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Do I Have to Give Back the Car I am Financing if I File a Chapter 7?

By Jonathan on December 4, 2007

I have a question about the blog in Nov,2006. You said that filing bankruptcy can stop car repossion . But after you file chapter 7 do you get to keep the car and the debt is discharged or you can keep the car only if you promise to make payments on tht vehicle. Because I have been told the only way you can keep the car when filing chapter 7 is if you promise to make payments and you do not include it in your chapter 7 bankruptcy. I was told if you owe on the vehicle and place it in your chapter 7 bankruptcy you have to give the car back. Could you give me some insight.
–Fana

Jonathan Ginsberg responds: Fana, the minute you file a bankruptcy, all creditor action stops because of something called the "automatic stay." There are a few exceptions to the automatic stay (i.e. multiple filings, child support debt, and a few other limited categories), but as a rule, all creditor action stops the minute you file.

Chapter 7 is primarily designed to get rid of unsecured debts like credit cards and medical bills. In a Chapter 7, secured debts must be either reaffirmed or the collateral must be surrendered to the secured creditor.

Automobile loans are considered secured debts because the vehicle you purchased serves as security for the loan. If you want to keep your vehicle in a Chapter 7, you must reaffirm it. Reaffirmation of a vehicle loan is voluntary on the part of the secured creditor. Generally, most car lenders will reaffirm if:

you are current with your payments

you have enough income to pay for the reaffirmed debt in your budget

your are able to shelter (exempt) your equity, if any, as part of your Chapter 7 petition

If the creditor refuses to reaffirm your choices are to surrender the vehicle or to convert to Chapter 13 where you can try to force a repayment down the lender’s throat.

If you do nothing – do not reaffirm and do not state any intention, the Bankruptcy Code will presume that your intention was to surrender and after the bankruptcy is over, the secured lender can repossess the vehicle. Note that in this situation you would have no personal liability for a repossession deficiency – the Chapter 7 discharge serves to wipe out your personal liability. However, the lien (in rem jurisdiction) that encumbers the vehicle remains and survives the bankruptcy.

So, if you are financing a vehicle and you file Chapter 7, there is a good chance that you can keep your vehicle if you qualify for a reaffirmation.

Will Your Income Tax Refund Count in a Means Test Calculation?

By Jonathan on November 26, 2007

I am considering chapter 7. I am not sure about the median income info because I am no longer employed and working a temp job and used my retirement to live on. My question has to do with income tax refund check. I don’t think I will be getting a refund this year because of my retirement penalty, but if I did get one would I have give to the bankruptcy courts because I filed bankruptcy?

Sheila

Jonathan Ginsberg responds: Sheila, you raise a number of points in your question – let me address one by one:

First you ask how to calculate your median income given your change in employment. When you file bankruptcy, the law requires us to look at your income over the 6 month period preceding the month you actually file. For example if you were planning on filing in December, we would look at your median income from June through November.

If your income is lower than it "normally" is because of a job loss, that’s fine. You would have an easier time passing the "median income" test. The reverse, unfortunately, is also true – if you currently have no income but had a large income during the six month look back, your median income may exceed the limit and you would have to go into a means test calculation.

Additionally if you pass the means test but now have a high salary going forward, then you might have trouble fitting into Chapter 7 because of your budget.

Secondly, you raise the issue of your tax refund. Your tax refund does count when looking at your median income. Don’t be confused – all sources of income or revenue count in a median income calculation.

Third, you raise the question about what to do about your tax refund. Your tax refund is an asset that would have to be listed on Schedule B of your petition. Depending on how much you have or will receive, your tax refund may or may not be "exempt." In Georgia, you can use 1/2 of your unused real estate exemption + your wildcard exemption and shelter up to $5,400 of cash or cash equivalent like a tax refund. A qualified attorney can help you plan the timing of your filing to preserve as much of your tax refund as possible.

