Chapter 7 Bankruptcy Options

In a chapter 7 proceeding, you are generally not allowed to keep a recreational vehicle if you own it free and clear.  You will either have to surrender the item to  the trustee, or buy the item back from the trustee.  If you surrender the item to the trustee, the trustee will sell it and after withholding the administrative expenses of the sale, will pay the remaining proceeds to your creditors.  One option you can pursue is to purchase back from the trustee, typically at a reduced price.  The trustee will then take your purchase proceeds, less his administrative expenses and pay the creditors.

For example, if you had a quad that was worth $2500, the trustee could sell the quad at an auction and perhaps get $2000 for it.  After subtracting his administrative expenses for his efforts as well as the cost of the sale, the trustee would be able to pay $1800 to the creditors.  Or, you may offer to purchase the quad back from the trustee for $1500 and keep the quad.  The trustee would then pay the $1500 less his administrative expenses to your creditors.

Pre Bankruptcy Planning For Non Exempt Assets

A better way to address the issue with your recreational vehicle would be perhaps to sell it before filing bankruptcy and place the cash proceeds into an exempt asset such as the equity in your home or your primary vehicle.  In this scenario you get to keep the cash, but lose the recreational vehicle.  You should get proper legal advice from your lawyer prior to pursuing this option and other pre bankruptcy planning strategies.

Chapter 13 Bankruptcy Options

In a chapter 13 bankruptcy, you would have to pay the trustee back the value of the asset, over the life of the Chapter 13 plan.  A Chapter 13 plan typically lasts 3 to 5 years.  For example, if you have a quad that is worth worth $2,500.00, you would pay the trustee roughly $45 per month for five years to keep your quad.  Again, this assumes you own the quad free and clear.

Under either chapter 7 or chapter 13 Bankruptcy, if you owe money on the quad, you simply have to keep making the payment to keep it.  If you have a substantial amount of equity in the quad, and still owe money on it, you may have to pay the trustee an amount equal to your equity in order to keep the quad, or the trustee may take it and sell it if he believes there is enough equity in it to warrant the sale.  In a chapter 7, if you were going to pay the trustee for the equity, you would have to do it all in one lump sum.  Whereas in a chapter 13, you can pay the equity in time, in monthly payments, over the life of the plan which is three to five years.

One reason people try to work with debt negotiation companies is that they believe it is better for their credit than filing for bankruptcy.  However, the credit rating companies still look at your need to use a credit counseling agency as evidence of your inability to pay your debt, just as a bankruptcy signals that inability.  Therefore there is likely no benefit to your credit for using a credit counseling agency as opposed to filing for bankruptcy.

Also, you must understand that most, if not all, of these credit counseling agencies are paid by credit card companies.  That is, they get paid a certain percentage of every dollar they get you to pay to the credit card companies.

However, you should be aware that any proceeds placed into your retirement account within the six months prior to filing bankruptcy are not protected.  The reason for this is that the government does not want people taking large amounts of cash that would otherwise not be exempt and stashing it into retirement accounts in order to get around the bankruptcy exemption laws.

For example, if you are constantly late or making sporadic payments on some of your debt, you might be able to continue making late or occasional payments over the period of one, two or even three years.  Once you finally catch up, that is when your credit will start to recover, assuming you have no other debt issues.  This is a way of prolonging the agony of bad credit.  Whereas if you simply file bankruptcy, your credit will begin recovering immediately.

Additionally, your credit will likely recover more quickly because most of your other debt has been eliminated and it will not be counted against you in weighing down your debt to income ratio.  Therefore, for most people, bankruptcy will actually help improve their credit by helping them recover from bad credit far quicker than if they didn’t file for bankruptcy.

Statutory Property Exemptions Allow You To Keep Certain Property While Filing Bankruptcy

If the government took all of your belongings, the government would then have to support you.  This is not their goal.  Therefore, they allow you keep things essential to you obtaining a fresh start such as certain retirement accounts, equity in your home, equity in your vehicles, household furniture, tools of your trade, and many personal items.  Arizona provides certain exemptions via statute.  These statutes provide a detailed list of what you are allowed to keep.  When people come to see me and use our services, we provide them with a workbook that, among other things, lists all of their property exemptions.

Other Chapter 7 Options

If you owe money on your car, and you wish to keep it, under a Chapter 7 you can keep the car so long as you keep making payments for the car.  This obligation will remain after most other debts are discharged as part of your bankruptcy.  But, you get to keep your car.  Another option is to pay the the present market value of the car, in our above example that would be $8,000.00, by either getting a new car loan for that amount from another bank or by getting the money from a friend or relative.  This option allows you to keep your car and eliminate the unsecured portion of the debt, in the above example, you would have eliminated $10,000.00 of debt.

Another Chapter 13 Option

In addition to all the options described above, Chapter 13 bankruptcy also offers you the following option.  Depending upon how long ago you purchased your vehicle, you may be able to force the bank to reduce the amount of the debt you owe on your vehicle and also keep your vehicle.  For example, if you owe $18,000 on your vehicle, but it is only worth $8,000, you could reduce your loan amount to $8,000, keep the vehicle, and make a monthly payment of for as little as $140.00

If you are behind on your home payments, you will fall into one of three scenarios.  The first two involve you having fallen behind on your home payments due to temporary economic circumstances, perhaps because of an emergency medical situation or a temporary job loss.  This means you missed several home payments, but are now able to make the payments.  After overcoming the temporary set back, people will find themselves in a position where they can again make the current payment but are unable to make up the arrearages.   By filing bankruptcy under chapter 7, you will delay any pending foreclosure action and allow you time to come up with the arrearages owed to the bank.  You can typically get 45 to 65 days after filing bankruptcy to pay the arrearages.  This may become possible after you no longer have to pay your unsecured creditors that will be eliminated as a result of you filing bankrutcy.

If you cannot come up with all the arrearages during that time frame, a chapter 13 bankruptcy would allow you to pay off the arrearages over a period of three to five years.  For example, if you are behind $10,000, you could pay that over time, in monthly payments of as little as $166,67.

In the third scenario, if you are unable to continue making your monthly payment, and have arrearages, then bankruptcy will not save your home.  You will have to let the bank foreclose on your home through the bankruptcy process.  However, the bankruptcy will eliminate any deficiency debt that arises from the foreclosure of your home and the resulting tax consequences that arise from a deficiency sale.

If you have a vehicle that you still owe money on and wish to keep, you will likely have to keep making payments on the vehicle in order to keep it.  However, if you do not want to keep the vehicle, you can give the vehicle back to the creditor and eliminate 100% of the debt associated with that vehicle.  This is true for other loans that are secured by property, such as a home mortgage or a big ticket item that is financed, such as a refrigerator.