If you are currently in a Chapter 13 bankruptcy and want to purchase a new vehicle there are several things that must be done. The information below is extremely important to the success of you being able to get a new vehicle so read it very, very carefully. It is critical that you get the court’s permission before going and incurring any debt (loans) on your own. To make the process as clear as possible we have broken it up into five different steps.
If you are in a Chapter 7 case, it is usually best to just wait until the bankruptcy case is completed and then if you need to withdraw funds or take out a loan, you can do so. If you request court permission during your bankruptcy, there will be attorney fees involved and it could lengthen your time in the bankruptcy case.
If you are in a Chapter 13 case, you need to contact your attorney as soon as you realize you may need a loan or withdrawal. The process takes some time, and usually your income and expenses have to be reviewed along with drafting the motion, filing the motion, and waiting for a court hearing. This whole process can take at least a month. Your attorney will also ask you specific questions about why you need to do the withdrawal or loan. The court will only approve withdrawals or loans if they are necessary, such as to fix your air conditioning unit, pay for a medical procedure, etc. The court will not approve the withdrawal or loan for unnecessary reasons such as taking a vacation or installing a swimming pool in your backyard.
Remember, communication with your attorney during your bankruptcy case is the key to a successful case. If you are ever in doubt, contact your attorney to find out how to proceed, but remember you cannot touch your retirement account during your bankruptcy case without getting court permission.
Should you cosign on a debt for a friend or family?
Cosigning on a debt is almost never recommended. However, it’s a tough decision sometimes when you have friends or family that need you to cosign on a debt to receive the necessary loan. Typically, though, it’s not a good idea to cosign on a debt. Let’s find out why.
What is a cosigner?
When someone is trying to obtain financing and they do not have the FICO credit score necessary to receive financing on their own, the creditor may request someone else cosign on the debt to receive the desired financing. So what exactly does cosigning mean? If someone cosigns on a debt it means they are agreeing to be responsible for that debt if the original debtor is unable to pay it.
The problem is, if the person who originally needed the loan can no longer pay it then the creditor can go after the cosigner for the debt. The creditor has the same rights to go after the cosigner as they do the primary debtor. It is not uncommon at all to see a codebtor be sued for an uncollectable debt.
Lets take a look at an example:
Dana the daughter needs to get a new vehicle. Her old vehicle has broken down and without a new vehicle she cannot get to her minimum wage job. She goes to a car dealership and after sitting down to sign all of the final paperwork the finance director at the car dealership they tell her they cannot give her financing due to her low credit score. Dana had a repossession three years ago that appears on her credit. They tell her she will need to get a a cosigner to receive the necessary financing. Stressed and needing a vehicle Dana calls Molly, her mother, to explain the situation. Molly the mom wants the best for her daughter Dana and knows she has to have a vehicle. Dana promises her mom that she will make the payments. Hesitantly Molly cosigns on a car loan for $30,000.
Fast forward and a year later Dana has made all of the payments on the vehicle. Molly barely even remembers that she cosigned on the debt. Unfortunately though, Dana ends up losing her job and can no longer afford the monthly car payment. To ensure the car is not repossessed again Molly, Dana’s mother, agrees to make the payment until Dana gets a new job. Months and months pass by and Dana is unable to find a job. Molly has used her savings and even pulled from her retirement account to try to continue to make the payments. Eventually Dana’s moved back in with her mother and Molly has exhausted all of her savings and retirement funds and they get behind on the car. The financing company eventually repossesses the vehicle and sells it at an auction for $5,000. The problem is, they still owed $20,000 on the vehicle. The finance company then tried, unsuccessfully, to collect on the deficiency balance of $15,000. Because of that, they filed a lawsuit against both Dana and Molly and eventually place a lien on Molly’s house and add interest, late fees, penalties and attorney’s fees to the amount owed.
The creditor could potentially try to repossess Molly’s other vehicle (which is paid off), go after money in her bank accounts and even foreclose on her house (which has a lot of equity). As time passes the creditor continues to add extra fees to the amount that is owed. Eventually, Molly has to file bankruptcy because she owes on the deficiency on the vehicle that she cosigned on and owes a lot in taxes because she had to withdraw a lot from her retirement account.
So what have we learned?
Don’t cosign on a debt with someone else. The person needing a cosigner may have the best of intentions. In our example above, Dana certainly did not want her mother to go through the stress and worry of having creditors come after her. The reason a finance company requires a cosigner is because they believe there is a good chance the person seeking the financing won’t be able to make the necessary payments. If this were to happen, creditors don’t care that you cosigned just to help out. Instead, they will come after you as if you were the one who originally failed to make the payments.
Of course! The court does not expect everyone who files bankruptcy to be down, out, and unemployed. That’s just not how life works; our clients are good hard working people who have simply fallen on hard times. You may have a job and file a bankruptcy and in most cases unless you have signed something stating that the employer must be notified if you file a bankruptcy, your employer wouldn’t have a clue you even filed.
In your petition you are required to report your income in several different areas. You will have to show your earnings for the past two years, where you work now and what your expected income going forward as well as what you have earned in the past 6 months prior to filing the bankruptcy. In bankruptcy, your income is calculated based upon a “Means Test”; although there are many other types of income besides employment that are also a factor in the means test. This tells the court whether or not you qualify for a Chapter 7 bankruptcy or if you will need to file a Chapter 13 bankruptcy based upon your income.
