by Melinda Dionne, Esq. on October 22, 2011
What to Do? Reaffirm? Surrender? Redeem?
One of the decisions that a Chapter 7 debtor must make when filing a bankruptcy case is what to do with property securing a debt. Debtors living in the area covered by the Eleventh Circuit Court of Appeals have one of three options. A Debtor’s options are
- reaffirm the debt owed to the creditor;
- surrender the collateral securing the debt owed to the secured creditor; or
- redeem the secured collateral for its value on the day of the filing of the bankruptcy case.
Reaffirming a Secured Debt
A reaffirmation agreement is a written document setting out the terms under which a debtor will repay a secured debt after the filing of the bankruptcy case. The reaffirmation agreement must be signed by the creditor and the debtor. The Bankruptcy Code also requires that the agreement be signed by the Debtor’s attorney with a certification that continuing to pay the debt will not create an undue hardship on the debtor or the debtor’s dependents. The reaffirmation agreement must be filed prior to the entry of the debtor’s discharge.
Surrendering Collateral to a Secured Creditor
Liens, unless avoided, pass through bankruptcy as if a case had never been filed. When a debtor decides to surrender secured property, the creditor has the right to recover the property. However, the debtor has no further obligation to make payments. When the discharge is entered, the debtor’s liability becomes non-recourse. Non-recourse means that the creditor can only recover the collateral and sell it to pay the debt. If the property is worth less than the debt, the creditor cannot pursue the debtor for any shortfall. If the property is sold for more than the debtor owes, the debtor or the Trustee is entitled to any money over that required to pay the debt.
Redeeming Secured Property
The final option available to a debtor is to redeem the property. To redeem secured property, the debtor must file a motion and pay cash equal to the value of the property on the day of the filing of the bankruptcy case.
What happens if I just keep paying and don’t reaffirm?
Notwithstanding the 11th circuit’s ruling, many mortgage companies, but not all, take the position that as long as you remain current on your payments they will not seek to foreclose after your chapter 7 bankruptcy case. The problem with this approach is that the mortgage company no longer reports to the credit bureau regarding your timely payments. When your timely payment history is not reported, it makes it difficult for you to rebuild your credit score. If you do reaffirm a debt in your chapter 7 bankruptcy case, you need to make sure that your lender will continue to report your payment history. The reporting of your timely payments will allow your credit score to rise post filing.
by Melinda Dionne, Esq. on October 22, 2011
You Must File Chapter 13 BEFORE Your Car is Repossessed
In the 11th Circuit Court of Appeals case of Lewis v. Charles R. Hall Motors, Inc. (In re Lewis), 137 F.3d 1280, 1282 (11th Cir.1998), the Appeals Court determined that Alabama Debtors cannot compel the return of a car that was repossessed prior to the filing of their bankruptcy case. Occasionally, a creditor will agree to give the car back but you should not count on this happening. If you are behind on your car payments, you need to speak to an experienced bankruptcy before your car is repossessed.
Lowering Your Interest Rate With a Chapter 13 Bankruptcy Case
Many people find themselves in a situation where the only car loan they can get is one with a very high interest rate. In a Chapter 13 case you can lower the interest rate you are paying on your car. For example, if your interest rate is 29% (yes, I said 29% and yes I see loans like this everyday), you can reduce to interest rate to as little as 4.25% in the Western Division of the Northern District of Alabama.
On a $20,000 loan the payment at 4.25% would be $394.36 per month. At the 29% interest rate, the payment was $655.43 per month. That is a savings of $261.07 per month!
Save Even More By Reducing The Amount You Have To Repay
The bankruptcy code allows a debtor to split (“bifurcate”) a secured claim into two parts when the value of the property is less than the amount owed. One part of the claim is treated as a secured claim while the remaining balance is treated as an unsecured claim. There are two conditions that must be met for you to bifurcate a car claim in Chapter 13:
- first you must have owned the car for more than 910 days or the loan on the car must be one that was not used to purchase the vehicle; and
- second, the value of the car must be less than the amount you owe.
The Real Life Savings
Lets stay with our same example that we used above to show you how this works in real life. The $20,000 loan is secured by a car that is 8 years old and is only worth $8,000. The Debtor purchased the vehicle 3 years ago. In the Chapter 13 plan, the debtor can propose to repay the car debt as follows:
- Secured portion of $8,000;
- Interest rate of 4.25%;
- Unsecured portion of $12,000 paid at the same percentage as other unsecured claims (the percentage rate could be from zero to 100%);
- repayment period of 56 months;
- The resulting payment would be $158.00 per month;
- TOTAL SAVINGS: $497.43!
Saving Your Car and Saving Big Bucks
I am often asked how can I afford an experienced bankruptcy lawyer when I can’t even afford to pay my bills. Well ladies and gentlemen, I just showed you how!
Experienced Birmingham and Tuscaloosa Alabama bankruptcy attorneys can restructure your finances so that you can not only afford their ,you can afford to live a better life! When we are in debt we tend to think there is no hope. That is the wrong way to think. Pick up the phone and talk to an experienced Birmingham or Tuscaloosa bankruptcy lawyer. You might just find the answers you need to get out of debt once and for all!
