Tag Archives: secured debt

Safer in Bankruptcy Part 3 — The Confirmation Order

Confirmation orders are only entered in reorganization chapters (for consumers most normally a Chapter 13), but when they are entered, they constitute a new contract between all parties to the order (which includes the debtor and all of the creditors in the case).  This new contract requires, among other things, that the debtor be treated as current.  It limits the creditors’ ability to get paid only as provided for in the plan.  It limits a creditor’s ability to charge late fees or to apply payments in ways other than as specified in the plan.  Now, some of the protections of the Confirmation Order require that the debtor successfully complete the plan and receive a discharge; but it remains a potent form of protection for a debtor in a chapter 13 bankruptcy.

Another thing that makes a Confirmation Order particularly valuable during uncertain times is that it can be modified by Motion and Order.  That means that if bad things happen during a multi-year plan of reorganization, the Debtor can ask the Court to modify the Confirmation Order to allow the debtor room to cope with the unexpected.  The ability to request a modification means that if something bad happens during a Chapter 13 bankruptcy, the Debtor is almost always going to have time to address it, and if a little time isn’t enough the tools to change payment terms or sometimes even to extend the repayment term.

One of the surprising aspects of the CARES act (one of the principal pandemic assistance statutes) is the ability to extend a chapter 13 repayment plan from 5 years to 7 years.  Now, this only applies to cases that were confirmed before March 27, 2020, and the provision will sunset on March 27, 2021.  Still, for people experiencing a decrease in income for an extended period of time, this provides a unique tool for curing arrears on secured debt.

The incredible protections of a confirmation order are one of the reasons I am recommending Chapter 13 filings during this time of great uncertainty.  It can be difficult to explain, but being in a chapter 13 can be one of the safest places to be during times as scary as the ones we are currently living through.


How Long Before They Repo My Car?

I get asked this question a lot, and the answer varies pretty widely depending on the facts. Most commonly, though, I am asked this question by someone who needs to file for Bankruptcy and has made the decision that he cannot afford to keep his car. In other words, the client is going to surrender his interest in the car to the car lender during the bankruptcy.

There are a number of options in a Chapter 7 Bankruptcy for dealing with secured debt (i.e., debt that is secured by a lien on a piece of property, like a car loan or a mortgage). One of them is to surrender the property to the lender. So, the question being asked is really – so, how does that surrender thing work and how long does it take anyway?

Well, that depends.

I’m a lawyer, you were expecting a definite answer?

When the bankruptcy is filed the Debtor files a Statement of Intent that states what he intends to do with his secured debt. So, in this case, the Debtor will indicate that he intends to surrender the vehicle. However, at the instant that the case is filed the Automatic Stay goes into effect, and that stays (or temporarily stops) all collection activity against the debtor or property of the debtor – including the car in this illustration. So, even though the Debtor is indicating his intention to surrender his car to the lender, the lender can’t take it; because taking it would be an effort to collect a debt, and that is prohibited by the Automatic Stay. Are we having fun yet? Thought so.

Now the ball is in the lender’s court. They can either wait until the Bankruptcy is over with and then repossess the vehicle., or they can file a Motion with the Bankruptcy Court asking the Court to lift the automatic stay and abandon any interest that the Bankruptcy estate might have in the vehicle. The creditor can do that as soon as he learns of the Bankruptcy filing or not until later. It isn’t uncommon for creditors to wait until after the First Meeting of Creditors, which is generally about 30 days post-petition, to file their motion. Given these facts, once that motion is filed, it will be granted in about 3 or 4 weeks – kind of depending on how excited the creditor’s lawyer is to get it done. The net effect of this motion being granted is the Bankruptcy Court gives the creditor permission to collect his debt against the property – not the debtor, just the property. The stay remains in effect as to the Debtor, and assuming that no objections to discharge are granted; the stay will be replaced by the discharge injunction at the conclusion of the Bankruptcy. The discharge will prohibit the car lender from EVER trying to collect money from the debtor again. The creditor is welcome to the car, because he has a lien on it; but that is all he gets.

After the creditor gets permission to repossess the car, and he will – eventually. Some creditors will have someone out looking for it the next day. Others take longer to get around to it. In my office I point out to my clients that they don’t want to be driving this car if a repo guy might be looking for it. Walking out of the grocery store with ten sacks of groceries including 2 gallons of ice cream and finding no car to put them in is not a situation most of my clients want to find themselves in. So, I will generally arrange for the debtor to deliver the car to the lender. Not everyone does it that way.

The long and the short of this is that even if you want to give the car back it will take just under a month or . . . longer, to do so. On the other hand, if the Debtor wants to keep the car as long as possible, that is a completely different analysis and one that is going to vary widely depending on the specific facts, the creditor involved and even the court in which the case is filed.


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.