Sometimes, even with the most thorough contemplations beforehand, we change our minds after a decision has been made. It can happen to anyone. Sometimes we change our minds about what to have for lunch and sometimes we change our minds about something pretty big and important – like which personal property to hold onto after declaring bankruptcy.
Understanding the law regarding bankruptcy and personal property can help you with your decisions.
For instance, I had a bankruptcy petitioner come to me for advice after filing Chapter 13 (with two vehicles included). After they filed, they decided that it would be best if they could give up the house they were purchasing and find a cheaper home to rent instead. Their mortgage was not included in the Chapter 13 bankruptcy, but the back amount owed to the mortgage holder was: $2,600.00. The mortgage holder was a private individual, i.e. not a bank. They contacted me in order to discover if there was a method by which they could legally walk away from the house while keeping their two vehicles.
The answer is complicated. It’s possible to walk away from your home and keep both vehicles, but the process would be complicated. It is highly recommended that you discuss potential pitfalls with an experienced southern California bankruptcy attorney prior to dismissing your Chapter 13 bankruptcy, but generally speaking, there are two major concerns in this particular type of situation.
First, determine if you are eligible for a Chapter 7 bankruptcy. If so, you may want to convert your Chapter 13 to a Chapter 7 bankruptcy.
Is Your State a Non-Deficiency Liability State?
In many states, mortgage lenders are allowed to come after the homeowner post-foreclosure seeking any unpaid mortgage balances. This practice is called “deficiency liability.” The first step is to determine whether or not you live in a non-deficiency liability state. If you are a resident of a non-deficiency liability state you can walk away from your property, lose it to foreclosure and avoid being held responsible for the unpaid balance due your mortgage company. Residents of states that impose deficiency liability may be able to wipe out this liability by filing for Chapter 7 bankruptcy. If you find yourself in this situation, the next step is to determine if you are eligible for Chapter 7 bankruptcy protection. If you are not eligible, your best option is probably to stay in the Chapter 13 bankruptcy in order to obtain the discharge to serve as a protection from any mortgage deficiency liability.
Are the Vehicle Loans Being Paid Through the Chapter 13 Plan?
The complicated part of the process to get out of the Chapter 13 bankruptcy is directly related to your loans being included in the Chapter 13 repayment plan. The repayment plan is set up to include all debt included in the bankruptcy filing. Filers make one payment to the bankruptcy trustee who then distributes the payment amongst the various creditors. Depending on the bankruptcy district, the car payment could be included in the Chapter 13 repayment plan with the vehicle balance being spread out evenly over the entire term period. The way the repayment plan for Chapter 13 bankruptcy is set up means you can be current on your payment to the Chapter 13 trustee payment, but simultaneously delinquent on your vehicle payment.
- Joe Smith (bankruptcy filer) has a $250 monthly car payment with 24 months left on the life of the loan. The remaining balance is approximately $6,000.
In some bankruptcy districts, as discussed above:
- Joe Smith’s $6,000 balance will be spread out over the 36-60 month term of the Chapter 13 repayment plan.
- Using the 60-month repayment plan, one monthly payment is issued to the Chapter 13 bankruptcy trustee. The bankruptcy trustee takes this payment and distributes the money to creditors with approximately $100 issued to the car lender (without interest).
- The monthly vehicle loan payment as agreed in the original loan contract was $250, but under the terms of the Chapter 13 bankruptcy repayment plan the trustee is only paying $100.
- This leaves Joe Smith falling behind on his original vehicle loan contract by $150/month.
If you stay in the Chapter 13 until completion, this is not a problem because the vehicle loan is paid off after the 60-month term.
If you decide to get out of the Chapter 13 bankruptcy, it becomes a problem.
Once the bankruptcy protection is removed, the lender sees Joe Smith as delinquent according to the original terms of their loan agreement.
I practice in one such district and it can be very difficult to protect vehicles for clients finding themselves in this situation. In some situations, it’s simply not possible as the client would be required to bring the loan up to date immediately upon removing the protection offered by the Chapter 13 bankruptcy and the balance due is too high to be covered by the petitioner.
In situations like Joe Smith’s as detailed above, an individual could find it necessary to surrender their property, but also stay in their Chapter 13 bankruptcy until the repayment term is completed in order to retain the protection for vehicles and any potential deficiency liability.
To get answers to questions regarding Southern California bankruptcy and how Chapter 7 compares to Chapter 13 in your particular situation, contact the bankruptcy attorneys at Westgate Law.