pandemic relief package.

Majority Leader Mitch McConnell said the following on the floor of the Senate:

More help is on the way. Moments ago, in consultation with our committees, the four leaders of the Senate and House finalized an agreement. It would be another major rescue package for the American people.

As of this writing (Sunday evening) the language of the bill has not yet been finalized. It has not passed either the Senate or House of Representative, or been signed into law. So the details are not fully nailed down. But this is what is now very likely to happen:

Extension of Unemployment Benefits

The new law would extend federal unemployment benefits up to $300 per week. This is half as much as the prior $600 weekly benefits from the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. Those expired back on July 31, 2020.  (Our blog post of April 6, 2020 covered the unemployment benefits under CARES.)

The new $300 weekly benefits could start as early as December 27. This date is currently up in the air but should be finalized in the next day or two. Very likely the benefit would last up to 11 weeks of unemployment.

A separate CARES Act provision gave unemployment benefits to self-employed workers, independent contractors, and gig workers. This was set to expire after December 31, 2020. The new law will very likely extend this for 11 weeks as well. (See this U.S. Dept. of Labor article about unemployment benefits under CARES.)

Stimulus Checks

There will almost certainly be stimulus checks of $600 per person. Very similar to the CARES Act’s $1,200 checks, these will be reduced for people earning more than $75,000 in 2019. There will again be a sliding scale, with those with incomes of more than $99,000 receiving nothing.

Unlike the CARES Act, which provided reduced amounts for children, both adults and children will receive $600. Adult dependents are not likely to qualify for these payments.

Eviction Moratorium

A nationwide moratorium on evictions is currently expiring on December 31, 2020. (Our blog post of September 9, 2020 is about this moratorium.) The new law is set to extend that by one month, to the end of January 31, 2020.

The pending law apparently has about $25 billion in funding for emergency renter assistance in the pending law. We don’t yet know how that is to be allocated.

Next…

At this writing Congress will likely vote on this new law early this week, with the expectation that the President will sign it before Christmas. This law has been haggled over for months, with numerous delays, so we’ll see in the next few days.

Assuming that this new pandemic relief agreement does become law, we’ll cover its details in our next few blog posts.

 

Chapter13 Buys More Time with Your Vehicle Loan

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Chapter 13 buys you much more time than Chapter 7. Prevent repossession, then have greater power and flexibility dealing with the vehicle loan.

 

We’re in a series on the smart timing of your bankruptcy case. Last week we interrupted for a breaking story on the pandemic-based extension on not paying federal student loans.  Two weeks ago we showed you ways that a well-timed Chapter 7 “straight bankruptcy” buys time with a vehicle loan. Today we get into how a Chapter 13 “adjustment of debts” case gives you much more time and flexibility.

Start by Stopping a Pending Repossession

With both Chapter 7 and Chapter 13, one aspect of the timing is that same. They both give you the “automatic stay,” the power to immediately prevent repossession of your vehicle. The automatic stay goes into effect the instant that you and your bankruptcy lawyer file your case. It stops virtually all collection activity by creditors. This includes vehicle repossessions.

The law says that a bankruptcy filing itself “operates as a stay” of various kinds of creditor collections. (See Section 362 of the U.S. Bankruptcy Code on the Automatic stay.) A “stay” is an immediate legal prohibition or stopping of the action at issue. The two kinds of stayed acts pertinent here are:

(3) any act to obtain possession of [your] property,” and

(4) any act to… enforce any lien against [your] property.

Bankruptcy Code Section 362(a).

So, the second you file your bankruptcy case, your vehicle loan creditor can’t “obtain possession of”—take—your vehicle. And it can’t “enforce [its] lien”—its right to repossess under your contract. Both make clear that a creditor cannot repossess your vehicle one you file bankruptcy.

Chapter 7 and 13 are the same in this respect. They both prevent repossession. They both buy you time in that respect. But these two options are very different in how much time they buy you AFTER you file your bankruptcy case.

