Kentucky Bankruptcy Law

Counsel with Care

Bankruptcy Myth of Non-dischargeable Car Loans

I have heard from two different people looking for relief from their debt that they thought they could not discharge their car loan debt in a bankruptcy. In fact, one person said they had consulted an attorney on this very issue and they were told they could not discharge their car debt in a bankruptcy even though the vehicle was already repossessed. The source of the myth is one of the reforms that occurred to the bankruptcy code in 2005. The change was that if you had purchased a vehicle within 910 days (about 2.5 years) prior to filing your bankruptcy petition, that purchase money debt secured against the vehicle could not be “crammed down”.

Cramming down a debt is where the amount of the debt secured against property, such as a car, is reduced to the value of that property on the date of filing the petition. For a car, you may owe $15,000.00 but the vehicle is only worth $10,000.00. That debt could be crammed down so that you would have to reaffirm (agree to pay) only $10,000.00. Under the old law, the $5,000.00 debt above the value of the car was discharged. The change in the law prevents this from being done on cars purchased within 910 days.

However, what did NOT change is that the debt of a car loan can be discharged. If your car was repossessed or if you surrender it, then the whole remaining debt will be treated as unsecured and will be discharged. If you keep the car and you purchased it over 910 days prior to the bankruptcy you may want to consider a Chapter 13. In the Chapter 13, you propose a plan that includes valuing a car secured by a debt. You suggest what you believe to be the value of the car. The creditor can challenge that, but usually a compromise is reached. You then only pay the value of the car in the Chapter 13 while the rest of the debt’s principal is treated as an unsecured debt. Any remaining unsecured debt after the plan payments are paid in full gets discharged.

In a Chapter 7, if you have the resources, you could attempt to redeem the vehicle at its fair market value. This hardly ever occurs, however, because few debtors have the resources to pay a lump sum sufficient to redeem a vehicle. So, most debtors either have to reaffirm the debt for the full debt or surrender it. The Chapter 13, then, offers the most viable option to cram down debt on a car.

Advertisements

March 27, 2013 Posted by | Bankruptcy | , , , , , , , , | 9 Comments

Post Holiday Pitfalls for Bankruptcy part 1a

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.

January 3, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Plan, PMSI (purchase money), Redeem / Redemption, Security interests | , , , , , , , , , , , , | Leave a comment

Post-Holiday Pitfalls in Bankruptcy part 1

There are some bankruptcy code provisions that take on extra significance for the Debtor who files Chapter 7 or Chapter 13 in the weeks following the Christmas season. People tend to rack up greater debt and on higher priced items during this season. It is hard to resist the lure of commercialism, even when one is already feeling the squeeze of debt. Even then, folks want to give good gifts to their children, extended family, and friends.

The code provision I want to highlight today is 11 USC Sect. 522(f)(B). Ordinarily, this provision is used to “strip off” (make unsecured) a secured debt on exempt household goods. However, this only applies to NONpurchase money debts. These are ones where you already had the item and went to a lender who then asked to put up your property as collateral. Purchase money security interests (PMSI), however, create a security interest at the moment of purchase. This matters because even though your personal obligation to repay the debt gets discharged in the bankruptcy, the lender continues to have an interest in the property.

So, even if your go through a bankruptcy and it seems to all be over and done, that creditor can still come back and demand the property be surrendered to them (no deficiency debt would exist though). This can be very troubling if you really want  to hang on to that particular item or if you gave that 60 inch HD television to your retired dad so he can watch The Price Is Right in high-definition down in the basement.

The only way you may know that a PMSI exists on a particular item is if you have the receipt and any other paperwork you signed when you purchased it. You may only have a recollection that you had to sign two places instead of one. That second signature would have been the security agreement. Regular credit card purchases rarely involve a PMSI, but in-store credit or store specific credit cards often do involve purchase money security interests.

January 2, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Planning, PMSI (purchase money), Property (exempt, Security interests | , , , , , , , , , | Leave a comment

Post Holiday Pitfalls in Bankruptcy part 1

Certain provisions of the bankruptcy code bear special scrutiny when someone is filing bankruptcy in the weeks following the Christmas holiday season. This is because people tend to rack up higher debt during this season and tend to purchase higher priced items. Even folks struggling with a debt load find it hard to resist the lure of commercialism. They hope to still give great gifts to their children, family and friends.

The first provision to be aware of in a post-Christmas bankruptcy filing is 11 USC Sect. 522(f)(B). Ordinarily, 522(f) is the code section that allows one to strip off (turn from secured to unsecured) a debt that has household goods as collateral. However, 522(f)(B) clearly applies only to debts that were NOT purchase money security debts.  The reason this matters just after Christmas is that many large price purchases come with a purchase money security interest (PMSI) forcing you to either pay the debt or cough up the goods purchased. This can be embarrassing when you purchased a nice, large screen TV for your retired dad so he can watch the Price is Right in high-definition.

So, how do you know if a PMSI attached to you gift purchase? The only way to know for sure is if you still have the receipt and any other paperwork you signed when you bought the item. Ordinarily, regular credit cards do not involve PMSIs on their purchases, but in-store credit or store specific cards often do attach PMSIs to goods.  Your only clue that you are actually giving the creditor a security interest in the item you are buying may be when you have to sign two different places instead of just one. At some stores, the security agreement prints out on receipt paper just like the ordinary receipt which you sign whenever you make a credit purchase. Or, nowadays, you may be asked to sign an electronic signature device twice to complete the transaction.

PMSI debts do get discharged in a Chapter 7 or Chapter 13 as to your personal obligation to repay, but the security interest remains attached. So, even after the bankruptcy is over and done and you think all is well, the creditor can still show up and demand the property be surrendered to them. They cannot demand you repay them, but they do have a right to the stuff.

January 2, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, Debt collection, Discharge, Exemptions, PMSI (purchase money), Property (exempt, Security interests | , , , , , , , , | Leave a comment