Articles Posted in Cram Down

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One of the best benefits of declaring a Chapter 13 bankruptcy in Jacksonville, Florida is the ability to “Cram Down” certain assets such as a car loan, certain real estate debts, or even some personal property. A cram down allows debtors to lower the principal balance and interest rates on debts they owe on secured debts. A Jacksonville Bankruptcy Attorney can help you determine if any of your debts might be eligible for a cram down through bankruptcy.

So how does an asset qualify for a cram down? First, the debt must be a secured loan. A debt is a secured loan when a lender has a security interest in the asset or collateral. This interest grants the lender certain rights to the asset, such as the right of repossession of the item if the debtor defaults on his or her payments. The most common type of security interests are found in cars and houses.

A cram down can occur when a person declares a Chapter 13 Bankruptcy. Unlike a Chapter 7 Bankruptcy, this type of bankruptcy requires that the debtor pays back his or her debts through a repayment program, which lasts 3 to 5 years.   It is important to note that a person’s homestead property does not qualify for this benefit. Continue reading →

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Secured and Unsecured DebtsWhen you file bankruptcy you’re required to provide a list of everyone to whom you owe money. Those people and businesses are your creditors. There are separate sections in your bankruptcy petition for creditors that are secured and unsecured.

A secured debt is one that is backed by collateral. This means that if you don’t pay the debt, the creditor can repossess something, typically a car or house, to help pay what is owed. If the collateral is sold for less than what is owed, the debtor must pay the difference. This is called a deficiency.

Unsecured debt doesn’t have collateral like secured debt. It’s security is the creditor’s ability to damage the debtor’s credit. This includes items like, medical bills, signature loans and most credit cards. Occasionally, a credit card will attempt to collateralize the item purchased using the card, such as furniture or jewelry.

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Florida Redemption Car Refinancing Fair Market ValueCar payments seem to be unavoidable. Unless you’re one of the rare people who have the luxury of being able to ride a bicycle to work, you must have a car. Everyone knows that the value of a car drops as soon as you drive it off the lot and as a result, many people who drive financed vehicles owe more to the lender than the asset is worth. Wouldn’t you love to be able to pay what you vehicle is worth right now, rather than what you owe on it? You can, and here’s how:

11 USC 722 allows a bankruptcy debtor to pay the secured portion of the debt owed on the car to satisfy the lien. “Security” for a loan the physical asset which can be exchanged to satisfy a lien. A typical security is a house or car. If you stop paying on the lien, the lender can take the house or car to satisfy the lien amount. Any value in the house or car above and beyond what is required to satisfy the lien (and associated fees) is returned to the borrower. A “Deficiency” occurs when the house or car sell for less than the lien amount. Deficiencies are unsecured debts for which a lender may sue. Deficiencies are very typical in the housing market these days.

When a debtor elects to use 11 USC 722, the court bifurcates the lender’s single claim into two claims, one secured which is equal to the fair market value of the car and one unsecured which represents the remainder. This way the borrower can discharge the unsecured portion, pay the secured portion and keep the vehicle. This is relatively easy in a Chapter 13 because the debtor can re-amortize the secured debt to be paid over the length of the Chapter 13 repayment plan, typically over five years. However, in Chapter 7 the payoff must occur immediately which is often impossible for people who’re already bankrupt.

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Mortgage Modification through Bankruptcy MediationNearly half of Florida homes that have mortgages are worth less than the mortgage debt on the home. This, combined with the nation-wide decrease in incomes has lead to one of the greatest recessions our country has seen.

A home mortgage is essentially a contract. You promise to make payments according to the contract’s terms, and the lender promises to transfer the home’s title to you when you finish making your payments. The government regulates these contracts by creating laws that set out procedures for things like foreclosures. Of course, there is still an element of free contract which allows lenders and borrowers to negotiate the terms of their agreement at any time. The government is limited in how much they are allowed to interfere with contracts so instead of trying to force banks to offer mortgage modifications, they make programs like HAMP, which offers lenders tax deductions or other benefits to make deals with borrowers. Personally, I think that the government isn’t offering the lenders enough in benefits because banks aren’t particularly helpful in getting borrowers into the program. HAMP mods are done in-house by the banks and “can” lower a borrowers mortgage payments to 31% of their gross income if you qualify. But what if you don’t qualify, and what if your payments are already below 31% of your gross income?

This is where lenders will begin the foreclosure process. They may offer you a so called, “in house modification”, but offer or no, the foreclosure process will continue until either you are somehow successful in obtaining an in-house modification or your home is sold on the courthouse steps. This is because the judiciary can’t force a bank to modify your loan. Honestly negotiated terms that were created in accordance with the laws can’t usually be modified by the government due to our rights to free contract as citizens. That being said, a recent program out of Orlando creates an opportunity for people facing Jacksonville bankruptcies and foreclosures.

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Bondo Mobiles and Negative EquityWhen you finance a car, it’s accompanied by a note and there’s a monthly payment. The note gives the seller security, as they now have recourse if you don’t pay -they can repossess the vehicle. This system is good for the seller because their money is backed by an asset instead of backed by your credit score. You can damage a credit score, but you can’t repossess a credit score and sell it to someone else.

