Tag: cram down

Bankruptcy, Credit Unions and Cross-Collateralization of Loans

One issue that periodically comes up in bankruptcy cases is cross-collateralization of assets by credit unions. What does that mean? Cross-collateralization is basically the use of collateral from one loan to secure other loans.

Most credit unions, including local credit unions here in Rochester, New York, use “Loanliner” documents. These form agreements are used by financial institutions for their lending transactions. Included in standard Loanliner lending agreements is a provision in which the borrower agrees that all other loans with the lender are cross-collateralized. The cross-collateralization clause from a recent Loanliner agreement reads: “the security interest also secures any other loans, including any credit card loan, you have now or receive in the future from us and any other amounts you owe us for any reason now or in the future.”

Credit unions often use this clause in vehicle loan agreements to secure all other credit union debts with the vehicle. This may surprise someone when they discover that the debt on the car may include a personal loan, a line of credit, and credit card balances.

There are a few options in bankruptcy if the debtor has a cross-collateralized auto loan. If a Chapter 7 Bankruptcy case is filed, the debtor can request that the credit union prepare a reaffirmation agreement for the vehicle without regard to other debts. In this situation, the debtor is asking the credit union to voluntarily strip off the cross-collateralized loans. If the credit union rejects such request, the debtor has two options: (1) surrender the vehicle and discharge all debts to the credit union; or (2) redeem the vehicle.

If the debtor surrenders the car, the credit union takes the car back and sells it, usually at auction. Any deficiency left on the car loan and all additional cross-collateralized debts owed to the credit union are discharged in the Chapter 7 Bankruptcy. If the debtor in Chapter 7 Bankruptcy chooses to redeem the car, the debtor gets to keep a vehicle by paying the value of the vehicle, not the total debt that is owed. While somewhat similar to a Chapter 13 Bankruptcy cram-down, redemption requires that the payment to the secured creditor must be made in a lump sum and does not allow for payments over time.

If the debtor is filing a Chapter 13 Bankruptcy, the loan can be crammed-down to match the vehicle’s value provided that the loan is over 910 days old. Any remaining debt is treated as unsecured debt and is discharged at the end of the Chapter 13 case. Another option is to surrender the vehicle just as in Chapter 7 Bankruptcy.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Car Ownership and Bankruptcy

I am often asked what happens to the debtor’s car if he or she is forced to file for bankruptcy.  The answer to that questions depends on whether the car is owned by the debtor outright, is being financed, or is leased.

If the car is owned outright, and its value is less than the value of New York’s vehicle exemption, currently limited to $2,400, then the debtor can keep the car without any bankruptcy related consequences.  This is true for the debtor filing either a Chapter 7 or a Chapter 13 bankruptcy.   If the value of the car is greater than the allowed exemption, in a Chapter 7 case,  the bankruptcy trustee can demand that the debtor turn the car to the trustee.  Subsequently, the trustee would have the vehicle sold at an auction, and the debtor would be repaid the value of his or her exemption, and the rest of the money would be paid to the creditors.   If a car is jointly owned by a debtor and someone else (such as a spouse), then the debtor will only be entitled to 1/2 of the equity.  If debtor and a spouse file a joint bankruptcy petition, they can “double up” or stack their exemptions (i.e., $4,800 in one vehicle owned by them jointly, or $2,400 in two vehicles total).  If the car is financed, the relevant value is the value of the equity in the vehicle, that is the difference between the market value of the vehicle and the amount owed to the lender.

When filing Chapter 7 bankruptcy, you have three options for handling a car loan.  You can reaffirm your loan with the lender.  That means that you agree to continue making regular payments on your car.  In exchange, as long as your are making payments on the loan, your lender will not repossess the car.  Whether you sign a reaffirmation agreement is strictly voluntary.  Another option, although rather rare, is redemption.  The debtor agrees to make one lump payment to the lender representing the car’s fair market value, regardless of what is owed on the loan.   Any amount owed on the car in excess of its current value can be discharged as part of the bankruptcy.  The final option is to surrender the car if you cannot afford to continue making payments.  Any debts associated with the car will be discharged.

In Chapter 13, a debtor can keep his or her car even if the equity is greater than the allowed exemption amount, as long as the value of equity in excess of the exemption is distributed to creditors through the chapter 13 plan, i.e., satisfying the good-faith test.  Chapter 13 bankruptcy can effectively halt car repossession and will allow the debtor to repay any arrears on the loan over the life of the Chapter 13 plan.  In addition, in a Chapter 13, the amount the debtor will pay may depends on how long ago the car was purchased.  If the  car was purchased in the last 910 days (30 months), the debtor must usually pay the full amount owed, regardless of the car’s current value.   However, under appropriate circumstances, the interest rate on the loan may be reduced by the bankruptcy court.  If the car was purchased more than 30 months ago, the debtor is likely to have to pay the lender the amount representing the car’s present value over the life of the repayment plan.  The amount representing the car’s value is treated as secured debt, and the remainder of the debt is treated as unsecured.  This is particularly significant where the car is upside down, i.e., the amount owed significantly exceeds the car’s value.  Those situations may result in significant savings to the debtor.

If the debtor is leasing a car, he or she has two options.  The debtor can reaffirm the lease and keep the car, while continuing to make payments.  Alternatively , the debtor can reject the lease, return the car, and discharge any debt associated with the lease.

If you are dealing with debt problems in Rochester, New York, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation.