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Can I Wipe Out a Car Title Loan in Bankruptcy and Keep the Car?

Car Debt iStockASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

My car was paid off, but I recently took out a car title loan. I am current on the loan,  but the payment is a hardship. I don’t want to lose my car. If I file for bankruptcy, can I wipe out the car title loan without losing my car? 

Thank you, 

Janelle 

Dear Janelle,

The short answer: In Chapter 7 bankruptcy you will lose your car if you fail to make the payments. However, there are other options that might help you keep the car.

How Security Interests Work in Chapter 7 Bankruptcy

The lender took a security interest in your car when it made the loan to you. Your car serves as collateral for repayment of the loan – if you don’t pay, the car title loan lender can repossess the car.

While Chapter 7 bankruptcy will discharge your personal liability to repay loan, it doesn’t get rid of the “lien” or security interest that the lender has in your car. That means that if you don’t make the payments, the lender can repossess.

(To learn more about how this works, see the discussion in If You Are Behind in Your Car Payments, Can Chapter 7 Help?)

Redeeming the Car

One option is to “redeem” the car in Chapter 7 bankruptcy. You do this by paying the car title loan lender the current market value of the car. For example, if you owe $8,000 to the lender, but your car is only worth $3,000, you can redeem the car for $3,000. If you do that, the car becomes yours. The remaining $5,000 that you owe the lender becomes unsecured debt and can be discharged in your bankruptcy case.

In order to redeem your car, however, you’ll have to pay the entire amount in full – you can’t pay in installments. Most people don’t have the money to do this.

(Learn more about keeping your car in Chapter 7 bankruptcy through redemption.)

Filing for Chapter 13 Bankruptcy 

Another option is to file for Chapter 13 bankruptcy. In Chapter 13, you can pay redemption price for the car, as in Chapter 7, but (with court approval) can spread out the payments over as much as five years. (This is called cramming down the loan – see Car Loan Cramdowns in Bankruptcy.)

There is one exception: You cannot cram down the loan if it was used to purchase a car within 910 days prior to the bankruptcy filing. Since yours is a car title loan, you don’t have to worry about this exception.

Negotiate With the Lender After Filing for Bankruptcy

I have one last idea for you. Lenders are sometimes willing to renegotiate the loan terms after you have filed for bankruptcy. For example, your lender might agree to reduce your interest rate, the monthly payment, or the loan balance. However, lenders are rarely willing to do this unless the value of the car is much less than the amount owed.  Otherwise, the lender has no incentive to modify the loan.

— Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+


 

Nolo Author Leon Bayer to Be Featured on KALW’s “Your Legal Rights”

On Wednesday night Nolo author and Los Angeles bankruptcy attorney Leon Bayer will be featured on Chuck Finney’s popular radio show, “Your Legal Rights.”  Mr. Finney’s show has been a mainstay  on  San Francisco’s public radio station KALW for decades.

Leon will be talking about bankruptcy and the newest edition of Nolo’s The New Bankruptcy: Will it Work for You?, of which Leon is a co-author.  Leon authors the popular “Ask Leon” series on this blog in which he answers questions from real people. Wednesday night is your opportunity to listen to Leon and ask him questions live!

The Details:

Date:  Wednesday, July 17, 2013

Time: 7 to 8 p.m.

Station:  KALW, 91.7FM San Francisco

 

Options for Dealing With a Burdensome Cosigned Student Loan

leon2ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I co-signed a student loan for my adult sister. My sister defaulted, the loan is in collection, and we now owe $80,000. My sister has never held any job for long, and is on disability. I make about $45,000 a year. The debt collector has agreed to settle for $60,000 cash. I could pay that by liquidating my retirement plan, which I don’t want to do (my wife says she’ll divorce me if I do that). The collector also offered to rehabilitate the loan if I pay $4,000 up front and then make monthly payments of $320.

I can’t afford to make payments; my wife and I barely scrape by as it is. But I have about $300,000 equity in my home. Can I protect my house by signing it over to my wife and filing for divorce? We don’t really want a divorce, but I am at my wits end. Also, since I was only the co-signor, can the collector legally make me pay? Please give me any advice that might work. 

Kevin 

Dear Kevin,

I’m sorry you are in this mess. Let me take it step by step.

Are You Legally on the Hook for a Cosigned Loan?