Benefits of Chapter 13 with Vehicle Loans

Chapter 13 is often better than Chapter 7 regarding your vehicle loan for the following reasons:

  1. You’re more likely to get back your vehicle even after repossession.
  2. You’ll have lots of time to catch up on back payments on your vehicle loan, or not need to pay those at all.
  3. Likely able to lower vehicle payments, interest, and total amount to pay—through cramdown
  4. Gives you the option often to surrender vehicle, now or later

1. Return of Vehicle AFTER Repossession

You should definitely aim to file your bankruptcy case before a repossession. But if your vehicle just got repossessed, you might be able to get it back if you act fast enough. This is much more likely under Chapter 13 than Chapter 7.

Under Chapter 7 you’d need to have a lot of amount of money immediately available. You’d have to bring the account fully current—pay all the back payments and late fees. Plus you’d have to pay all the repossession costs, which are likely several hundred dollars. If your insurance has lapsed, you’d have to pay to reinstate it. Plus pay for any insurance that the creditor paid on your behalf.

If you had that kind of money you probably would have paid it to the creditor and prevented the repossession. After the repossession the amount needed is significantly more because of the repo costs.

But even you were somehow able to gather that money now, it may still not matter. It may still refuse to return your vehicle. Your vehicle creditor may no longer want to work with you. Whether it must take your money and return your vehicle depends on how your local bankruptcy court interprets the law.

Chapter 13 Solves These Chapter 7 Problems

Filing Chapter 13 is much more likely to get your repossessed vehicle back for two reasons.  

First, you’d very likely need to pay less money to your vehicle creditor to get back your vehicle.

Second, you have much more power over your creditor to make it give it back.

Pay Less Money Before the Return

First, you’d very likely need to pay less to the creditor to get back your vehicle. That’s because you’d likely not need to catch up on any missed payments before getting it back. Under Chapter 13 one of two things will happen, depending on your vehicle loan. You’ll either not need to catch up on the missed payments. Or you’ll have of time to do so.

If you qualify for “cramdown” you won’t have to catch up at all. We covered this in a recent (November 9, 2020) blog post. But basically you don’t need to catch up because you effectively get new payment terms going forward. You don’t have to pay the missed ones.

If you don’t qualify for “cramdown,” you’ll likely have to pay those missed payments. But you’ll have lots of time to do so. Chapter 13 provides a legal mechanism for you to catch up on the missed payments through a settle-all-your-debts payment plan. Usually, you have many months, even years, to catch up. This is in contrast to having to do so in a matter of a month or two in a Chapter 7 case.

Note that under Chapter 13 you will still likely have to pay the repossession costs up front. (This is a big reason for preventing the repossession from happening at all by filing bankruptcy beforehand.) Plus you’ll have to be current or get current on insurance. The bankruptcy courts tends to strongly believe that if you can’t pay the insurance to protect the creditor’s interest in the vehicle, as you are contractually required to do, then you can’t keep that vehicle.

Power Over Your Vehicle Creditor

Second, under Chapter 13 your vehicle creditor is more likely forced to return your vehicle. The bankruptcy court has power to require its return. Assuming you have insurance or can reinstate it quickly, your bankruptcy lawyer can file a motion for the vehicle’s return. Or on threat of such a motion, your lawyer contacts the creditor or its own lawyer and arranges for the return. How much you’d have to pay up front depend on your situation. It can depend on when you bought your vehicle, and on whether you owe more than it’s worth. But generally if you do what the law requires of you, your creditor has to return your car.

Next…

We just covered the first of 4 reasons why Chapter 13 is better than Chapter 7 for your vehicle loan. We’ll cover the others next week.

 

Stop Vehicle Surrender or Repossession

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Filing bankruptcy immediately stops the repossession of a vehicle by its creditor. Then you can use Chapter 7 or 13 to hang onto it permanently.

