Filing Bankruptcy Can Remove Liens Against Personal Belongings

If you took out a personal loan, did the lender ask you to write down a list of your personal belongings?  If so, you may have given the lender a lien against your personal property, turning what would otherwise be an unsecured personal loan into a secured one.  A lien is a claim against an asset that can be used to satisfy a debt.  In other words, if you don’t pay the loan, the lender can take possession of the collateral you pledged to offset the debt.  Typically, these types of loans are not made by banks, but instead by finance companies that specialize in small, high-interest rate loans.

The Finance Company Doesn’t Want Your Old Television…

But they don’t want you to know that.  Used household goods are rarely worth enough to satisfy the loan.  Instead, the lender knows that your belongings are worth more to you than to anyone else, and that if they tell you that they are going to take back your belongings, that you will do whatever it takes to pay the loan, often putting you further behind on your other bills or over-drafting your bank account.  With the high interest rates charged on these loans, you will end up paying many times over what your property is actually worth.  But, because of the high interest rates, it can take a long time to pay down the principal, keeping you trapped by the finance company for years.

Bankruptcy Can Help

Thankfully, filing Chapter 7 or Chapter 13 bankruptcy may help you remove the lien on your belongings.  In order for this to occur and to ensure your creditors keep their hands off your belongings, you must make sure that these conditions are met:

  1. You must be able to claim an exemption in the collateral securing the loan.
  2. The collateral must be for household goods and furnishings, your work tools, or your prescribed health aids.
  3. The loan must have been a “nonpossessory, nonpurchase-money” loan.  What this means is that the finance company can’t retain possession of your belongings, like pawn shops do.  Also, the purpose of the loan can’t be for purchasing the property that is secured by the loan, like a house or auto loan.

You Must Ask The Court To Remove The Lien

Filing bankruptcy doesn’t automatically remove the lien.  Instead, your bankruptcy attorney will file a motion with the court requesting that the lien be removed.  While the finance company will have an opportunity to respond, they usually do not.  If they don’t object, the court may not even hold a hearing and may rule in your favor by default.  If the creditor does chose to respond, they would need to prove that your belongings are worth more than you can exempt.  Luckily, under both the North Carolina and Federal exemptions, most filers can exempt all of their household belongings.

Talk To A Bankruptcy Attorney

If you have liens on your personal belongings, talk to an experienced bankruptcy attorney to find out if bankruptcy can help you eliminate those liens.

 

What Happens to Your Vehicle & Loan in Chapter 13 Bankruptcy

This big-picture guide will give you an in-depth look at how vehicles with loans are treated in a Chapter 13 bankruptcy.  Addressing the issue involves two separate topics: whether you can keep your vehicle; and how car loans are treated in your case

Whether you can keep your vehicle

In a Chapter 7 bankruptcy case, you can lose your vehicle if you have more equity than you can exempt.  However, in a Chapter 13 bankruptcy, you can still keep your vehicle even though it is over-exempt.  It just means that you will have to pay that extra amount that is over-exempt to your unsecured creditors.  

For example, if your vehicle is worth $20,000, has a loan balance of $15,000, and the North Carolina vehicle exemption of $3,500 is applied, you will have $1,500 of non-exempt equity left over for your vehicle.  The nonexempt equity of $1,500 is the minimum amount you will be required to pay to your unsecured creditors in your Chapter 13 plan.  This works out to about $25 per month over the course of a 60-month plan Chapter 13 plan.  There are other factors that determine how much your unsecured creditors have to be paid, and the length of time you have to pay them, but that will be a topic for another post.

How your loan is treated

Next, we deal with how your vehicle loan itself is treated.  A Chapter 13 bankruptcy case offers four main options:

  1. Surrender
  2. Pay the lender directly
  3. Pay through trustee
  4. Cram down

Each choice has positives and negatives, though each option may not be available for your particular situation.

 1. Surrender 

Not everyone wants to keep their vehicle when they file bankruptcy. Surrendering your vehicle allows you to give the vehicle back to the lender.   This can be a great option in some circumstances:

  • You have a vehicle that is in need of major repairs; 
  • You have a second vehicle that you no longer need; 
  • You have a vehicle that no longer serves the purpose that you bought it for, such as a work truck or a passenger van.  

The advantage of surrendering the vehicle is that you do not pay for the full amount of the loan or worry about selling the vehicle yourself.  The lender will have to resell the vehicle, and whatever is left of the principal loan balance is paid pennies on the dollar as an unsecured debt.

2. Pay the Lender Directly

If you are current on your vehicle loan, you may be able to just continue making monthly payments directly to the lender.  The original terms of the loan are not changed, so the length of the loan, interest rate and principal balance will stay the same.  This can be a good option if you have a low interest rate loan on a newer vehicle.

However, there are some restrictions in order to use this option if you are filing bankruptcy in the Western District of North Carolina (other districts may have different local customs, and this firm only files cases for the Asheville and Bryson City division of Western North Carolina).  You must be current on your loan payments and the last payment on your loan must be due after the last payment under your bankruptcy plan. Stated simply, if you have six years left on your loan and your bankruptcy plan will last for five years, you can use this option. You may also use this option if there is a cosigner on the loan and the cosigner is not filing a joint bankruptcy case with you (only spouses can file joint cases).