Cosigning a loan is always serious business. People often misunderstand the consequences. When you cosign, it means you owe the money. If the other person does not pay as agreed, then you have to pay it for them. It can be legally enforced against you.

When somebody needs a co-signor, it is because the lender has determined that the person is not financially reliable and is at risk of defaulting. In your case, the lender looked at your financials and liked what it saw. You are a solid, responsible guy. If you had been in the same boat as your sister, the lender would not have made the loan. 

Can You Discharge the Student Loan in Bankruptcy?

A bankruptcy won’t help because you will not be entitled to discharge the student loan. To discharge a student loan you must prove that to pay the loan would cause you undue hardship, which you won’t be able to prove in your situation. (To learn more about the undue hardship standard, see Nolo’s Student Loans in Bankruptcy topic page.)

Should You Transfer Your Home or Use Retirement Funds?

Transferring the house and filing for divorce is no solution. The lender may sue to set aside the house transfer because it was a fraudulent transfer, and then it could force it to be sold to pay off the debt. Draining your retirement money to pay the debt leaves you without a nest egg for the future.

 Claims Against the School and Lender

Sometimes borrowers have a case against the school and the lender, especially if the school was a vocational school. And if certain circumstances apply, your sister  might be able to get her loans cancelled altogether. Here are some questions that may apply. Did the school know your sister was unemployable and would remain unemployable after graduation? Perhaps it can be shown that the school made false representations to induce her to attend and for you to co-sign? Perhaps it knew the education could not benefit her in any way? Did the school go out of business before she finished? (To learn more, see Nolo’s topic area on Student Loan Cancellation.)

I suggest that you and your sister together go and see a lawyer who handles student loan cases. That is the best way to find out if you have any defense or can cancel the loan. Your question does not mention such facts, so I will continue under the assumption that no legal defenses are available.

Government Repayment Plans

If your sister has federal loans or federally guaranteed loans, you might want to check out some of the federal repayment plans. (To learn more about these plans, see Nolo’s article Income Contingent and Income Based Repayment Plans.) You’d first need to get the loan out of default (see Nolo’s article Student Loan Rehabilitation to Get Out of Default).

(For more on dealing with student loans, see Nolo’s Student Loan Debt topic area.)

But in your situation, it’s likely that the repayment terms under these plans will result in a higher payment than what your lender is currently offering you.

Taking the Lender’s “Deal” 

Assuming you don’t have any claims against the school and cannot cancel the loan, here is my advice: Pay the $4,000 that is needed to rehabilitate the loan. Take it from your retirement plan if necessary. It is a much better option than cashing in your entire plan and winding up divorced. You say you can’t afford the $320 monthly payment. But a monthly payment of that amount is a fantastic deal for you. It allows you to keep an $80,000 debt under control. Find a way to make that payment. If necessary, a part-time job working a few hours per week is all you need. That is not as painful as a divorce would be. Also, the interest you pay on the loan might be tax deductible.

Here is what I want you to take from this. Save your marriage. Save your home. And save your retirement plan. The lender is being very generous to you under the circumstances. Take the offer.

-Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+

As of July 1, 2013, California Protects More Wages From Garnishment

On July 1, 2013, California’s wage garnishment law changed to protect more of a debtor’s wages from garnishment. If you earn the minimum wage or close to the minimum wage, California law now protects more of your wages from attachment than does federal law.

What Is Wage Garnishment?

If a creditor sues you in court and wins a money judgment against you, it can take various actions to collect that judgment from you. One of those methods is wage garnishment, where the creditor gets a court order that directs your employer to turn over part of your wages directly to the creditor.

Some creditors, like the IRS and the Department of Education, can garnish your wages without first getting a judgment.

(To learn more about wage garnishment works and how you can object to one, see Nolo’s Wage Garnishment topic area.)

Limits of Wage Garnishment Amounts

Federal law limits the amount that judgment creditors can garnish from your paycheck. States must provide at least as much protection as does federal law, but may provide more if they choose to do so.

In the past, California wage garnishment limits mirrored federal limits. But effective July 1, 2013, California now protects more of your wages than does federal law if you earn the minimum wage or close to the minimum wage.

Here are the new rules.

For any given workweek, creditors are allowed to garnish the lesser of:

  • 25% of your disposable earnings, or
  • the amount by which your weekly disposable earnings exceed 40 times the state hourly minimum wage (which is currently $8.00 per hour, but may increase in 2014).

