Tag Archives: auto loans

Should I Buy a New Car before Filing for Bankruptcy?

You may not be advised by your Michigan bankruptcy attorney to buy a new car prior to filing for bankruptcy depending upon whether you actually need a new car, the other assets and property that you own, and whether you are filing a Chapter 7 or Chapter 13 bankruptcy.

To read more about car purchases prior to filing Chapter 7 or Chapter 13 bankruptcy, click here to read our full post on this topic on the new Michigan Bankruptcy Blog of The Hilla Law Firm, PLLC.

If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact us at (866) 674-2317 or john@hillalaw.com to schedule a free, initial consultation.

Can I Reaffirm My Car in a Chapter 7 Bankruptcy?

This question seems to have been on a lot of people’s minds recently. Nearly every potential client who has contacted me in the past week has had a question about whether or not they could retain secured property such as a home or car if they filed a Chapter 7 rather than a Chapter 13 bankruptcy and, if so, how they could do it. As I’ve discussed previously on this blog, it’s a particularly pertinent question here in the metro Detroit area of southeast Michigan because of the area’s lack of viable public transportation. Fortunately, there are a few different ways to retain possession of one’s vehicle through the Chapter 7 process, although not all of them may be for the ultimate good of the debtor.

First, in a Chapter 7 bankruptcy, it is possible to keep a car without striking a reaffirmation agreement with the loan lender. This is possible if you own the car outright and are not currently making payments to an auto loan lender on the vehicle. If that is the case, it may wholly or partially fit into either the state or Federal exemptions available.  Under the Michigan state exemptions, currently, $2775.00 may be exempted for an automobile. (Note that “exempted” means that this property or that dollar-value’s worth of property may be “exempted” from the bankruptcy estate that is created legally when a bankruptcy petition is filed and which contains all of your property except that property that is “exempted.”) So, if you own your car outright and its fair-market value is $2775.00 or less (as of this writing), it is simply property wholly owned by you that you may exempt. Under the Federal exemptions, which are used alternatively to state exemptions, the vehicle exemption limit is currently only $2440.00.

Second, a car may be “redeemed” in a Chapter 7 bankruptcy. In redeeming property during a Chapter 7 filing, the debtor makes a lump-sum payment to the creditor for the total fair-market value of the property. This allows the debtor to retain the vehicle free and clear of the obligation to make any future payments, during or after the bankruptcy process. However, many prospective Chapter 7 debtors do not have a sufficient lump-sum available at the time that the bankruptcy petition is filed, and, thus, redemption is not always a viable option.

Third, if you do not own your car outright and are currently making payments on it, it may indeed be reaffirmed in a Chapter 7 filing—but with some caveats.

A “reaffirmation agreement,” first, is an agreement that is struck between the debtor filing for bankruptcy and the automobile loan-provider (or home-loan mortgagee) stating that you are reaffirming the debt you owe to that loan-provider and that you intend to continue paying it either as-is or with modified terms. The reaffirmation agreement keeps the property in question and the terms of payment surrounding it out of the bankruptcy estate.  The agreement, essentially, stipulates that the debtor agrees to continue to be held liable for the full amount of the agreement, even after the bankruptcy discharge occurs, while the creditor agrees to refrain from repossessing the vehicle.

The reaffirmation agreement must be signed before the discharge takes place, and it must be filed with the bankruptcy court. If the debtor is represented by an attorney in his or her bankruptcy filing, the attorney must also sign the agreement, stating that he or she believes that the agreement will not pose an undue hardship to the debtor, and the attorney must further attest that the agreement was signed by the debtor voluntarily and free of any undue influence. If the debtor is not represented by an attorney, the bankruptcy judge must approve the agreement. Additionally, the debtor must file with the court a statement of income showing that remaining disposable income, after the bankruptcy, is sufficient to make the payments required by the reaffirmation agreement.

As to the caveats, there are many. Many attorneys will not sign a reaffirmation agreement for their clients—ever. The primary reason for this is that, when you sign a reaffirmation agreement, you deprive yourself of the opportunity to fully enjoy the protections provided by bankruptcy. It is possible that, at the time you sign a reaffirmation agreement, you feel that you are fully able to handle the continued payments after the bankruptcy discharge. However, hard times may roll around a second time, and you may find yourself unable to continue making those payments at some point after the discharge (and well before the 8 year time-span required between Chapter 7 bankruptcies lapses). At that point, the creditor may not simply repossess the vehicle but will also be able to pursue you to collect the entire amount of the loan—all of which would have been discharged in the bankruptcy without the reaffirmation agreement.

There are ways around this sticky system, however, that an experienced bankruptcy attorney can guide you through to the best possible result.

If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or john@hillalaw.com to schedule a free, initial consultation.

Is Debt Consolidation a Good Alternative to Bankruptcy?

Many consumers question whether “debt elimination,” which would occur under, for example, a Chapter 7 bankruptcy filing, is a better or worse option with regard to their future credit-scores than “debt consolidation,” a non-bankruptcy-related procedure. The answer is that it depends.

What it depends upon is, first, your current credit standing. A bankruptcy will always be detrimental to your credit-score and will remain on your credit-report for 10 years. However, there comes a point for consumers who have suffered financial set-backs where the impact of a bankruptcy upon their credit-score is not as harmful as lingering in a state of financial decline. This occurs when they have already missed multiple payments, are in arrears on home or auto payments, or possibly have been foreclosed upon or had a vehicle repossessed. At this point, the bankruptcy filing is actually, effectively, an improvement. That is, when you file for bankruptcy and your debt is discharged, you are at least in a state of rebuilding your financial well-being and credit-score rather than treading water in a state of steady decline and suffering incessant collection attempts and late-fee charge application.

Even more to the point, whether debt consolidation is a good option, depends greatly upon the means by which you are consolidating your debt. For the most part, however, debt consolidation is not a good deal for the consumer in need.

There are legitimate credit counseling agencies who provide the pre-bankruptcy petition credit counseling that is required by bankruptcy law. These agencies sometimes recommend a debt management plan, which, for some debtors, may provide a non-bankruptcy solution to their debt management problems. Often, however, such plans are not a good idea as they usually do not reduce the principal owed by the debtor and don’t help with secured debt, such as home mortgages or auto loans.

Worse, there the other “debt consolidators” that debtors considering bankruptcy tend to run into. These are for-profit companies that claim to be able to negotiate with a debtor’s creditors. These companies do not have any legal means of convincing a credit card issuer or other creditor to reduce a debtor’s debt, and, often, they simply take the debtor’s money in the form of a monthly “lump” payment and hold onto it. Very few debtors end up completing the “consolidation” programs offered by these companies, and, in my experience, they often end up being just another creditor listed in the bankruptcy petition when the debtor ends up filing for bankruptcy anyway.

In short, be very careful of which company is offering you a “debt consolidation” plan. For the most part, it is not a good deal and may even be harmful to many consumers, regardless of whether they go on to consider filing for bankruptcy as an option.

If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or john@hillalaw.com to schedule a free, initial consultation.