How much is your car worth?  Most people think they know the answer to this question.  More than one client has gotten an unpleasant surprise after I pulled up Kelley Blue Book and showed them their automobile is worth thousands of dollars less than they guessed.  The next reaction is usually a combination of disappointment and fear, because the client still owes significantly more than the car is worth.

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!

Many of the people I consult with own a home.  Some are behind on payments and facing a foreclosure.  Others are current on the home, but have fallen behind in other areas.  It is true that bankruptcy can help in these situations, but the first question must always be: is the home worth saving? 

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.

A few weeks ago I published an article explaining what preferential transfers are, how to avoid them, and what to do if you're sued by a trustee because of a transfer.

You can read the article here.