Disposable earnings are those wages left after your employer has made deductions required by law.

To learn more, and to see a comparison of the federal and California wage garnishment limits, see Nolo’s article California Wage Garnishment Law.

Losing the Automatic Stay With Repeat Bankruptcy Filings

Leon Bayer PhotoASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

My mom and I have been fighting to save our home in Van Nuys, California. This is all so unfair. The house was in foreclosure. My mom filed Chapter 13 bankruptcy on October 9, 2012 to stop the foreclosure sale. But some of the required papers were missing from her court filing, so the case got dismissed. 

She filed a second Chapter 13 on November 113, 2012. That case was also dismissed, for failure to file all of the required paperwork. The house was coming up for foreclosure auction once again so she filed another Chapter 13 case on January 23, 2013. It was a complete filing with all the required papers. 

About two weeks later, the lender went ahead and held a foreclosure sale. It did this even though it was timely notified of the third bankruptcy. It admitted that it knew about the bankruptcy. 

The sale was in complete violation of mom’s automatic bankruptcy stay. We want to sue the lender for violation of the stay. I know that on a repeat filing you still get a 30-day stay. So our rights were violated. How does she bring an action for this violation? We don’t want the bank to get away with this. They must be stopped. 

Thanks, 

Larry in Van Nuys

Dear Larry,

As far as I can see, you don’t have a valid claim against the mortgage company for a stay violation. Here’s why.

The foreclosure sale was conducted after your mom filed her third Chapter 13 bankruptcy case within 12 months. The bankruptcy court has a “three strikes rule” when it comes to repeat bankruptcy filings. The purpose of the rule is to prevent the court from being a revolving door for people who don’t follow rules and don’t have a legitimate reorganization purpose.

Your mother’s third bankruptcy filing did not create an automatic stay. There wasn’t even a temporary stay. This is because if you file for three bankruptcies within one year, there is no stay at all. The lender was free to hold a foreclosure sale and in doing so it did not violate any stay. (To learn more, see Nolo’s article Losing the Automatic Stay in Repeat Bankruptcy Filings.)

This case is a good example of the perils of filing Chapter 13 without expert help. We have written about it before in this blog. More than 99% of all Chapter 13 cases filed in the Los Angeles Bankruptcy Court without a lawyer are dismissed. Your mom has spent nearly $1,000 just on court filing fees for her three cases. What a shame.

-Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+


Don’t Be Haunted by a Zombie Foreclosure

zombie imageNight of the Living Dead,  The Plague of the Zombies, Dawn of the Dead and … foreclosure?  It turns out that the recent  cultural obsession with zombies has leached into the foreclosure arena, with zombie foreclosures.

There are a number of  issues that have been haunting homeowners in foreclosure for quite some time– like foreclosure consultant scams and mortgage service industry abuses.  But the newest kid on the block, a zombie foreclosure, can strike when you least expect it.

(Learn about foreclosure scams and mortgage servicer abuses.)

What Is a Zombie Foreclosure?

A zombie foreclosure occurs when a mortgage servicer starts the foreclosure process, the homeowner moves out (thinking he or she will soon lose the home), and then the foreclosure stalls, or is cancelled.

According to Nolo’s new article on zombie foreclosures, a zombie foreclosure can cause major problems for an unsuspecting homeowner, including:

  • being on the hook for property taxes
  • getting sued by your homeowners assocation for assessments that you continue to be liable for
  • fines because your home falls into disrepair and violates housing codes and  ordinances (and even face jail time in some instances if you don’t meet repair deadlines), or
  • a bill from your local government for yard maintenance, repairs, trash removal, and/or graffiti scrubbing.

According to Nolo Network author Amy Loftsgordon, the best way to prevent a zombie foreclosure?  Stay in your home through the entire foreclosure process and wait for an official notice to vacate before moving out.

Learn more about zombie foreclosures and other reasons to stay in your home during foreclosure in Nolo’s Foreclosure: Should You Stay or Go? topic area.

U.S. Trustee Suspends Random Audits

Audit checklist, with tick against "audit satisfactory",On March 30, 2013, the Office of the U.S. Trustee announced that it would stop conducting random audits of bankruptcy cases.  The indefinite suspension is due to budget constraints.