Property Give-aways Prior to Bankruptcy – a Dangerous Decision

By Jonathan on November 19, 2007

Whenever I teach a continuing legal education bankruptcy seminar, I always get questions about fraudulent transfers. Bankruptcy Code Section 544 as well as the Official Code of Georgia make transfers by an insolvent debtor to another person for less than market value a fraudulent transfer.

The Bankruptcy Code gives trustees the right to recover fraudulent transfers and Section 727 of the Code makes a fraudulent transfer grounds to deny a debtor’s discharge.

I think that fraudulent transfer cases can be especially dangerous because the law that has developed around this area often defies common sense. Often the neither the debtor nor the transferee has any bad intention and, in the 11th Circuit, you cannot "undo" the transfer. Attorneys not famliar with this area of the law are often surprised at the harsh results that follow.

I recently came across a case out of Ohio that illustrates how unforgiving the fraudulent transfer law can be. The Ohio case involved a situation where a young man transferred title to a motorcycle to his father. The young man’s wife did not like having the motorcycle around. The father never drove the motorcycle nor did he ever insure it. My guess – although the case does not say this – is that the son periodically drove the motorcycle away from the watchful eye of his wife.

In any case, the father found himself in financial trouble and in need of bankruptcy relief. Prior to filing the father "gave" the motorcycle back to his son.

When the father filed bankruptcy, the trustee asserted that the transfer was fraudulent and demanded that the motorcycle be turned over to the bankruptcy estate. The Ohio bankruptcy judge agreed with the trustee and found that the transfer was, indeed fraudulent.

My collegues in the Bankruptcy Law Network have written extensively about fraudulent transfers and I urge you to review their postings. The point here – if you are considering bankruptcy, think hard about any transfer that you might have made even if you never really considered the property to be yours. These type of "oh, by the way" matters are the statements that keep bankruptcy lawyers up at night.

Should Bankruptcy Judges Be Given the Power to Rewrite Mortgages

By Jonathan on November 12, 2007

The United States Congress is currently considering legislation that would allow bankruptcy judges to rewrite some of the terms of a mortgage to reflect the value of a homeowner’s property and the current mortgage investment climate. My colleague Wendell Sherk of the Bankruptcy Law Network notes the following about the legislation currently before Congress:

The legislation now pending in Congress would allow homeowners in Chapter 13 to rewrite their mortgages to reflect current market value with market interest rates for the long haul. In other words, it asks the investors to take a small loss to avoid a bigger one. The investor still has a lien on the debtor’s home and has the remaining investment protected from inflation by a market rate of interest. The investor doesn’t have to absorb the costs of foreclosure or the added losses from a fire sale real estate market. The mortgage servicer gets a performing mortgage in the portfolio again, although it loses all those additional fees it would charge for processing the foreclosure.

Traditionally, the Chapter 13 process has allowed debtors to rewrite the terms of credit card lenders, vehicle lenders, furniture lenders and pretty much every other kind of lender – except mortgage lenders. Perhaps it is time for mortgage lenders to become full participants in bankruptcy. Is it possible that the many abuses we see from the mortgage industry arise from their special status?

As a proponent of the free market, I have some concerns about empowering bankruptcy judges to rewrite mortgage loans. Such a change will impact the mortgage markets – good, bad or indifferent and no one knows exactly what such a change would mean. On the other hand, mortgage lenders have brought this rather significant change upon themselves with a litany of questionable and abusive practices:

teaser rates
balloon notes
interest only loans
negative amortization
lack of tranparency with fees
unexplained fees, costs and charges

All this brings to mind the observations of Robert Peroni, my tax law professor at Tulane Law back in the early 1980’s – greedy people lead to the enactment of bad law. Professor Peroni was fond of noting that attempts by wealthy doctors to shelter income from taxes led to the closing of otherwise legitimate tax shelters. I think that the same process is at work here.