 

We’re continuing a series of blog posts on the smart timing of your bankruptcy case. This week we get into filing bankruptcy to stop a vehicle repossession or surrender. Bankruptcy gives you several tools to save a vehicle that you really want to keep. But bankruptcy can also buy just a few more weeks with a truck or car that you can’t pay for. That way you can surrender it when you’re better prepared to do so.

What’s most important is that you can’t take advantage of these benefits if you surrender your vehicle, or it gets repossessed, before you file bankruptcy. Then it’s too late.

What to Do?

If you currently can’t afford your vehicle payments, you may feel that you have no choice. You figure you just have to give up the car or truck.

You may be currently behind on your payments, worried about an inevitable repossession. You’re wondering whether it makes more sense to just surrender the vehicle yourself. That way you feel you at least have some control of the timing. Or maybe instead you’ll be able to hang onto it a little longer if you wait until it gets repossessed.

Bankruptcy can give you better options then these. First, it can often allow you to keep the vehicle. And second, if it still makes sense to let go of it, you get more control over the timing.

Vehicle Surrender or Repossession Seldom Solves Anything

Surrendering your vehicle, or letting it get repossessed, is seldom a good idea. Both can really hurt, immediately and long-term.

In both of these situations, you would very likely continue owing money on the vehicle loan. Your creditor would sell your vehicle and credit the sale proceeds to your loan balance. But then you’d owe the rest of the balance. That balance would be due in full right away. And almost always the amount you’d still owe would be much more than you expect.

There are a bunch of reasons for that. First, the vehicle would likely be sold for less than it is worth. It would likely be sold at an auto auction, where the purchase prices tend to be low. Second, your creditor would add onto your balance a bunch of costs and fees. Besides late fees, there are various repossession and sale costs, including storage, the auction fee, and such. These charges—which your contract allows—can really add up. Bottom line: you’d likely owe a huge balance, on top of not having your vehicle.

Next, your lender likely won’t waste much time before suing you for that huge balance.  If you don’t respond to the lawsuit, next come wage and bank account garnishments. These would likely force you into bankruptcy. So it makes sense to look at that option before surrendering or losing your vehicle to repossession.

How Chapter 7 Helps

Filing a Chapter 7 “straight bankruptcy” helps in a number of ways.

First, if you’re behind on your vehicle loan payments, filing bankruptcy puts an immediate stop to a pending repossession. The “automatic stay” stops virtually all creditor collections actions, including repossessions. You would then have a month or two, sometimes more, to catch up.

Second, by forever writing off (discharging) all or most of your other debts you’d more easily afford your vehicle payment. Same with your other vehicle costs, like insurance, gas, and maintenance.  

Third, if you decide it’s best to surrender your vehicle, Chapter 7 lets you do so anxiety-free. You don’t have to live in fear about your vehicle disappearing at the worst time. Instead you and your bankruptcy lawyer arrange for a convenient time for you to surrender it. You do so while the automatic stay is protecting you from adverse actions by your lender. Plus it helps to have your bankruptcy lawyer in your corner, instead of being on your own.

Fourth, if you do surrender your car or truck, the remaining balance is forever discharged in bankruptcy. Instead of being on the hook for that balance (as discussed above), you’d owe nothing.

How Chapter 13 Helps

If you really need or want to keep your vehicle, Chapter 7 may not help enough. You may not be able to afford the monthly payment even after discharging other debts. That may be because you owe special debts that Chapter 7 does not discharge, like child support or income taxes. Or you may be behind on payments and be unable to catch up as fast as the lender demands.

Chapter 13 can often cut through all these shortcomings.

First, Chapter 13 often allows you to pay your vehicle payment first, before other important debts like taxes and support.

Second, Chapter 13 can give up to 5 years to catch up on any back payments. Often, you don’t ever need to catch up on them.

