Tag Archives: car

Short Answers to Complicated Questions

Frequently when I get a call from someone considering a bankruptcy filing, the first question I’m asked is — complicated.  Here are a few examples.

Are taxes dischargeable in Bankruptcy?

That depends.  Some taxes, like sales taxes and some withholding taxes are never dischargeable.  More commonly I am asked about income taxes, and not surprisingly the rules are complicated.   The most important thing I can tell you in brief is that when you see tax problems developing (and they usually snowball on you), file your returns on time.  Extensions are fine, as long as you file before theyexpire.  If you can’t pay, well, you can’t pay; but file the return.  There are three time frames that must be met before income taxes can become dischargeable, and one of them runs from the time that the tax return was filed.  There is also some troubling case law developing in other parts of the Country limiting dischargeability for late-filed returns.  Of course, if the IRS has filed a substitute for return, that is a whole different ball game.  Yes, I know, this doesn’t make a lot of sense.  It is a short answer to a very complicated question.  Just remember to file your returns timely, and if you wind up way over your head with tax debt, contact a qualified Bankruptcy attorney in your jurisdiction for a consultation.

If I file for Bankruptcy, can I keep my car?

Well, that depends on a lot of things — is it paid for, are you current on it, how much equity do you have in it, have you maintained insurance, can you afford to make the payments?

Think about this one for a minute.  There were over 6300 people who filed for Bankruptcy in the Western half of Oklahoma last year.  If they were all hitchhiking to work, don’t you think you would have noticed? Generally, the impetus for this question is a deep seated sense of shame and a fear that you have been bad and are going to be punished.  I don’t mean to belittle this, it is very real; and most of us have a voice in the back of our heads that says things like this to us, but bankruptcy isn’t about punishment; and most people who file for Bankruptcy keep their cars.   Are there exceptions?   Yes, but that is a whole different blog post.

I’m married, does my spouse have to file with me?

Probably not.  Now, are there reasons why you may want to file jointly?  Yes.  Are there times when you both need to file in order to get a particular result that you want?  Yes.  If your spouse doesn’t file with you, will your filing affect your spouse?  That really depends, and that is one of many reasons why I require that non-filing spouses attend the initial appointment with the filing spouse.

Is the Trustee going to come to my house?

Well, I don’t know.  Are you inviting him for dinner?  Seriously, now, the Chapter 7 panel trustees are highly compensated professionals who get paid a very small amount of money to administer cases.  They make their money administering non-exempt assets.  No one is paying them to go through your sock drawer.  Now, if a Trustee has reason to believe that you are concealing valuable assets, can a Trustee get a search warrant for your home or office?  Well, yes; and in 22-years of practice, I have seen that happen once.  The Debtor went to prison for a number of years for all kinds of fraudulent behavior.  So, don’t hide uncashed royalty checks; and the Trustee will not be paying you a visit.


Bankruptcy and Secured Debt — the Car Edition

I can’t count the number of times I have answered the phone, and the first words out of the caller’s mouth (before Hello, my name is. . . , etc.) are, “If I file for Bankruptcy can I keep my car?”

If everyone who filed for Bankruptcy automatically lost their cars, don’t you think you’d have heard about it by now?   Do you really think car dealers would ignore advertising to  this large a market?  So, when was the last time you saw an ad for a car lot that went like this.

So, you need to file for Bankruptcy.  You’re going to lose your car, of course; but we all know you can’t live in Oklahoma without a car!  So, you just come on down and pick out a replacement.  We will hold it until your Bankruptcy is safely filed.  Don’t you worry, we’ve got ways to get you into that car as soon as you lose your old one. After all, you don’t want to be one of those thousands of bankruptcy filers out hitch hiking to work!

Doesn’t sound too familiar to me either, but it was kind of fun to write.

The fact is that when it comes to secured debt in a Chapter 7 Bankruptcy you generally have four options:

  • Reaffirm;
  • Retain;
  • Surrender; or
  • Redeem.

