So what to do with that "underwater" auto?  The simple solution in a chapter 7 is to surrender the vehicle and discharge the debt.  Problem solved.

Well... sort of.  Except that you live in Northern Michigan where there is little or no public transportation. And everything is too far to walk, and bikes don't work real well in the snow! You need a vehicle to get to work and haul the kids around.  Maybe you can borrow one from family, or buy a clunker before you file, just to get by for a few months.  If you can make it through the gap between your old car getting repossessed and your discharge, you can probably finance a reasonably priced used car.

Too bad you can't just "retain and pay" - that is, keep the car and make the payments while still discharging your personal liability.  Unfortunately, the 6th Circuit has ruled you can't under the 2005 changes to the bankruptcy code.  So you have to do something if you want to keep the vehicle.

You might reaffirm the debt, assuming you can still afford the payments and are not behind (in which case, you might consider a chapter 13).  But then you're stuck paying significantly more for this vehicle than it's worth.  If something goes wrong down the road (literally) you'll be stuck with a big deficiency and will really be in a pickle!  Between surrender and reaffirm on a significantly underwater vehicle, I always strongly recommend surrender.

But there's another option, which many people overlook: redemption.  Redemption is found under 11 USC 722 of the bankruptcy code.  It applies only to chapter 7 bankruptcies.  In short, you get your vehicle free and clear in exchange for paying the creditor the value of the vehicle on the date of filing.

For example: your truck is worth $1500.00 on the day you file a chapter 7 bankruptcy.  You owe $10,000 to ABC Financial.  We file a motion to redeem, and the court agrees the vehicle is worth $1500.  You pay ABC Financial $1500, and you keep the truck.  The remaining $8500 is discharged.

OK, so that's great!  Right?  Oh yeah, except your automobile is worth $5000+ and you don't have that much cash just sitting around (hence the problem).  Unfortunately, this is why redemption is not always possible.

There is one more trick, however: obtaining financing for the payoff.  Friends or family are probably ideal, since they could be secured in the automobile and usually offer reasonable repayment terms.  There are also banks which do "722" financing, such as www.722redemption.com.  I had a client recently obtain 722 financing and lower their monthly car payments by over $100 per month!

A couple things to watch out for though - the new creditor will charge you interest through the nose, so be sure it'll actually save you money.  Also, a cosigner can be a big problem.  If mom or non-filing spouse co-signed for the auto, they will probably still be personally liable on the debt.  So even if you can make the lien go away through redemption, the creditor will be hot on the heels of your friendly co-signor (making him or her not-so-friendly!)

The bottom line: if you're in or considering a chapter 7 and are underwater on your auto, surrender and reaffirmation are not your only option - take a look at redemption!

But don't panic if a creditor sues you.  The creditor cannot use these tools until a judgment is obtained. To get a judgment, the creditor must file and serve you with the complaint.  If you're served by mailed, you then have 28 days to answer. After that, the creditor must apply for a default judgment, and then wait another 21 days for it to become effective. If you answer the complaint, you can buy more time as the court will set the matter for a pretrial.  

First, the existence of the business will complicate things.  Most attorneys will charge more for your bankruptcy because it will take more time to prepare the filing and administer the case.

Second, your interest in the business is an asset.  Even if the business is a separate entity, like a S-corp or C-corp, and owns all the equipment and debt, you still own the stock.  And the stock has a value, directly tied to those assets and debt.  The trustee will want to know what that interest is worth.  To establish that, you'll have to provide tax returns for the business (if it's separate from your personal returns), a profit and loss statement, and a list of assets and recent transfers for the business.  If you don't already have a good accountant, get one.

Also, keep in mind that a personal bankruptcy filing will discharge your personal liability the business debts, but it won't discharge a corporation or limited liability company unless it too files a chapter 7.  The corporation does, however, have the ability to fold up or take other state law action to liquidate its assets.

Finally, be aware that certain personal business debts, like "trust fund taxes" incurred by failing to pay employee withholding tax or sales tax, will not be discharged.

A bankruptcy will not change the monthly payment on your primary residence.  I've consulted many clients who initially wanted to save their homes more than anything, but after considering how much they owed, how much the home was worth, and what the actual costs of home ownership compared to renting were, they decided that walking away was a better decision.  I haven't heard anyone who has regretted walking away from a $100,000.00 home to discharge $175,000.00 of debt and $1000+ per month payments.

