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Recent Blog Posts
Giving a Creditor "Adequate Protection"
To be able to keep your property that’s collateral or security on a secured debt, you must give that secured creditor “adequate protection.”
In the bankruptcy system, debtors and creditors each get certain protections.
“Automatic Stay” Protection for You
A major protection that you as a debtor filing bankruptcy get is the “automatic stay.” That’s the part of bankruptcy law which stops creditors’ collection actions against you. That includes stopping a secured creditor from repossessing or foreclosing its collateral or its security. (See Section 362(a) of the U.S. Bankruptcy Code.)
The automatic stay protection goes into effect immediately upon your filing of bankruptcy. But it doesn’t necessarily keep the collateral protected for the long term. The creditor can challenge that protection.
“Adequate Protection” Protection for Secured Creditors
What the IRS/State Can and Can't Do After You File Bankruptcy
Filing bankruptcy stops tax collection just like it stops other debt collection by more conventional creditors. But there are exceptions.
The last several weeks of blog posts have been about bankruptcy’s “automatic stay” protection from creditor collections. We’ve also gotten into many of the exceptions to that protection—when certain creditors CAN take certain actions.
Today we focus on some very limited exceptions to the automatic stay protection, those which apply specifically to income taxes. In bankruptcy you don’t want surprises, especially from a tax collector. These limited exceptions are reasonable. But it’ll still help you to understand them in order to not be surprised by them.
Tax Determination is Allowed, Tax Collection is Not
Simply put, the exceptions to the automatic stay protections are about determining the amount of tax owed. The IRS and the state tax authorities can take steps during bankruptcy to figure out how much you owe. They can make you do what the law requires along these lines. For example, they can require you to file your tax returns, regardless that you’ve filed bankruptcy. But then they can’t take any action beyond that to collect any taxes owed.
No Automatic Stay after Multiple Prior Bankruptcy Filings
If you’ve had more than 1 case filed and dismissed within the last year, you’ll need to show “good faith” to get automatic stay protection.
The Effect of ONE Prior Dismissed Bankruptcy Case
Our last blog post was about losing the automatic stay protection from debt collection, 30 days after filing bankruptcy. This loss of protection could happen as to ALL of your creditors, not just one particular one. It could happen if you had filed a bankruptcy case within 1 year before the filing of your present case, and that prior case got dismissed (thrown out and closed).
You could prevent losing this protection from debt collection by showing the new case is being filed “in good faith.” There are specific considerations laid out in the law for demonstrating “good faith.” See Section 362(c)(3) of the U.S. Bankruptcy Code.
Does Hiring a Bankruptcy Lawyer Stop Collection Actions?
Hiring a bankruptcy lawyer can stop creditor phone calls and some other potentially very important collection actions against you.
What relief can you get when you get a bankruptcy lawyer?
Relief After vs. Before Filing Bankruptcy
The moment you file a bankruptcy case, all or most of your creditors must legally stop collecting their debts. The law that accomplishes this is called the “automatic stay.” This is what prevents a home foreclosure or vehicle repossession from going through. It also stops a lawsuit from turning into a wage garnishment, and ends an ongoing garnishment. See Section 362 of the U.S. Bankruptcy Code.
However, if you are just now looking into bankruptcy as an option you may be several weeks, or more, from actually filing your case. In very urgent situations you may be able to file a bankruptcy case quite quickly. But to be practical, it can take some time for you to understand and choose among your options. You may need some time to gather information or documents. It’s sometimes much better tactically to delay filing for a few days or weeks. In all these situations it can be really helpful if you could get some relief sooner than the bankruptcy filing itself.
Chapter 7 vs. 13 When Your Vehicle is Worth Too Much
Usually your car or truck is protected in bankruptcy with a vehicle exemption. Or if the vehicle is worth too much Chapter 13 can protect it.
How Chapter 7 and Chapter 13 affect your vehicle and vehicle loan can determine which of these options you choose. That’s why we’ve focused the last several blog posts on the differences between these options. We’ve especially looked at reaffirming a vehicle loan in Chapter 7 vs. cramming it down in Chapter 13. Depending on your circumstances one of these is likely a safer and/or less expensive way to keep your vehicle.
But there is another consideration we don’t want to lose sight of. What if you have too much value in your car or truck? What if you either own it free and clear or else it has lots of equity? What if you’re not worried about your lender but rather with the bankruptcy trustee taking your car or truck?
Exemption for Your Vehicle
Why would a bankruptcy trustee be interested taking your vehicle?