“How Do I Recover from Bankruptcy” – Some Thoughts from the Trenches

By Jonathan on October 26, 2007

“How do I recover from bankruptcy?” This question comes up in every new client interview or client meeting that I conduct. There is no no universal answer to this question, but here are a few thoughts:

Become a more educated consumer. Bad financial decisions often lead to debt problems that can overwhelm you, thereby leading to a bankruptcy filing. If you are filing or if you are close to filing, take a few minutes to step back and think about how you ended up in your financial predicament. What would you have done differently? Moving forward take advantage of the financial resources on the Internet, most of which are free. Examples of helpful sites include
NADA – shows car prices
Bankrate.com – comprehensive financial resource
The Motley Fool – easy to understand investment advice
Clark Howard’s web site – consumer guru Clark Howard offers advice about living on the chap and avoiding ripoffs.
Resolve to cut your overhead. Start by creating a household budget. Include a “rainy day” saving account in your budget and avoid major purchases that strain your budget. Obviously, houses and car purchases are the two biggest areas that you can control. Work towards a goal of having a paid off car and a paid off house. Monthly overhead that you cannot change will eat you up, both financially and mentally.
Avoid unnecessary purchases and learn to spot sales pitches. Good salespeople train themselves to sell to you by allowing you to convince yourself to make a purchase. A very useful book that describes many of these techniques is called Influence by a social psychologist named Robert Cialdini. If you understand how you are being influenced you may be less likely to fall prey to sales pitches for unnecessary purchases. Some of the types of unneeded purchases that I see a lot in bankruptcy court include:
- time shares – almost always a bad deal
- large furniture purchases – if you are on a budget, you will pay 10 cents on the dollar for used furniture
- fancy vacuum cleaners – almost always a wasteful purchase
- expensive new computers – if you use your computer for school homework or to email, a one or two year old computer will serve your purchases. You will pay $200 to $300 instead of $1,500 to $2,000
- big screen televisions – personally, I watch very little television – perhaps a baseball or football game on occasion and the news every once in a while. My children are only allow to watch tv on weekends. Most successful people I know watch very little television. If you find yourself watching hour after hour during the week, consider alternatives like reading a book, taking a walk or finding a part time job. There is nothing positive that will happen in your financial life if you watch four or five hours of TV every day
Got any other ideas or helpful resources? Let me know.

Unfiled Tax Returns – No Matter What the Reason – Create Havoc in Chapter 13 Cases

By Jonathan on October 17, 2007

In Chapter 13 cases filed in the Northern District of Georgia, both the IRS and the Georgia Department of Revenue receive notice of your filing. In my office, I include both the IRS and Georgia as "notice creditors" in every case filed.

Recently, I have had to deal with problems arising from "estimated liability claims" filed by either the IRS or Georgia in Chapter 13 cases.

The problem arises in the case of a debtor who did not file a tax return in a prior year because of very low or non-existent income. I have had a number of clients tell me that their accountants or tax preparers advise them that the debtor did not need to file a tax return for years in which the debtor earned little or no income.

I do not know if this advice about not filing returns is correct or not as I am not a CPA or a tax preparer. What I do know, however, is that if you did not file a return in a prior year, there is a good chance that the IRS or Georgia will file an estimated liability claim for those tax years in your Chapter 13 case.

This estimated liability claim will often be calculated based on your earnings for recent years. In other words if you earned zero in 2003, but earned $50,000 in 2004, 2005 and 2006, then the IRS will assume that you earned around $50,000 in 2003 and they will estimate your liability for that period as well. Their estimated liability claim will include tax liability, interest and penalties.

If the IRS files an estimated liabilty claim based on unfiled returns, your Chapter 13 case will include unanticipated priority tax debt and there is a good chance that the Chapter 13 trustee will not agree to recommend confirmation of your case because your tax debt is actually unknown.

I am currently working on several cases where we have had to ask for reset after reset to give the debtor time to file a return showing zero earnings and for the IRS to amend its claim.

If there are any years in which you did not file tax returns, I think it would be wise for you to consult with your tax preparer prior to filing Chapter 13. I am now recommending to my clients that they advise their tax preparers about this estimated liability problem and file a return showing zero income so that their Chapter 13 plans will not be in jeopardy.

[tags] chapter 13 and taxes, estimated tax liability claims in bankruptcy, proof of claim, Georgia Department of Revenue, IRS claims [/tags]