Need to Get A New Car? You Might Want To Do It Before Filing For Bankruptcy

A question clients frequently ask me involves the timing of buying a vehicle when filing for bankruptcy. The question of whether it's better to buy a vehicle before filing for bankruptcy or after filing is a good one.

If you're filing a Chapter 7 bankruptcy, there can be a few advantage to buying before you file. First, you may have a lower interest rate. After filing, you'll be able to get a car loan easily, but the interest rate is likely to be around 25%. Sometimes clients will actually have decent credit scores before filing that may allow them to get lower interest rates. Even a few percentage points can make a big difference over the life of the loan.

Second, many clients of mine find themselves in the unfortunate position of having to buy a vehicle at a "buy here, pay here" lot. These dealerships specialize in catering to low-income or bad-credit customers. As such, many of the cars are low quality and unreliable. The prices are inflated and the interest rates are exorbitant. If you buy the vehicle before filing your case, it is a pre-petition debt and is dischargeable. Of course, if you want to keep the vehicle you'll most likely have to sign a Reaffirmation Agreement that still makes you liable on the loan, but it gives you some time to evaluate the vehicle before being stuck with it. This is because you can rescind the Reaffirmation Agreement until you receive your discharge. If you do, you can return the vehicle without being responsible on the loan anymore. Because the average Chapter 7 case lasts about four months from filing to discharge, you can keep it and use the pendency of your case more or less as an "evaluation period". If you purchase the vehicle after your case is filed, it is a post-petition date. If something happens to it or it's repossessed, your out of luck and you're still liable on the car loan.

On the down side, if you purchase a vehicle before your case is filed and you have too much equity in the vehicle, your case trustee may seek to seize the vehicle and sell it. Also, if someone is going to be giving you a vehicle outright, it may be best not to title the vehicle in your name until after your case is filed, depending on the value of the vehicle and your available bankruptcy exemptions. The Ohio bankruptcy exemption for equity in a vehicle is currently $3,450.

Within the context of a Chapter 13 bankruptcy, there are also advantage to purchasing a vehicle before your case is filed. Because it is a pre-petition debt, you can include it in your Chapter 13 bankruptcy at (most likely) a reduced interest rate, currently 5.25%. If you choose to purchase a vehicle after the filing of your case, you'll need to first talk to your attorney. This is because you need to get court permission to incur any significant debt after your Chapter 13 is filed. This usually involves filing a motion with the bankruptcy court. The court can also require you to get multiple competing bids and may deny your motion if it is not satisfied with the vehicle you are trying to obtain. It can be a time-consuming and burdensome (although sometimes unavoidable) process.

The pitfalls with getting a vehicle before your Chapter 13 are similar to those involved in a Chapter 7. Although your Chapter 13 trustee won't take the vehicle, the excess equity in the vehicle may mean that you end up paying more through your Chapter 13 plan to your creditors. As always, it's best to discuss these issues with a qualified bankruptcy attorney before filing your case.

I'm an experienced Canton bankruptcy attorney who's filed or managed over 1,000 cases. For more information on Chapter 7 and Chapter 13, call me at 330-605-3508 or visit my website at http://www.ohiobankruptcyrelief.com/.

Client FAQs - Will Filing for Bankruptcy Affect My Spouse?

There are really two sides to this question. In bankruptcy, we're mainly concerned about two things: your debts and your property.

DEBTS

In Ohio, when one spouse files it does not affect credit of the non-filing spouse. As long as the non-filing spouse has not co-signed or otherwise used the credit of the filing spouse, they will not be held liable for the debts of the filing spouse.

One thing to keep in mind, however, is the situation in which both spouses have co-signed for a loan or are jointly liable for a debt. In that circumstance, one spouse's bankruptcy filing does not relieve the other of liability for the debt. The non-filing spouse is fully liable. One caveat to this is if the debtor is filing a Chapter 13 bankruptcy and is re-paying a consumer debt in full through their plan. In this circumstance, the bankruptcy code has a "co-debtor stay" in effect that protects the co-debtor from the creditor (11 U.S.C. 1301).

