Is Your Car Too Expensive? Bankruptcy Can Help

Next to home mortgages, motor vehicle loans are often your largest debt. The average cost of a new car or truck sold in the U.S. during 2019 exceeded $36,000.00. Borrowers are taking vehicle purchase loans for 6 years or longer, and when interest rates are factored in, the loan can cost you thousands of dollars above the purchase price.

Unlike real estate purchases, motor vehicles depreciate, that is, they lose value every year. If you took out a loan to buy your car or truck payable over 4 to 6 years, there is a good chance that you will owe more on your vehicle that it is worth until year 3 or 4 of your contract, commonly known as “being under water”. This means that in the event of a financial crisis such as an illness or job layoff, you won’t be able to eliminate your financial obligations by selling your vehicle, and may wind up owing a substantial amount of money to the lender.

If you “roll over” your loan into a new loan for a less expensive car, you’ll just delay dealing with this issue because you will end up owing far more on the less expensive car than it will ever be worth. Further, your monthly car loan payment is not your only vehicle expense. Insurance costs can increase quickly and unexpectedly in the event of an accident or traffic tickets or DWI conviction. Routine maintenance and repairs also increase your cost of ownership. In sum, an unexpected job loss or change, illness, insurance claims or any number of other factors could turn that your new car into a major financial problem.

Bankruptcy And Car Loans

Personal bankruptcy offers a number of options to address the “too expensive car” problem. The easiest choice would be to use the power of bankruptcy to terminate the loan and surrender your vehicle back to the lender. In a Chapter 7, any deficiency balance will be discharged as an unsecured debt, and in a Chapter 13, any deficiency balance will be paid as an unsecured debt, often at pennies on the dollar – if the lender files a proof of claim.

However, if the debtor wants to retain the vehicle, another option would be to use the cram down provision in the Bankruptcy Code to restructure the car loan as part of a Chapter 13 bankruptcy. If your loan was taken out more than 910 days (about 2 ½ years) prior to filing, a Chapter 13 cram down allows you to modify the interest rate (usually) and to reduce your outstanding principal balance to equal the fair market value of your vehicle. If you owe substantially more than the value of your vehicle, the cram down can save you thousands of dollars.

Even if you cannot cram down your loan, you can still reduce your monthly payment by including the unpaid balance in your Chapter 13 plan and setting a payment to the vehicle lender that fits your budget. You are not obligated to pay the contract rate of interest to the vehicle lender in a Chapter 13, which is very helpful in situations where someone has bad credit and interest rate is high.

Obviously the decision to file a Chapter 7 or Chapter 13 should be made in consultation with an experienced bankruptcy lawyer like Alexander Korotkin, Esq., and with full knowledge about how bankruptcy will impact your situation.

However, if you are having or foresee problems with payments due on your vehicle loan, you should certainly learn about and consider your bankruptcy options.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Are Pension or 401k Loans Dischargeable?

A significant percentage of retirement plans, like pensions or 401k plans, allow you to borrow money from individual accounts in case of need. One of the most common situations is debtors borrowing money from their retirement accounts to try to pay back their debts. Unfortunately, if these debtors decide to file bankruptcy, the pension or 401K loans they took out will not be dischargeable in Chapter 7. Further, if a bankruptcy was filed, these retirement accounts could have been protected in their entirety since retirement accounts are fully exempt under either federal or New York exemptions in either Chapter 7 or Chapter 13 bankruptcy.

Bankruptcy court views loans from retirement accounts differently than a credit card, a car loan or a mortgage. When you borrow from your retirement account, you are essentially borrowing from yourself, and as result, the loan is not considered dischargeable in Chapter 7 bankruptcy. However, these loans can possibly be included in a Chapter 13 bankruptcy repayment plan, and any amount not repaid at the completion of the 3-5 year plan will typically be discharged. If you have already taken a loan against a pension or 401k account, then Chapter 13 might be the best option, depending on other factors. For many debtors, a pension or 401k account are their biggest assets that should be protected and a bankruptcy filing prior to borrowing money from those accounts would do that.

While borrowing from retirement funds is often seen as a last resort, it should not be. There could be a good reason to borrow against a retirement account in a healthy financial situation, but as a desperate effort to pay bills, borrowing from a pension or 401K will do more harm than good. Realize that if you are considering taking a loan against a retirement account that you have already reached the last straw. Discussing your bankruptcy options should really be the next step.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Determining Chapter 13 Repayment Plan Payment

If debtor does not qualify for Chapter 7 bankruptcy, that debtor is likely to qualify for Chapter 13 bankruptcy. The most important issue for anyone filing Chapter 13 is to know is how much their Chapter 13 Plan payment will be. In my opinion, given the typical 5 year duration of Chapter 13, properly set plan payment is the most important factor in whether the case will be a success.

Determining the amount of the payment can be challenging at the very beginning of the case. Early estimates of plan payment can change significantly as more information becomes available.

Generally, there are four tests applicable to determining the amount of the Chapter 13 Plan payment:

The Chapter 13 Means Test (officially, the “Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period and Calculation of Your Disposable Income”);
The Disposable Income Test;
The Chapter 7 Liquidation Analysis Test; and
The Required Payments Test

The Chapter 13 Means Test was imposed when BAPCPA became law in 2005. The Means Test’s purpose is to determine whether debtor’s Plan would be 3 years or 5 years long, and to have an objective way to determine the amount of the payment. This calculation uses one of the established four methods of determining your Chapter 13 Plan payment.

The Disposable Income Test is the only one of the four tests that is strictly based on debtor’s ability to pay. Initially, debtor’s net household income is calculated and from that figure, debtor’s actual reasonable monthly expenses are subtracted. The resulting number–disposable income–is Chapter 13 Plan payment. That calculation does not include a deduction for the debts that will be paid through the Chapter 13 case, such as mortgage arrears, car loan payments, student loan payments, tax payments, and credit card bills.

In the Chapter 7 Liquidation Analysis Test, bankruptcy attorney looks at how much debtor’s general unsecured creditors (typically credit cards, medical bills and personal loans) would receive in a hypothetical Chapter 7 case. In many cases, they would receive zero, because there are no non-exempt assets with equity, and creditors would get nothing in a Chapter 7 case. The total amount of payments under Chapter 13 plan can’t be less than the amount determined under the Liquidation Analysis Test.

The last test is the Required Payments Test. Usually, priority debt, such as recent taxes and domestic support obligations, must be paid in full during the course of the Chapter 13 case. Mortgage and other secured debt arrears must also be paid in full, along with unpaid attorney fees, trustee commissions and (in most cases) at least a nominal amount to the general unsecured creditors. Add these payments up, and you reach the Required Payments.

After all of the numbers under each test have been calculated, debtor is required pick the highest amount, which becomes the plan payment. At the same time, that figure may change during the case as creditors submit their proofs of claim, as debtor’s income, expenses and assets change. This figure may also change depending on trustee’s view of the debtor’s financial circumstances.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Henrietta, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.