And third, if your vehicle loan is more than two and a half years old, you can likely do a “cramdown.” This would lower your monthly payment. It may reduce your interest rate. You’d likely pay less overall on your loan, sometimes by thousands of dollars. Then at the end of the Chapter 13 case you’d own your vehicle free and clear. (See our blog post 2 weeks ago for more about vehicle loan cramdown.)

Conclusion

You can see that it’s usually not smart to surrender a vehicle or allow it to be repossessed. Instead talk with a bankruptcy lawyer to see you could keep that vehicle through either Chapter 7 or 13. Or surrender it but owe nothing on the vehicle loan.

 

Timing of Non-Vehicle Collateral Cramdown

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Cramdown is most familiarly known as a tool to decrease monthly payments on vehicle loans. But you can also cram down debt on other collateral.  

 

We’re in a series of blog posts on the best timing for your filing of your bankruptcy case. Last week we got into timing the cramdown of a vehicle loan. Cramdown is a legal tool for reducing monthly payments on a debt secured by collateral. It also usually enables you to pay less on the debt overall, and eventually own the collateral free and clear.

This doesn’t just work on vehicle loans. You can cram down debts secured by purchased furniture, appliances, or just about anything else you buy on time.

The rules are similar for such non-vehicle collateral as they are for vehicles. But the timing is different.

A Creditor with a Security Interest

If you bought something on credit, you can’t just file bankruptcy, write off the debt, and keep what you bought. That is, you can’t if the creditor legally kept a right to what you bought. That right is called a security interest. That’s what allows a creditor to repossess what you bought if you don’t pay the debt that’s tied to it.

Talk with your bankruptcy lawyer whether or not a creditor has a security interest in what you bought. Each situation is different. Two transactions that look very similar can be completely different. If the creditor did not jump through the right hoops, it may not have a security interest, and you may not need to pay anything.

But assuming the creditor does have a security interest in what you bought, you have to pay to keep it. Outside bankruptcy, of course you have to pay the entire debt to keep what you bought.

Advantages and Disadvantages under Chapter 7

This situation is a little better in a Chapter 7 “straight bankruptcy” case. You have the option of surrendering the collateral and then almost always you’d owe nothing. That’s because whatever you’d owe would be discharged—legally written off permanently—a few months after your filing. You’d satisfy the creditor’s security interest by surrendering the collateral. Then you’d take care of the remaining debt by discharging it through your Chapter 7 case.

But if you want to keep the collateral, you usually have to pay the whole debt. The creditor requires you to “reaffirm” the secured loan as part of your Chapter 7 case. That means you agree to fully pay that debt. This generally means keeping the same monthly payment amount, same interest rate, and all other contract terms. Also, if you’re behind on payments you may need to bring them current quickly. This can include late fees and other charges. Hard to do when money is very tight.

Sometimes a creditor will be flexible with the loan terms in the Chapter 7 reaffirmation process. This happens more often with non-vehicle collateral. That’s because such creditors have less leverage than they’d have with a vehicle. People generally really want to hang onto their vehicle; less so with furniture and such. Plus there’s usually less money involved, and more hassle for the creditor to repossess the collateral. Non-vehicle collateral also tends to depreciate faster. So sometimes this kind of creditor is willing to negotiate about the monthly payment, interest rate, and the total amount paid. Again, talk with your bankruptcy lawyer about your specific situation.

The bottom line: under Chapter 7 if the creditor wants you to pay the full amount, you don’t have much choice. Your only real leverage: to threaten to surrender the collateral and pay nothing.

Advantages of Chapter 13 Cramdown

In contrast, a Chapter 13 non-vehicle collateral cramdown can be much better because you have tons more power and leverage. You effectively can force the renegotiation of the debt, usually on very favorable terms.

Cramdown usually reduces the total amount you pay on that debt, often significantly. The amount you pay is largely based on the value of the collateral. Again, collateral like furniture and appliances tend to depreciate quickly. This reduces the total you would pay.

