A common question when looking at filing for Chapter 7 bankruptcy is whether a debtor can keep their car. If the car has equity, then to keep the car it must be covered by an exemption. There is a specific exemption for a vehicle under Federal law, but one may also use any excess “wild card” exemption. The Federal exemption is at least $3,675.00 in equity (it goes up most years).
If the car has a secured loan against it then to keep it in a Chapter 7 one typically will have to reaffirm the debt. This means that the debtor will have to agree to remain personally liable on the loan as it existed when the bankruptcy was filed. Sometimes creditors will not insist on the reaffirmation so long as the loan is not past due and the debtor keeps making payments on time. However, many of these loans are for much more than the car is worth and have exceedingly high interest rates.
Another way to keep your car in the Chapter 7 is to file a Motion to Redeem Personal Property under 11 USC Sect. 722 of the bankruptcy code. Essentially, the debtor is moving to court to let them pay fair market value of the car in one lump sum as opposed to the full amount of the loan. If granted, then the creditor must release the lien on the car for the lump sum payment.
You may have enough exempted funds in a bank account to pay the lump sum, or you may have to seek a “722 loan” from another source. Either way, this is a good option for a vehicle that is upside down on its loan or has a high interest rate.
These last years of recession afforded me the privilege of consulting with a number of small business owners. There are special concerns for the small business owner facing a debt crisis and so finding someone with experience in this area is paramount. Few small business owners would be good candidates for a Chapter 11 bankruptcy because of the expense involved, but it is wise to consult a practitioner that has a grasp of Chapter 11 issues even when looking at a Chapter 7 or possibly a Chapter 13.
Ordinarily, the small business owner’s personal finances are tied to the business finances in such a way that an individual Chapter 7 or Chapter 13 is necessary, even if most of the debt belongs to the business. In other words, just filing a Chapter 11 or Chapter 7 on the business almost always leaves the business owner still personally liable on the debt. The practitioner, then, must analyze whether both a business and an individual bankruptcy is necessary. If only a business entity needs to enter bankruptcy, then things remain fairly straightforward. If an individual (or joint for married folks) bankruptcy is required, then what will come of the business?
Very often the small business owner wants to keep their business up and running through the entire individual bankruptcy. Sometimes there are practical reasons behind this, but many times it is more of a sentiment. The small business owner understandably becomes very attached to the business entity. It is very common for the small business owner to have a hard time differentiating between themselves and the business because they have put so much work and care into it that it becomes an extension of themselves. Solid legal counsel can help you figure out just what the risk is of keeping the entity as a going concern versus letting is dissolve or filing a business bankruptcy.
One key factor the attorney must analyze is the value of the business. To do this, the assets, including accounts receivables, must be valued and any secured debt tied to those assets must be ascertained. Furthermore, is there transferable goodwill or a client list with substantial value? Is this a sole owner business or are there multiple owners? If multiple owners, how readily transferred are the debtor’s shares? Once a best estimate of the value is derived, the attorney must see if there are sufficient exemptions to cover the non-encumbered value (equity). If the value can be exempted, then the attorney must determine the likelihood of challenge by the trustee based on the nature of the business and help the small business owner decide what level of risk they are comfortable with. If the value cannot be exempted fully, then the lawyer should help sort out what a Chapter 13 plan payment would look like given the unique set of facts involved or if there is a source of funds to buy the non-exempt interest back from the trustee.
Depending on the option the owner/debtor chooses there are a number of other considerations to take into account beyond these basic ones listed. However, one thing is almost assured, unless the business is shut down or bankrupted too, a Chapter 7 will last one to two years rather than five to six months. The Chapter 13 would not be extended beyond its normal time frame, but that is three to five years.
I just wrote about purchase money security interests (PMSI) and bankruptcy for the post-Christmas filer and offer this tidbit in follow-up. If you did make some PMSI purchases for the holidays and you want to make sure you or the person you gave it to is able to keep the items, then there are two options that can still offer some relief.
First, you may want to look at is 11 USC Sect. 506. This provisions allows the debt secured against most items (there are exceptions related to cars and residences) to be “crammed down”. This means that the amount that is secured is no more than the actual value of the item on the date of filing. This is helpful in a Chapter 13 because you may have purchased a $1,500.00 television, but when you file a little more than three months later (this time will be explained in another post) the television is worth only $500.00, then the amount that must be paid in order to keep the television is only $500.00 over the course of the plan.
Section 506 also comes into play in Chapter 7 in conjunction with 11 USC Sect. 722. This provision gives the debtor the right to redeem personal property that would ordinarily be exempt property by paying the creditor a lump sum in the amount of the value of that property.
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