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Pros and Cons of Reaffirming a Car Loan After BankruptcyWe recently discussed whether you should continue to lease a vehicle when you are filing for bankruptcy. You are more likely to have to decide whether you will reaffirm your car loan. In a Chapter 7 bankruptcy case, you can surrender (give back your car) and discharge remaining debts at the end of your case. With a reaffirmation agreement, you keep the vehicle in exchange for continuing to make loan payments. However, you should carefully consider the consequences before you enter such an agreement.

Why You May Want to Reaffirm

Texas bankruptcy law has a generous motor vehicle exemption that can prevent a Chapter 7 bankruptcy trustee from selling your vehicle. You are allowed to exempt the full value of one vehicle per member of your household with a driver’s license. You can also exempt a vehicle if an unlicensed member of your household relies on someone else using a vehicle to transport him or her. However, if you do reaffirm, a bankruptcy exemption does not prevent a lender from repossessing your vehicle after bankruptcy if you are behind on your loan payments. A lender may offer you a chance to reaffirm the loan because it would prefer you to continue paying back the loan. A reaffirmation agreement can be advantageous to you because:

  • You will keep the vehicle;
  • You may be able to negotiate more favorable terms for the loan; and
  • Paying the loan can help rebuild your credit rating after bankruptcy. 

Why You May Not Want to Reaffirm

You filed for bankruptcy in order to relieve yourself from debts. By reaffirming your loan, you are renewing your debt obligation and leaving yourself vulnerable if you cannot keep up with your payments:

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Federal Employees Expected to Continue Bankruptcy Payments Despite ShutdownThe federal government shutdown is nearing a month, and federal employees have started to miss paychecks. Losing your job income can put a strain on anyone’s budget, but people with a Chapter 13 bankruptcy repayment plan feel under particular pressure. Filers agree to court orders to make regular payments to their creditors, and the payment amounts are based in part on their regular income. When a federal employee going through Chapter 13 bankruptcy stops receiving pay, he or she may not have the money available to make the scheduled payments. 

Missing Bankruptcy Payments

A Chapter 13 bankruptcy trustee receives your payments and distributes them to your creditors. The trustee can file a motion to dismiss your case if you repeatedly miss payments, which would require you to:

  • Fulfill your missed payments;
  • Motion to modify your payment plan; or
  • Allow the dismissal and attempt to refile for bankruptcy.

During the previous government shutdown in 2013, some bankruptcy trustees were willing to delay a motion for dismissal when a federal government employee missed a payment. However, this government shutdown has already lasted for longer than any other on record, and it is unclear when a resolution will be reached. We do not know how patient trustees will be if bankruptcy filers are forced to continue to miss payments.

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Should You Continue Your Vehicle Lease During Bankruptcy?Protecting your motor vehicle is often a priority during your bankruptcy. In a Chapter 7 case, different rules apply when you are leasing a vehicle. Monthly lease payments may be cheaper than loan payments, but you do not actually own the vehicle. Chapter 7 bankruptcy filers must decide whether they will assume or reject their vehicle lease.

Assuming the Lease

Filing for bankruptcy puts an automatic stay on your vehicle lessor’s attempts to repossess your leased vehicle. The bankruptcy trustee technically has 60 days to claim your lease, but this is rarely done because the trustee would need to find someone else who would be willing to pay more than you to lease the car. You should decide whether you want to assume the lease before that deadline. You can keep the vehicle by assuming the lease, but:

  • You will be responsible for continuing payments under the lease contract;
  • The lessor can reject your request to assume the lease and try to repossess the vehicle (but that rarely happens); and
  • The lessor can repossess the vehicle if you cannot keep up with payments.

Chapter 13 bankruptcy can help you keep your leased vehicle if you are behind on lease payments because you can include the payments in your long-term repayment plan.

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Actions to Avoid Before Filing for BankruptcyThere are several actions you can take to help prepare yourself to file for bankruptcy. However, it is also important to understand what you should not do. Creditors will examine your financial activity leading up to your bankruptcy to spot instances of potentially fraudulent activity, which they can attempt to use to hold you liable for your entire debt. Other actions may be legal but needlessly drain resources that your bankruptcy could have protected. Here are four things you should not do before filing for bankruptcy:

  1. Incurring Large Debts Right Before Filing: It is extremely rare for individuals to run up their credit cards in order to prevent paying by filing bankruptcy. However, it is fraudulent to incur debts that you have no intention of paying. Once you have consulted with a bankruptcy attorney, you should avoid using any credit cards. A creditor may accuse you of fraud if you use credit to purchase luxury goods or services within 90 days of the date of your bankruptcy filing.
  2. Attempting to Hide Assets: Intentionally omitting assets during bankruptcy can cause your case to be dismissed. Selling or transferring assets right before bankruptcy might be fraud, and a bankruptcy court may cancel the transfer or dismiss your case. You should consult with your bankruptcy attorney before you sell any assets.
  3. Repaying Creditors in Advance: Bankruptcy has a process for prioritizing which creditors must be repaid. Paying back an unsecured creditor immediately before bankruptcy is unnecessary and potentially a waste of assets. It is possible that the bankruptcy would not require you to repay that creditor in full. You may have been able to save that money or used it to pay a debt that you cannot discharge (such as your student loan obligation or certain taxes) or your secured obligations that must be paid in order to keep the collateral (such as mortgage and car payments).
  4. Withdrawing from Retirement to Pay Debts: You may feel tempted to borrow money from your retirement account in order to repay creditors without filing for bankruptcy because your debts are a more immediate concern than saving money for your retirement. Not only are you stealing from your future income, but you may pay a penalty for making an early withdrawal from your retirement account and you lose the benefit of compounded interest over time. Bankruptcy exemptions allow you to protect your retirement money. You can clear your debts while keeping your retirement intact.  And this will be critical in your retirement years. 

Contact a Denton County Bankruptcy Attorney

Hiring a bankruptcy attorney is vital towards using the process to best clear your debts. A Frisco, Texas, bankruptcy attorney at The Page Law Firm can guide your decisions leading up to and during your bankruptcy. To schedule a free consultation, call 214-618-2101.

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Senior Can Use Bankruptcy to Protect Assets from CreditorsDebt has become an increasing problem for senior citizens, who do not have the same income stream to keep up with their payments as they did when they were still working. Several factors are contributing to the rise of senior debt, including:

  • Increasing health care costs;
  • Social security no longer being sufficient income to meet daily, necessary expenses; and
  • Retirement accounts depleted by the recent recession.

Your debts can pile up because of your reduced retirement income and increased need for doctor visits and medical treatments. Rather than depleting your retirement savings to pay off your debts, you should see whether filing for bankruptcy may help. Bankruptcy laws protect many of the assets that senior citizens need. 

Social Security

Your Social Security benefits during a Chapter 7 bankruptcy case are protected from your creditors, as long as you keep that money separate from other funds. Social Security money is vulnerable to a bank levy if it is co-mingled with other money in a bank account. This includes mixing it with money you receive from your retirement accounts. The best way to avoid this is to create a separate bank account for your Social Security income. In Chapter 13 bankruptcy, the Social Security benefits you receive each month are not considered part of your income used to determine your repayment plan.

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National Association of Consumer Bancruptcy Attorneys State Bar of Texas
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