That alone often enables you to reduce the monthly payments. That’s because it’s a reduced amount paid over the same length of time. Then in many situations you are also able to stretch the payments over a longer term. So you’re paying a reduced amount over a longer time, really reducing the monthly payment. And If the contractual interest rate is high, you can often reduce it. This also nudges down the monthly payment.

Finally, if you’re behind on payments you usually don’t need to catch up. And you often pay little or none of any accrued late fees and other contractual charges.

You get these benefits, IF you qualify for cramdown.

Qualifying for Cramdown

First, as with vehicle loans, non-vehicle collateral loan cramdown is only available under Chapter 13 “adjustment of debts.” It is a tool not available in a Chapter 7 case.

Second, cramdown is available on a broad category of collateral. The law says cramdown applies to “collateral [which] consists of any other thing of value” other than a “motor vehicle.” U.S. Bankruptcy Code, Section 1325(a)(hanging paragraph after (9)). So the collateral can essentially be anything of value other than a vehicle.

Third, cramdown makes the most sense when the collateral is worth less than you owe on it. That is by far the most common situation. That’s because collateral often depreciates faster than you pay down the debt.

In the unusual situation where collateral is worth more than the debt, cramdown is either not helpful or of more limited benefit. The total amount paid on the debt would not be less. There’s no cramming down of the debt amount to the value of the collateral. But if the number of months of payout can be increased, the monthly payment amount could be reduced. This happens if the length of the 3-to-5-year payment plan is longer the remaining length of the loan contract.

The Timing Qualification

The final qualification is the timing one. The loan must be more than 1-year old when you file your Chapter 13 case.

What happens if you file your Chapter 13 case before your loan is a year old?  You can’t do a cramdown on that debt. You’re stuck with the regular payments, interest rate, and full balance to pay. You generally want to qualify for cramdown if you can.

However, there are usually other timing considerations involved in choosing when to file bankruptcy. Some may be more important and/or may involve more money than this one consideration. Use the knowledge and experience of your bankruptcy lawyer to understand the different considerations and to file your case at the best time.

 

Bankruptcy Timing for Vehicle Cramdown

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Cramdown usually lowers your monthly vehicle loan payment and the total amount you must pay. To qualify the loan must be more than 910 days old.


We’re in the midst of a series on filing your bankruptcy case with the best timing. Today we get into the right timing to be able to cram down your vehicle loan. Cramdown is a potentially huge benefit, so it’s important to know how to take advantage of it.  One key consideration in this is the timing of your bankruptcy filing.

Advantages of Vehicle Loan Cramdown

In a Chapter 7 “straight bankruptcy” case, if you have a vehicle loan you must “take it or leave it.” To keep the vehicle, you have to “reaffirm” the vehicle loan. That means you agree to remain fully liable on the debt. It usually means you are stuck with the regular monthly payment, even if you can’t afford it. You can’t change the interest rate, even if it’s high and jacking up how much you must pay. You are stuck with the full balance on the loan, even if the vehicle is worth much less. This includes late fees and any other contractual charges. If you’re behind almost always you have to quickly catch up. Usually the only other choice is to “leave” it—surrender the vehicle and discharge (write-off) the vehicle’s debt. If you need and want to keep your vehicle, that’s not an option.

In contrast, a Chapter 13 vehicle cramdown can be much better in all these respects. Cramdown can reduce your monthly vehicle loan payment. It can reduce the total amount you pay on that debt. You can often reduce the interest rate. You may well not need to pay any accrued late fees and other contractual costs. And you generally don’t need to catch up on late payments. You get all these benefits, IF you qualify for cramdown.

Qualifying for Cramdown

We’ll get to the crucial timing qualification in a moment. But let’s first quickly cover a couple other ones.

First, as implied above, a vehicle loan cramdown is only available under Chapter 13 “adjustment of debts.” Not in a Chapter 7 case.

Second, cramdown is only available for personal vehicles, not business ones. The vehicle must be one “acquired for the personal use of the debtor.” U.S. Bankruptcy Code, Section 1325(a)(hanging paragraph after (9)).

Third, cramdown works best when your vehicle is worth less than you owe on it. The term comes from the power to “cram” the balance on the loan “down” to value of the vehicle. This ability comes from the fact that the law treats secured debts differently than unsecured ones. It favors secured debts because a creditor has property of some sort backing up the debt. This gives the creditor property rights that do not come with an unsecured debt.  Then, very importantly, Chapter 13 allows you to separate the secured part of vehicle loan debt from the unsecured part. The amount of the secured part equals the value of the vehicle. The unsecured part is the remaining part, that which is beyond the vehicle value. Cramdown essentially allows you to rewrite your loan to pay the secured part only. The unsecured part gets thrown in with the rest of your unsecured debts. You pay those only if and to the extent there’s money left over for them.

To make this clearer, let’s say your vehicle is worth $10,000 but you owe $15,000. In this example the secured part of the debt is the amount covered by the vehicle’s value: $10,000. The remaining $5,000 is the unsecured part of the debt. Essentially cramdown allows you and your bankruptcy lawyer re-write the loan at a balance of $10,000. It will likely be at a lower interest rate. You may well be able to stretch the payments out over a longer term. The effect will often be a significant lower monthly payment and total amount you pay. Then at the end of your successful Chapter 13 case you own your vehicle free and clear.

The Timing Qualification

So you’re filing a Chapter 13 case, with a personal vehicle loan with a balance higher than the vehicle value. Now you must meet one more timing consideration.  Your vehicle loan must be more than 910 days old when you file your Chapter 13 case. (910 days is essentially two and a half years.)

What happens if you file your Chapter 13 case at any time before your loan is 910 days old?  You can’t do a cramdown on that vehicle loan. You’re stuck with the regular payments, interest rate, and full balance to pay. You may not be able to afford to keep your vehicle. In any event you’ll miss out on saving lots of money on the debt. So you definitely want to qualify for cramdown if and when you can.

What if your vehicle loan is not yet two and a half years old? What if you h

ave other pressures to file your case before enough time has passed? This is where the knowledge and experience of your bankruptcy lawyer comes in. He or she will determine whether cramdown would help you and, if so, calculate how much it would help. You will receive counsel about ways to possibly ease the other time pressures. Your lawyer will help you figure out whether it’s worth waiting to file in order to qualify. And if so will help you buy time to get there. In other words, you’ll get specific advice on the best course of action for you.

Bankruptcy Timing for Vehicle Cramdown

Chapter 13 Timing to Discharge Student Loans

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Discharging a student loan requires meeting the difficult condition called undue hardship. Chapter 13 can help through more flexible timing.

 

We’re in a series on the best timing for filing your bankruptcy case. Two weeks ago we introduced the special condition you have to meet to discharge (write off) student loans: undue hardship. Last week we focused on how to better meet that condition with smart timing of a Chapter 7 “straight bankruptcy” case. Today we get into doing that with a Chapter 13 “adjustment of debts case.

Undue Hardship Requirements

We’re focusing on the phrase “undue hardship” because the law clearly establishes that as a condition for discharging student loans. The U.S. Bankruptcy Code says you can’t discharge a student loan unless paying it “would impose an undue hardship on the debtor [you] and the debtor’s dependents.” Section 523(a)(8). Generally bankruptcy courts have interpreted “undue hardship” to include three requirements. Each has a timing consideration. We’ll look at these three, showing how the timing benefits of Chapter 13 case can help you meet them.

Crucial Benefit of Chapter 13: the Long Automatic Stay

But first we need to introduce a crucial benefit of Chapter 13. It’s actually a benefit of all bankruptcy cases, but is especially strong in Chapter 13. And it provides you major advantages with student loans.

We’re talking about the “automatic stay.” This is the federal law that immediately stops almost all collection actions against you. It goes into effect the moment you and your bankruptcy lawyer file your case.