Cramdown on Vehicle Not Bought for Personal Use
The 910-day condition for doing a vehicle debt cramdown don’t apply if the vehicle was not “acquired for the personal use of the debtor.”
The Cramdown Advantage
The last several blog posts have been about the advantages of Chapter 13 cramdown, especially the cramdown of vehicle loans. Cramdown can be an excellent way to keep your vehicle. It usually allows you to reduce the monthly payment as well as the total you pay on the debt. Often the payment reduction is significant. You can often save thousands of dollars compared to what you’d usually pay on the debt overall. Through cramdown you may be able to keep a car or truck that you couldn’t afford to otherwise.
Because of these advantages vehicle loan cramdown may be a reason to file a Chapter 13 case. It’s not available under Chapter 7 “straight bankruptcy.”
The 910-Day Condition on “Personal Use” Purchases
Cramdown on Collateral Not Purchased with the Debt
The 910-day & 1-year conditions for doing a Chapter 13 cramdown don’t apply if the creditor doesn’t have a purchase money security interest.
The Cramdown Advantage
Last week we got into Chapter 13 cramdown of vehicle loans and furniture loans. Cramdown can be an excellent way to keep personal property that’s securing a loan. It allows you usually to reduce the monthly payment as well as the total you pay on the debt. Often the reductions are significant. Cramdown can enable you to keep a vehicle or some other important personal property that you couldn’t otherwise. It can be a reason to file a Chapter 13 case because it isn’t available under Chapter 7 “straight bankruptcy.”
The 910-Day and 1-Year Conditions
But as we’ve been discussing there is a timing condition you must meet to qualify for Chapter 13 cramdown. With vehicles you must have entered into the contract at least 910 days (about two and half years) before filing the Chapter 13 case. With any other kind of collateral the contract must be at least a year old.
Example of Reaffirming vs. Cramming Down Furniture Loan
An example comparing the reaffirmation of a debt secured by furniture in a Chapter 7 case and cramming down that debt in a Chapter 13 case.
Last time we showed how cramdown on a vehicle loan can reduce the payments and the total amount you pay. The amount you save monthly and in total may be enough to justify filing a Chapter 13 case. The alternative is usually paying the full monthly payments and the full contract balance through Chapter 7 reaffirmation.
Cramdown on Debt Secured by Non-Vehicle Personal Property
The concept is the same with secured debts on personal property other than your vehicle. Chapter 13 allows you to re-write the debt based on the value of the collateral, such as furniture you bought. That collateral value amount becomes the secured part of the debt. You pay that part in full, with interest but often at a lower interest rate. The monthly payment is almost always less than the contract amount. That’s because it’s based on the value of the collateral, which is less than the full loan balance.
Example of Reaffirmation Agreement vs. Cramdown of Vehicle Loan
Here’s an example of the reaffirmation of a vehicle loan in a Chapter 7 case vs. “cramdown” of the debt in a Chapter 13 case.
We’re in a series of blog posts about choosing between Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.” Along these lines two blog posts ago we outlined when to reaffirm a secured debt (focusing on a vehicle loan) under Chapter 7 vs. handling it under Chapter 13 instead. Then last time we gave some examples showing which option works better in different situations. That focused on situations in which someone had fallen behind on the payments, and/or had a rough payment history. But we didn’t cover the special situation of Chapter 13 “cramdown.”
Today we’ll give an example when cramdown on a vehicle loan may be a good reason to file a Chapter 13 case.
The Background Facts
Let’s say Christina is current on her vehicle loan. She got far behind on all her other debts because of a serious illness for which she was underinsured. She’s healthy now but being so sick hit her hard financially. She has way more debt than she could ever pay off, and she’s being sued by two of her creditors.
Examples of Reaffirmation Agreement vs. Chapter 13
Here are examples of the reaffirmation of a secured debt (like a vehicle loan) in a Chapter 7 case vs. addressing it in a Chapter 13 case.
The last blog post was about when to reaffirm a secured debt under Chapter 7 and when to handle that under Chapter 13 instead. This kind of comparison of options can get a bit dry. So today we’re demonstrating how it really works with some examples. We change the facts a few times to show when each of these two options makes more sense.
The Initial Facts
Let’s say a guy named Trevor just fell two months behind on his vehicle loan. He’s at immediate risk of getting his car repossessed. He really needs to keep his vehicle to get to and from work. He’s always behind on his vehicle loan because he has so many other debts—mostly medical bill and unsecured credit cards. What’s especially killing him is that he got sued on some big medical bills and is getting his wages garnished.
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