A reaffirmation agreement recreates the debt post-petition.  That sentence is fraught with meaning.  First of all, it is an AGREEMENT.  That means that you must agree to it, but the Creditor must agree to it as well.  So, if the creditor is sick of you, you cannot force them to let you sign a reaffirmation agreement.  Also, the agreement terms may well require that you be current on your payments as of the time of the Bankruptcy filing.

Second, the reaffirmation recreates the debt post-petition.  That means it is effectively after the bankruptcy.  If you subsequently default, the creditor will have all of the rights that they would have had if you had never filed.  This means you lose the benefit of the Bankruptcy discharge with respect to the reaffirmed debt.

Retain and pay is an option that varies dramatically by jurisdiction.  The 2005 Bankruptcy Reform Act tried to do away with this option, but like many parts of the Act, it wasn’t quite as well drafted as it could have been.  The long and the short of it is that depending on a number of factors including:  where you live, the terms of your loan, the relevant State law and even the identity of your lender; you may be able to simply keep making your payments.

Surrender is pretty self-explanatory.  If you don’t want the car or can’t afford to keep the car, you can give it back to the lender and discharge any remaining obligation for the loan.  Wash your hands of it, be done, over.

Finally, there is redemption.  Redemption is really kind of cool and deserves its own post — which it is going to get.  However, in a nutshell the right to redeem property is the right to pay the lesser of the value of the property or the amount owed in a lump sum to the lender and get a lien release.  So, owe $2,500 on a laptop now worth $300?  Pay the $300 and keep the laptop.  Owe $36,000 on a pickup worth $13,000?  (Why, no, I did not just make up those numbers.)  If you can find a way to pay the $13,000 in a lump sum, you can keep the truck and be done with the $36,000 loan.

As usual, the devil is in the details; and that is nowhere as true as it is with the concept of redemption.  So, check back for a post on how to make it happen — or not.



How to Get Ahead in Bankruptcy

One of my favorite tools in the Bankruptcy Code is the right of redemption.  Redemption, or to redeem property, is the ability to pay the lesser of the value of the property at the time the Bankruptcy is filed or the amount owed on it.   So, when you paid $2,500 for a computer two years ago that is now worth $400 but you still owe over $2,000 for it; redemption can be a great deal.   I’ve redeemed Palm Pilots ($50), dining room furniture, televisions, cars, mobile homes, travel trailers, all kinds of stuff in Bankruptcy.

Now, obviously there must be a lien on the property or you don’t need to redeem it, you just file the Bankruptcy.  If there isn’t a lien on property, then any debt owed is basic unsecured debt; and a bankruptcy filing eliminates that automatically anyway.  However, a bankruptcy discharge does not normally affect liens attached to property.

Redemption works best with property that isn’t worth very much.  Funding can be a real problem, because you have to pay off the original lender in a lump sum.  So, those used Palm Pilots in the ’90’s were easy.  Clients paid hundreds for them, racked up huge interest charges; and they could all come up with $50 to never make a payment on the Palm Pilot again.

Bigger ticket items present a different set of problems.  So, if you have a mobile home that you paid $70,000 for (I didn’t say my clients were all terribly bright), it flooded recently and has earthquake and hail damage — hey, its been a rough year weather wise; it might be worth considering what it is actually worth NOW in the condition it is in and whether you can come up with a source of funding to pay that amount off.   I’ve got a mobile home working now.  Granted, the amount owed is down to about $28,000 (in large part due to a seriously spotty payment history).  However, the mobile home is worth less than $12,000 — and the client has managed to come up with the $12,000 from a relative.

So, we file the motion, hire an appraiser and get ready to argue value in front of a Judge.

Cars are a little easier, because there are a couple of lenders who will finance the redemption of vehicles.  Their interest rates are astronomical, but it can still make a huge difference in the total amount being paid for a vehicle.  I think my record on a vehicle was a Chevy pickup worth $12,000 and with a payoff balance of more than $35,000.  My clients redeemed it with redemption financing at 28% interest.  Their payment went down and their payoff term went down.  GMAC was not happy.  Oh, well.  You can’t please all the people all the time, and GMAC  just never seemed to make it onto my list for the day.

Speaking of redemptions, I’ve got a motion to file.