PROPERTY

As a general rule, any property that is solely in the name of the non-filing spouse cannot be touched by the bankruptcy trustee. One thing to keep in mind, however, is the concept of fraudulent transfers. In Ohio, the trustee can look back up to four years at any property the debtor has transferred out of his or her name. If the debtor transferred property out of his or her name to the non-filing spouse, the trustee may be able to reclaim that property from the spouse.

Also, joint property can be an issue if there is equity in it. For example, if a couple owns a home worth $100,000 that has no lien on it, the trustee may end up selling the house. The debtor owns a 50% interest ($50,000), but Ohio bankruptcy exemptions only cover $21,625 worth of equity. The trustee could then sell the house, give the non-filing spouse the value of their interest, give the debtor the value of their exemption, and give the rest to creditors. This is the sort of situation that can result in the loss of a home, a car or any other jointly titled property. An experienced bankruptcy attorney should be able to point out these potential pifalls before you file your case.

For more information on Chapter 7 and Chapter 13, visit my website at http://www.ohiobankruptcyrelief.com/.

Red Alert! Want to Do A Bankruptcy Yourself? Find Out What SOME Trustees Are Doing That Could Make You Lose Your Home

Here's a quick hitter about the perils of doing a bankruptcy yourself, or hiring an attorney who isn't an expert in the field. Imagine this situation: You own a home, it has a mortgage, the payments are current and there is little or no equity. You want to keep the house. If you read my previous post, you'd think that there would be nothing in the way of you keeping your house. Well, there's something that SOME Chapter 7 Trustees are doing that could cause you to lose your house, even in this situation.

In Ohio, a mortgage is required to be signed by the borrower and be attested to by two witnesses and a notary public. If it's not, then it can be invalidated. If you think this is good news for your bankruptcy, then you're wrong. In theory, if the witnesses or the notary were not present when the mortgage was signed, then it is not valid and the property is not secured. What this means for your bankruptcy is that the property would be all equity. If it is worth more than you can exempt, the trustee can sell the property. The practical effect is that the debtor/borrower and the lender (both of whom entered into their agreement in good faith) both get screwed in favor of unsecured creditors like credit card companies and collection agencies. As a note, it is my opinion that this kind of action by any trustee is immoral and unconscionable. However, my opinion aside, it sometimes happens.

To be fair, most trustees DO NOT pursue this avenue, but there are some that do. And if you run into one, you'd better be prepared to answer his or her questions about it. When I know I'm going to have a hearing with one of these trustees, I prepare my clients. To be fair, most clients can't remember who was there and who wasn't. In this case, there is really nothing the trustee can do to invalidate the mortgage. But it's just another pitfall and another reason you should hire a qualified professional to handle your case.

For more information on Chapter 7 and Chapter 13, visit my website at www.OhioBankruptcyRelief.com. If you're in Northeast Ohio, call me at 330-605-3508 for a free bankruptcy consultation.

Second Mortgage Weighing You Down? You May Be Able To Get Rid of It!

Have a second mortgage on a house that is severely "underwater"? Then read on. You may find that there is an option you'd never thought about that can help you get rid of that second mortgage, sometimes without paying a penny on it.

First off, we have to talk about what a "secured debt" is. Secured debts are obligations that are secured by a particular piece of property, such as a house or a car. If you don't pay, they can take that property, whether through foreclosure or repossession. Having said that, we should all be able to see that mortgages on houses are secured debts, right? Of course, the answer is . . . maybe. What about a situation in which someone owes more on a house than it's worth? Is the mortgage fully secured, or is it secured just to the extent of the value of the property? And what about a second mortgage where the house is worth less than the FIRST mortgage. For example, what if a house is worth $80,000 with a first mortgage of $90,000 and a second mortgage of $20,000? Is the second mortgage really secured? If the second mortgage holder forecloses, how much money do you think they'd get? (Hint: the answer is A BIG FAT ZERO).