What’s crucial for our purposes here is that this protection usually lasts the length of your case. That’s not very long in a Chapter 7 case: only 3 or 4 months most of the time. In contrast, a Chapter 13 case generally lasts 3 to 5 years. So its automatic stay protection lasts that long. Meaning that your student loan creditors would be stopped from collecting throughout those 3 to 5 years of your Chapter 13 case. This is a huge benefit on its face; it can be even more so for meeting the undue hardship requirements.

1. Presently Inability to Pay

This long period of protection from collection allows you to delay establishing the required present inability to pay the student loan. You have to be experiencing “undue hardship” at the time your bankruptcy lawyer asks the bankruptcy court for the discharge of your student loan. With Chapter 13 you can file the case, imposing immediate automatic stay protection against your creditors, before qualifying for undue hardship.  In particular you can file when anticipating that you would be able to qualify within the following 3-to-5-years.  In the meantime your student loan creditor(s) is (are) prevented from requiring payment and taking other collection actions.

For example, assume you have a worsening chronic medical condition. But that condition doesn’t currently prevent you from maintaining a minimal standard of living if you paid the student loan. Filing Chapter 13 now would protect you from the student loan(s) and the rest of your creditors. Then you could wait as long as 5 years for your condition to worsen until you did meet this requirement.   

2. Extended Inability to Pay

The second requirement of undue hardship looks into the future. Your inability to maintain even a minimal standard of living must be predicted to last throughout most of the student loan repayment period. The advantage in Chapter 13 here is similar to the first requirement just discussed. Being able to wait to file the request for an “undue hardship” discharge as much as years after filing the Chapter 13 case increases your ability to meet this second requirement.

For example, assume you were in a serious vehicle accident a few months before filing the Chapter 13 case. You are receiving short-term disability payments. You need bankruptcy protection from all your other creditors now. But you do not yet know your long-term medical prospects, and thus your financial prospects. Specifically you don’t know whether you will be able to maintain a minimal standard of living throughout the student loan repayment period. Filing Chapter 13 now would protect you from all your creditors, including the student loan one(s). And it would keep you protected as your medical condition stabilized and your financial prospects got clearer. If you qualified for long term undue hardship then, your bankruptcy lawyer could file the request then. You’d more likely qualify because the future would be clearer then.

3. Prior Effort to Pay or Make Other Arrangements

The third requirement is that you must have taken certain action in the past before requesting a student loan discharge. You must have made a meaningful effort to repay the loan. Or else you must have applied for appropriate administrative programs for deferring or reducing payments on it.

In the midst of a Chapter 13 case you may or may not make any direct payments to the student loan creditor. This depends on the rules of your local bankruptcy court. Same with your ability to apply for the administrative fixes. Talk with your local bankruptcy lawyer about this.

If there isn’t great urgency to file the case, your lawyer may well counsel you to apply immediately for the administrative payment-delaying or reducing programs. That way you can better position yourself to meet this part of the test before filing the Chapter 13 case.

Even Without an “Undue Hardship” Discharge, Get Collection Protection

In these Chapter 13 scenarios, at the time of filing you’ll likely not know whether you’ll eventually qualify for hardship discharge. Time will pass while you’re in your case, and your medical/financial circumstances may deteriorate. Or they may improve, so that you don’t qualify for undue hardship. But the automatic stay would protect you from your student loan creditor(s) in the meantime. At some point during the case you may qualify for undue hardship.  But if eventually you don’t, you still would have gotten relief from your student loan creditor(s) during that time. 

 

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Attorney Robert Firth works with clients throughout the Coachella Valley and all courts throughout Riverside & San Bernardino Counties. We regularly work with clients in Palm Springs, Palm Desert, Indio, La Quinta, Rancho Mirage, Indian Wells, Desert Hot Springs, Yucca Valley, El Centro and Imperial County.

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