They Won't Take My Money! Making Payments After a Bankruptcy

When a person files for bankruptcy, a federal court order is immediately put into place which stops nearly all debt collection.  This "automatic stay" is very powerful, and one of the biggest benefits to filing for bankruptcy.  Not only does it stop garnishments and lawsuits, it prevents a creditor from even calling or sending a letter.  

Bankruptcy judges have very little tolerance for creditors who violate their orders.  Even innocent mistakes can result in the creditor being punished.  The process is setup to protect the person filing for bankruptcy, not the creditor, so judges often shift the responcibility of compliance to the creditor.

The automatic stay infuses creditors with fear, and that fear often makes them get a bit silly.  Even if the bankruptcy filer calls and voluntarily offers money, the creditor will often turn it down while the bankruptcy case is still pending.  The management is often worried that a court will look at the payment later as proof that the creditor coersed the person into paying!  They often disable online accounts and automatic payments.

So how do you make that payment in bankruptcy?  First, make sure it's something you should be paying. If you're in a chapter 13, talk to your attorney - the trustee may be making your payments! 

In a chapter 7, if it's a vehicle, home, or other personal property you intend to keep then you need to keep it current.  Ask the agent to speak with someone in the bankruptcy department.  That person should be able to take your payment.  You could also send a check with the payment ticket in - keep a copy of the check to prove you provided payment.  

If they keep giving you issues - have your attorney call them and straighten them out!

Once the case closes, most creditor re-open the online payment accounts and will begin taking payments again as usual.

Your Creditors Don't Want Your Stuff

Clients get nervous when I ask them how much their personal things are worth.  We list the value of clothing, dishes, furniture, toys... even the value of the family pet.  Some clients believe this means they'll have to sell these things if they file for bankruptcy, or that there is some chance they'll lose this property.

In fact, the creditors (represented by the Trustee in a bankruptcy) don't want your personal property. They want money, and most peronal property has very little liquidation value.  How much would you get for your things if they were sold at a garage sale?  Or if you had to buy a similar piece of property in like condition? Probably not very much.  I find most families have between $1,500.00 and $5,000.00 of personal property, with very few, if any, items worth over $550.

Combine this with the fact that you get to keep the following under the federal exemptions:

The debtor’s interest, not to exceed $550 in value in any particular item or $11,525 in aggregate value, in household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments, that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor.

In other words, you can keep up to $11,525.00 in the above items.  And for couples this amount is doubled.

Creditors focus more on things with actual resale value: home equity, equity in boats/motors, savings, and business interests. 

Length of a Chapter 7 Bankruptcy Case

A chapter 7 bankruptcy proceeding usually takes around 4 months from the time the case is filed, to the case closing.  Note that this does not include time it takes to prepare the filing.  Preparation can range from 2 weeks or longer, depending on the complexity of the case, how quickly the documents are brought in, and other factors.

Some chapter 7 cases take longer.  This is often the case when the trustee (the person appointed to administer the property) generates money to distribute to the creditors.  This happens when property cannot be exempted, or when the trustee reverses recent transfers.  In those few cases, the trustee must file a number of reports to the court, including: accounting for where the property came from; asking to sell the property; reporting on the proceeds obtained from a sale; stating how the proceeds were distributed to the creditors; and how much the trustee charged for the services.  At each stage, creditors and the debtor have an opportunity to object to the reasonableness of the trustee's action. Those opportunities have deadlines which add up, resulting in the case being open for many months. Sometimes a case can be open for years before the property issues are resolved.

However, most chapter 7 cases are "no asset" cases - that is, there are no assets for the trustee to liquidate after the exemptions are applied.  Usually, you will know before you file whether your property can be exempted.  The best way to make this determination is to consult with a bankruptcy attorney.

Redemption - Making Your Car Affordable in a Chapter 7

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!