Back off Chapter 13 bankruptcy, keep cars?


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Dear Bankruptcy Adviser,
We filed Chapter 13 with two vehicles included. We have now decided we want to give up the house we are buying and find a cheaper home to rent. How can we walk away from this house and still keep our vehicles? Our mortgage is not in the Chapter 13, but a back amount of approximately $2,600 owed to our mortgage holder is. The mortgage holder is a private individual and not a bank.
— Gary

Dear Gary,
You may be able to walk away from your home and keep both vehicles, but the process to do so might be complicated. While there are numerous issues, I will discuss two big ones to consider. You absolutely must talk to a bankruptcy attorney before you voluntarily dismiss your Chapter 13 bankruptcy since there are other possible pitfalls besides these two.

Are you eligible for Chapter 7 bankruptcy? You may want to convert your Chapter 13 case to a Chapter 7 bankruptcy. Many states allow the mortgage lender to come after the homeowner after foreclosure for the unpaid mortgage balance. This is called “deficiency liability.”

You need to first learn whether you live in a non-deficiency liability state. Non-deficiency states are those in which you are able to walk away from a property, lose the house in foreclosure and avoid liability for any unpaid mortgage balance. If you live in a state that does impose deficiency liability, you could wipe out that liability with a Chapter 7 bankruptcy.

You then need to find out whether you are eligible for Chapter 7 bankruptcy protection. You may not be eligible and need to stay in the Chapter 13 bankruptcy to receive a discharge just to protect you from any mortgage deficiency liability.

Are the car loans being paid through the Chapter 13 plan? This is the complicated part of your plan to get out of the Chapter 13 bankruptcy. In all bankruptcy cases, you make one payment to the Chapter 13 trustee and the trustee distributes your payments to creditors.

In some bankruptcy districts, the car payment is included in the Chapter 13 trustee payment and the vehicle balance is spread out evenly over the Chapter 13 bankruptcy term period. In these cases, you may be current on your Chapter 13 plan payment, but not on your vehicle payment.

For example, outside of bankruptcy, say you have a $250 monthly car payment with 24 payments left and a balance of approximately $6,000. In some bankruptcy districts, that $6,000 balance is spread out over the 36- to 60-month Chapter 13 bankruptcy term. In a 60-month plan, you make one payment to the Chapter 13 trustee and the trustee makes a payment of approximately $100 (without interest) to the car lender.

Your car loan contract payment was $250, but the trustee is paying only $100. Therefore, you are falling behind by $150 in each month that you are making the Chapter 13 payment.

This situation would not be a problem if you stayed in Chapter 13 and completed the plan because the car loan would be paid in full after the plan completion. It does become a problem when you want to get out of the Chapter 13 bankruptcy. The lender does not care that the court required you to make the payment through the trustee. The lender sees you as delinquent once the bankruptcy protection is removed.

I don’t know how many bankruptcy districts follow this practice. I practice in one of these districts and it is very challenging to protect vehicles in these cases. Sometimes, it is not possible because my client must bring the loan current immediately, which in many cases is too much money.

In some cases like yours, a person may need to surrender the property but remain in the Chapter 13 bankruptcy until completion in order to protect the vehicles and potential deficiency liability.

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