One of the problems is the initial appraisal used to get the second mortgage. Appraisals commissioned by mortgage lenders are notoriously untrustworthy. In all instances, they over-inflate the true value of the home, sometimes by ridiculous amounts. The reason for this? Because the mortgage lender has to make the loan "work". The loan cannot be underwritten if it doesn't have any equity and the loan-to-value ratio is too small. So how to fix this? Get an appraisal that shows that the house is worth more. When that happens, the the lender can give the second mortgage, brokers can get their commissions and the borrower can walk away with some cash in their pocket. So everyone wins, right? WRONG! Because it's all an illusion. There is no way the house can actually sell for the appraised value. If the borrower continues to pay on the second mortgage, then there is no harm. When they can't afford to, then the real problems start.

So how can you get rid of a second mortgage without paying for it? The answer is simple: Chapter 13 bankruptcy. If there is no equity attached to the second mortgage (the borrower owes more on the FIRST mortgage than the house is actually worth), then you can get rid of, or "strip", the second mortgage. In our example above, the borrower would be able to strip the second mortgage. And the amount of the second mortgage is immaterial. The only numbers that matter are the value of the property and how much is owed on the FIRST mortgage. Most courts are very particular in how you have to go about doing this and what appraisals are acceptable, so you should consult an experienced Chapter 13 attorney to do this for you. So what happens to the second mortgage? It is treated as unsecured and paid at whatever percentage the rest of your unsecured creditors are paid at. It is important to know, however, that stripping the second mortgage is contingent upon completing your Chapter 13 case and receiving your discharge. If your case is dismissed or converted to a Chapter 7 bankruptcy, the second mortgage stays secured. Also, if there is even ONE PENNY of equity in the second mortgage, the whole darn thing stays secured.

For more information on Chapter 7 and Chapter 13, visit my website at www.OhioBankruptcyRelief.com.

Client FAQs: Will I lose my home in bankruptcy?

One of the most frequent concerns people have when they come in to my office is whether or not they will lose their home in bankruptcy. Oftentimes, a person's home is more than just a piece of property. It is the realization of the American Dream. It is a place where memories are made and families are raised. It symbolized achievement and ownership in a community or neighborhood. People are right to ask the question "Will I lose my home in bankruptcy?"

With any question, of course, the answer depends on the circumstances. Clients should realize that with any property they have, their bankruptcy trustee is concerned with one thing, equity. The trustee's job is to find any property that is not exempt, liquidate it, and use the money to pay off creditors. In most Chapter 7 cases, there is nothing for the trustee to sell. These are called "no-asset" cases. Simply put, if there is no equity in your home (a common situation these days), then your bankruptcy trustee will not have any interest in it. But even if you do have equity, you may still be safe. The Ohio bankruptcy exemptions for homes (the "homestead exemption") allows any person to exempt $21,625 of equity in their primary residence. Double this for joint owners ($43,250). Even if you have more than this, your trustee may not pursue your property if they will not realize any money when taking into account the costs of sale.

If you have too much equity in your home, there is one of two ways this is resolved. Either the trustee will sell your property (and pay you the value of your exemption), or you can pay the trustee money to keep the property (in an amount agreed upon between the trustee and your attorney). If neither of these is an option, you should consider a Chapter 13 bankruptcy.
In a Chapter 13 bankruptcy, you do not lose the property, although the nonexempt portion of your equity is taken into account for purposes of your plan payment.

Finally, you should make sure that your mortgage payments are current, or that you have arrangements with your mortgage company, if you want to keep the home. If it is behind, you may want to consider a Chapter 13 bankruptcy to get it caught up or stop a foreclosure. Also, you can sometimes get rid of, or "strip", a second mortgage if you complete your Chapter 13 Plan and get a discharge.

For more information on Chapter 7 and Chapter 13, visit my website at http://www.ohiobankruptcyrelief.com/.