In the event that you file a Chapter 13 bankruptcy your debts are a factor, but your plan payments will be based also largely upon your past 6 months of income. For example, let’s say that based upon your arrears and debt in the plan, you’re looking at plan payments of $500 per month, BUT based upon your prior 6 months, your income shows that you have an extra $1,000 left over each month. You would make a payment closer to the $1,000 mark because your prior income states that you can afford it.
Also, in the occurrence that you file a bankruptcy and you have any secured items in which you may wish to keep (such as a house, car, jewelry, furniture, or electronics) you must be able to show that you can afford to make the contractual monthly payments. The court will not allow you to file a Chapter 7 bankruptcy unemployed and still keep your home unless you can show you are getting income from another source (like family support) to show you can afford the monthly payment. Bankruptcy court has been enacted to help consumers. Whether you have a job or not does have an impact on your bankruptcy options but you can certainly still file a bankruptcy even if you do not have a job.
When you are having trouble making your house payments, there are options that might work well for you. One of these options is a loan modification. This is when the bank changes your loan so that you have a lower, more affordable monthly payment. Many people who try to obtain a loan modification have been facing delays of all types.
When trying to get a loan modification, there is a lot of paperwork that the lender will need to determine whether you will qualify. Once the documents are submitted to the lender, some people will then get notification from the bank that either they are missing paperwork or that additional paperwork is needed. Another thing that seems to be common lately in the process is the lender telling the homeowner that they have missed a deadline. If that happens, they may even go back to the beginning of the process and start everything over. Typically, that means the homeowner has new deadlines, and has to submit all or some the paperwork over again.
It seems common lately for banks to say that they will not even consider a loan modification if you are current on the payments. They encourage people to stop making the payments so that they will have a better chance of getting a loan modification. Then, after the homeowner is several months behind in payments, the bank denies them the modification and the foreclosure process begins.
Typically, after applying for a loan modification, the lender will put the homeowner on a trial period for a few months at the lower payment amount. Make sure you keep all information pertaining to these payments. It has not been uncommon lately for the lender to either say they did not receive the payment on time or at all, or they do not credit the payment to your account correctly.
So if you are looking into the possibility of modifying your loan, be sure you are prepared for the possibility of long delays and a lot of paperwork. There could be more than one person handling your account, so make sure you write down and keep track of the entire process, including who you talk to, what papers you receive in the mail, what payments you send in, etc. Also, be sure you are persistent and follow up with the bank so you don’t slip through the cracks.
The saying, “the early bird gets the worm” is not always the best advice to take. For example, if you have already consulted with your bankruptcy attorney and decided that once you file your bankruptcy you will be surrendering your vehicle, giving it up voluntarily before the bankruptcy is filed is not the best decision. You should wait until you actually file the bankruptcy then give up the vehicle at that time.
Why should you wait? Simple answer: to help protect your credit from being more affected than it should. Filing a bankruptcy obviously gives you a major “ding” on your credit, but if you were to turn in your vehicle, the finance company reports that voluntary repossession as a repossession in general and does not specify the type of repossession; there is no way to distinguish on your credit that the finance company did not take the vehicle, but you instead gave it back. So after filing bankruptcy when you are trying to get your credit back in shape, your credit report will show two “dings”, it will reflect as having a repossession, then a bankruptcy filing. Also, by just giving up the vehicle voluntarily you leave yourself vulnerable for being responsible for the deficiency balance on the vehicle.
If you wait until you actually file the bankruptcy petition then contact the finance company and surrender the vehicle everything goes through the bankruptcy filing. Therefore your credit is only affected once instead of twice. Not to mention in some cases the finance company will not even collect the vehicle until they have an Order on Relief from Stay (meaning they have the courts’ permission to actually pick up the vehicle). If you are behind on a vehicle and you are considering giving it back to the finance company, it is strongly suggested that you consult with your bankruptcy attorney as to what is the best course of action for you.
If you are behind on your house payments and are considering filing Chapter 13 bankruptcy to save your home, it is important that you find out whether you have forced placed insurance.
Your bankruptcy attorney may ask you whether your homeowner’s insurance payments are usually included in your mortgage payments (in other words, whether your insurance is escrowed). If your answer to that question is yes, but you are several months behind on your mortgage payments, there are further steps you need to take.
When you fall behind on mortgage payments, the mortgage company is no longer receiving money from you each month to make your homeowner’s insurance payment on your behalf. Therefore, the homeowner’s insurance may lapse due to non-payment. The mortgage company cannot have the liability of a house with no insurance coverage, so the mortgage company will pay for insurance on your behalf. This is called forced-placed insurance because the mortgage company is essentially forcing it onto your home since there is no other insurance coverage on your home.
Why should you be concerned about forced placed insurance? The reason is that this insurance is generally much more expensive than the insurance you could find and pay for on your own. When your Chapter 13 bankruptcy is filed, the mortgage company will add the forced placed insurance costs onto the amount you are behind on payments. In the end, this could cause your Chapter 13 plan payment to be higher than necessary.
If you contact your mortgage company and find out there is forced-placed insurance on your property, speak with your Chapter 13 bankruptcy attorney about your options. He or she may recommend that you obtain your own property insurance that you will pay for out of pocket. Your attorney will also remind you to notify the mortgage company with proof of the new coverage when it has been obtained, so the forced-placed insurance can be cancelled.