Second, it's important to understand the limitations of bankruptcy.  A chapter 13 bankruptcy allows you to repay the amount you're past due on your home, in addition to making the regular monthly payments, over a 3 to 5 year repayment plan.  Other unsecured creditors are kept at bay and eventually discharged in whole or in part. 

Thus, you have to be able to afford your monthly mortgage payments.  If you cannot currently afford your payments, or if you'll be "house poor" making the payment each month, you need to consider surrendering the home.  There are some exceptions, like "stripping off" a wholly unsecured junior mortgage, which can make the home affordable.  It is important to talk to a bankruptcy attorney to make sure you know all of your options.

Finally, timing is important.  After the foreclosure sale, a chapter 13 bankruptcy cannot force the lender to accept payments in Michigan.  A chapter 13 must be filed before the sale, which means you need to speak with an attorney sooner, not later.  

The bottom line is that deciding what to do with your home is not an easy decision.  A free consultation can help you understand your options, and make the right choice.

When discussing bankruptcy you'll hear the terms "secured" and "unsecured," often in reference to a creditor or debt.  Like most fancy terms, these have simple meanings.

A secured debt is a promise to pay where the creditor holds a lien on some property to ensure payment.  It's usually a home or car, but could be other personal property like a motorcycle or TV.  That creditor is called a secured creditor, and if the creditor is not repaid as promised, the creditor can undertake certain state remedies to take the property and credit the property's value towards the outstanding balance.

An unsecured debt is the opposite of a secured debt.  That is, it's a promise to pay without any liens on property.  This includes things like credit card debt, medical bills, or simple promissory notes.

The reason this is important is because bankruptcy discharges your personal obligation to repay a debt. With only a few exceptions, it does not discharge a lien on property.  This means you have to deal with a secured creditor in one of five different ways, which I'll cover in a later post.

It's important to note that some creditors can become secured.  Creditors like the IRS or State of Michigan often place "tax liens" on personal property or land, which makes their unsecured tax debt a secured debt.   Other creditors can do this as well once they obtain a judgment.

You can read the article here.

• Between June of 2007 and 2008, bankruptcy filings were up 25%.  Between June of 2008 and 2009, bankruptcy filings were up another 20%!
• 38,681 filings were chapter 7; only 8,961 were chapter 13 filings.
• Chapter 7 filings increased 40% and chapter 13 filings decreased 7% (wasn't the means test amendment in 2005 to encourage more chapter 13 filings? Hrmm..)
• 1,472 chapter 13's were filed with "lien strips" to remove wholly unsecured second mortgages from the primary residence if all the plan payments are made.

The case load in the eastern district is becoming so heavy, they are considering adding three new judges. If you're looking at filing for bankruptcy in Michigan, you're certainly not alone.

• You're falling behind on monthly bills to make your minimum credit card payments;
• You've considered calling a debt settlement company, or have called one;
• You're at risk of having a vehicle repossessed;
• You're at risk of having your home go into foreclosure;
• A creditor is demanding a deficiency payment after a repossession or foreclosure;
• You're mortgage company is offering you a "short sale" to avoid a deficiency;
• A debt collector is threatening to, or has already, sued you;
• You're afraid of money being garnished from your wages or bank accounts;
• You've considered pulling money out of your retirement to pay bills;
• You're thinking about transferring assets to protect them from creditors;
• You're income will be increasing in the near future (potentially affecting your filing);
• You may have an inheritance coming in the next few years;
• You're losing sleep, stressed out about your debt, and the phone won't stop ringing.

If one or more of the above apply to you, you should go talk to a local bankruptcy attorney immediately. Bankruptcy might not be the answer, but better to ask too early than too late. There may even be factors which indicate bankruptcy is not right such as recent large payments to creditors, payments to relatives, recently incurred debt, or an eminent inheritance.

But too often the stigma surrounding bankruptcy alone discourages people from even asking for information until it's too late, resulting in lost time, money, and property.  Most attorneys (including me) charge nothing for the initial consultation.  

It's confidential and there is no obligation.  So why not get the information?

Save your retirement, property, and your sanity; you're going to need all three!