Ideally, the payment on the vehicle is based on the predicted future value of the car. If the car costs $10,000 today and will only be worth $2,000 in eight years, your payments over the eight years need to add up to $8,000 to keep the value balanced to the payments (I left interest out to make it less complicated). However, in some instances where the buyer’s credit is good the seller can offer the vehicle at a lower monthly payment despite knowing that the vehicle will be worth less than is owed on it. This is called negative equity. Eventually, that vehicle dies and the buyer is forced to purchase another car, still owing on the first. Instead of having a buyer who is unable to make two car payments, the new financing company offers to pay off the first car and roll the debt from it over into the new car’s note. Over time this vehicle gets more and more underwater and eventually the debtor is forced to file bankruptcy.

A “Cram-Down” occurs when a debtor asks the court to determine the value of their vehicle and to make this value the secured amount of the debt. i.e. if the debtor owes $10,000 on a vehicle, but it is now only worth $2,000, the court can lower the secured amount owed to $2,000. The remaining $8,000 becomes unsecured. This can be done in both a Chapter 7 or a Chapter 13 bankruptcy. However in a Chapter 7 the $2,000 has to be paid immediately, so it is less practical than in Chapter 13 where the debtor has several years over which to make payment.

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AMR, the parent company of American Airlines, announced November 29, 2011 that they filed for Chapter 11 bankruptcy in the Southern District of New York. The company said that in the first nine months of 2011, they lost $868 million and project that they will lose around $1.1 billion by years end. AMR, a Fort-Worth based company, listed $24.7 billion in assets and $29.6 billion in debt in their bankruptcy Schedules.

An article in the Financial Times says “the move brings to end a nearly decade-long effort to avoid Chapter 11. In 2003, American chose to avoid bankruptcy, while its rivals used the process to shed their pension plans and reduce structural costs, leaving it at a substantial disadvantage.”

The company’s CEO, Gerard Arpey, was not in favor of the company filing for bankruptcy. In fact, he had spoken out several times saying that he did not want AMR to file for bankruptcy. So he retired. Tom Horton, previously the company’s president, will now step in as the new CEO.

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Bankruptcy, Redemption, JacksonvilleJacksonville residents have several options when it comes to dealing with secured assets when filing bankruptcy. They can redeem the property by paying the creditor it’s fair market value, reaffirm the debt by offering the creditor the same loan terms or surrender the item by giving it back to the creditor.

Redemption is an attractive choice for debtors because it allows them to pay what a secured asset is worth instead of what they owe on it. There can be a significant savings here as vehicles plummet in value as soon as they roll of the car lot. However, there are two conditions precedent that often get in the way.

First, if the car is being used for personal consumer use, the date of purchase (or refinance), must be longer than 910 days before filing the bankruptcy to redeem. If the car was purchased for business use, there is no waiting period. The second, and more difficult issue, is that the money to pay for the vehicle’s value must be paid for at the time of redemption. This is a problem because the debtors are bankrupt and rarely have enough cash to meet the payoff amount.

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Florida Middle District Bankruptcy CourtFlorida was hit harder than most states when the recession of 2007 hit. The so named, “Middle District” being the third highest rate in the nation from mid-2010 to mid-2011.

As a result, it’s no surprise that Trailer Bridge, a local trucking and shipping company, filed for Chapter 11 bankruptcy reorganization yesterday. Truckers have been hit hard by the economic downturn and several of them are seeking loan modifications on their trucks. In a Chapter 13 reorganization, the secured amount owed on a truck can be reduced to what it’s fair market value is on the date of filing rather than what the driver actually owes in the contract. This method is called, “Redemption“. The loan new amount is also re-amortized to five years so that the driver leaves the bankruptcy owning the vehicle free and clear.

If you would like to learn more about “Redeeming” a vehicle, contact a Jacksonville Bankruptcy Attorney or call us at (904) 685-1200 to schedule a free initial consultation.

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bankruptcy-thumb-250x186-1907.jpgThere are many reasons that it would be advantageous to file for bankruptcy, but here are some of the most common reasons:

1. The first reason to file for bankruptcy is to stop a foreclosure sale. Filing for bankruptcy immediately stops a halts a foreclosure suit against you. This can give you time to reorganize your finances, try to sell your home, negotiate a modification, or find another place to live. Your chapter 13 Plan can let you catch up on your arrearages over a 5-year time span and so cure your default. If your home has been foreclosed upon, bankruptcy might be a good option for you.

2. Filing for bankruptcy not only stops a foreclosure suit, it halts almost all legal actions taken against you, such as a garnishment or auto repossession. If your auto is in danger of being repossessed, filing for bankruptcy will keep the creditor from doing so. You can value your auto in the bankruptcy and pay only fair market value to the creditor. This means that if you owe $20,000 on your auto and it is only worth $10,000. you can pay the $10,000 to the creditor through your bankruptcy and own the vehicle outright after your Plan is completed.

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house on fire.jpgAccording to Davidson County Sheriff David Grice, a Denton, NC man facing foreclosure hired a Virginia man to burn his house in order to collect the insurance money. The fire occurred on August 16 and fire investigators became suspicious of foul play when they learned that a flammable liquid had been used to start the fire. During the course of their investigation, police and fire officials were able to determine that the homeowner hired the other man to burn his home down before the bank repossessed it.

Police have arrested and charged the Virginia man with second-degree arson and homeowner has been charged with conspiracy to commit arson and conspiracy to commit insurance fraud. The home owner’s mother, who drove the Virginia man to the home in order to start the fire, has also been charged with conspiracy to commit insurance fraud for her role in the episode.

This is not the most effective way for homeowners to avoid a foreclosure lawsuit. If you are facing a Florida Foreclosure Lawsuit

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