3. Pay Through the Trustee

The most common method of dealing with your car loan is to pay it though your Chapter 13 plan with the trustee paying the lender.  Instead of you paying the lender directly, the trustee pays the loan from a portion of your monthly plan payment.  This option modifies the interest rate to the prime interest rate, plus an additional 2%.   Also, your vehicle loan will be paid off at the end of your bankruptcy case and you will own the vehicle free and clear from the loan.  However, it does not reduce the amount of principle you pay on the loan.  In some circumstances, paying your loan through the plan can be more advantageous than the paying the lender directly:

  • If you are shortening the length of your loan, your lender will get paid quicker than it otherwise would. However, instead of increasing the amount you have to pay to the trustee, it may come at the expense of your unsecured creditors by reducing the amount that they are repaid. 
  • Paying your loan through the plan helps to minimize disputes in your case.  If you are paying the lender directly and you miss a few payments, the lender may ask the court for permission to repossess the vehicle.  However, if you are paying it through your plan and you miss a few payments to the trustee, the lenders will typically skip asking the court for relief and instead rely on the trustee to require you to increase your payment amount to make up the difference.  

4. Cram Down

If you owe more than your vehicle is worth, a “cram down” can save you thousands of dollars in your bankruptcy case.  If your loan meets certain criteria, this is a great option to explore. Your vehicle loan is paid through the plan, but with the added benefit of reducing the principal amount due on the loan.  What your lender is paid will be split into two parts.  The first part is based on the fair market value of your vehicle.  This is the “secured” portion of the loan and is paid in full with interest.  The second part, the “unsecured” portion, is the remaining portion and is paid at the same percentage as your other unsecured creditors.  

For example, if you have a car loan with an outstanding balance of $10,000 but the car’s current retail value is only $6,000, then the lender is paid only $6,000 with interest.  The lender may only be paid 10% for the remaining balance, or $400, and without interest.  After you make all of your bankruptcy plan payments and receive a discharge, you will own the vehicle free of the lien.  However, a “cram down” is only available in limited circumstances:

  • If the loan was a “purchase-money” loan, meaning you obtained the loan at the same time you purchased your vehicle, you can’t cram down your loan unless you obtained the loan 910 days (about 2.5 years) prior to when your case is filed.  For example, if on January 1, 2018 you obtained a loan to purchase a vehicle, you would have to wait until June 30, 2020 before the loan is eligible to be crammed down.
  • If you used a vehicle that you already owned as collateral for a loan (like a title loan) or if you refinanced an existing vehicle loan into a new loan, you do not need to wait 910 days to take advantage of the cram down.

 

As you can see, you won’t lose your vehicle just because you file Chapter 13 bankruptcy.  If you want to surrender your vehicle, you can.  But, if you want to keep it, your Chapter 13 plan will offer you a solution, provided that you can pay the amounts required.  Are you curious about how your vehicle will be treated in a Chapter 13 bankruptcy?  Call 828-412-8700 today to see what solution works best for you.

Which Exemptions Do You Use When You File Bankruptcy?

When you file bankruptcy, your exemptions determine what property you get to keep.  There are federal exemptions and state-law exemptions.  The exemptions you use depends on where you have lived for the past two years prior to filing bankruptcy and whether that state requires you to use its exemptions or permits you to use the federal exemption.  If you’ve lived in North Carolina for the past two years, the answer is simple – you’ll use the North Carolina exemptions when you file bankruptcy.  You can read about those here.

 

But what if you haven’t lived in North Carolina for two years?  In that case, you look to where you lived for the 6-month period just before the two-year period.  For example, if you are filing bankruptcy on January 1st, 2018, you look to where you lived for the majority of the time from July 1st, 2015 to Dec 31st, 2015.

 

Once you have figured out which state applies for the 6-month period, there is one more step – you must look to the law of that state to determine if non-residents can use that state’s exemptions.  Many states do not allow non-residents to use its exemptions so you’ll use the federal exemptions. Some states do, and in that case, you will use your prior state’s exemptions, or if permitted, the federal exemptions.

 

The state-law exemptions usually differ from the federal exemptions, and depending on what you own, one set of exemptions may be more advantageous.  That is why it is important to carefully review the time periods and your assets to determine if you should go ahead and file bankruptcy now, or if it would be better to wait so that you can use North Carolina exemptions.

You Don’t Lose Your Retirement Accounts in Bankruptcy

You made responsible choices and contributed to a retirement account, and now that nest egg has grown significantly.  Don’t worry about losing your retirement savings in bankruptcy, because it’s exempt.  Under North Carolina exemptions, all IRS qualified retirement accounts (employer pensions, 401(k)’s, Traditional IRA’s, Roth IRA, etc.) can’t be touched by the bankruptcy court.

If you are a state or municipal employee, those retirement benefits are exempt too.  This also applies to retirement accounts from the federal government, as well as other states and their municipalities.

If you haven’t filed bankruptcy yet, but are considering withdrawing from your retirement benefits to pay down debt, please call me first.  Many times this just delays the time before you end up filing bankruptcy, except now you’ve spent your retirement funds.  Funds you would have kept had you filed bankruptcy first.

Every dollar that you spend from an exempt source is a dollar that you could have otherwise kept after filing bankruptcy. The sooner you file bankruptcy, the sooner you will stop making payments on old debts that are keeping you from getting a fresh start.