Random Bankruptcy Audits

The Bankruptcy Code permits the U.S. Trustee’s office to randomly select  a certain number of Chapter 7 and Chapter 13 cases each year for audit.  The U.S. Trustee’s office could randomly audit up to one out of every 1,000 Chapter 7 or Chapter 13 cases filed, and at a minimum at least one out of 250 cases in each federal judicial district.

Bankruptcy law also allows the U.S. Trustee to audit cases with red flags — those with unusual income or expenditures.

The U.S. Trustee would identify the cases to be audited, and then send them to independent audit firms to conduct the audits. The firms were to look for material misstatements or other evidence of fraud. To learn more about these audits, see Nolo’s article What Is a Bankruptcy Audit?

What Now?

The vast majority of bankruptcy filers do not lie or commit fraud in their bankruptcy cases. For those that do, they are likely to be caught by the bankruptcy trustee assigned to their cases. The case trustees look for  red flags on the petition and schedules and will inquire or investigate further if anything looks fishy.

Can I Get Title to Building When Owner-Lender Dies?

ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon,

Six years ago I bought an 11-unit apartment building in Los Angeles, California. The seller carried a note for most of the purchase price. The seller died a month after I bought the property, which was six years ago. I don’t know who to pay and no one has contacted me for the note payments. I have paid nothing on the note for these past six years.

Can I file a quiet title lawsuit or adverse possession or some other kind of lawsuit to get free and clear title to my building?

Thank you.

Sheila

Dear Sheila,

The Los Angeles County Public Guardian is the branch of government that deals with unclaimed property when the owner has died. You need to notify them. They can open a probate case to administer the mortgage for the rightful heirs. If no heirs are found then the mortgage “escheats” to the State of California for the public treasury.

The bottom line:  You still owe the mortgage note to somebody, and you also owe the six years of mortgage arrears. A Chapter 13 bankruptcy case may help if you are serious about keeping the building, but do not have enough money to bring the loan current all at once. A Chapter 13 may stop any foreclosure, and give you up to five years to get current on the note. (Learn more about how you can use Chapter 13 to catch up on mortgage arrears.)

-Leon

Guest blogger Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+

Tips for Buying a Car During or After Chapter 7 Bankruptcy

If you need to buy a car during your Chapter 7 bankruptcy, or after your bankruptcy is over, don’t despair. Most likely you will be able to get a car loan. Or, you might be able to pay cash for a very cheap car. Here are some strategies to consider if you need to buy a car during or after your bankruptcy:

1. Stop making car payments, enjoy your ‘free ride’ and then buy something cheap for cash with the money you saved. 

As soon as you file for Chapter 7 bankruptcy, you ordinarily get a “free ride” due to bankruptcy’s automatic stay. The automatic stay ordinarily protects your vehicle from repossession for about two and one-half months (that is, until 45 days after the first meeting of creditors in your bankruptcy case). In fact most car lenders will not repossess your car until after the bankruptcy discharge.

If you already received your bankruptcy discharge, you can still quit making payments and have a “free ride.” Most lenders won’t repossess a car until you behind  about two months. Save up the money and use it to get yourself a cheap “runner” to drive until you can get into something better.

Some organizations offer very cheap cars for sale, and sometimes private parties so too. For example, both the Salvation Army and Goodwill sell cheap running cars that have been donated.

Tip:  If your car is in danger of repossession, remove any valuables and personal effects from the car.

2. Buy a car with financing after bankruptcy.

In Los Angeles where I practice bankruptcy law, my clients are aggressively solicited by new car dealers, offering to finance or lease them a new car. They specifically target people emerging from bankruptcy as sales leads. The debtor can usually get into a new car, or even a late model used car still under warranty, even with bad credit, provided they have decent  income. This may be a far better alternative than it would have been to make a bad reaffirmation deal in the bankruptcy. (Learn more about reaffirming a car loan in Chapter 7 bankruptcy.)

Why buy a new car when you really don’t need one? A new car loan can quickly improve your credit if you pay on time, where as the unreaffirmed car loan will not help your credit. It likely will represent a better investment than keeping the old car with upside down financing on it. It’s also likely that the new car will probably be more reliable transportation, and will come with a warranty.

3. Get help from a friend.

Turn in the old car if a friend, loved one,  or family member will buy or lease something for you.

4. Rent or borrow a car while waiting for your discharge.

Some companies  will rent cheap used cars on a monthly basis. The payment for these monthly rentals can be less than the payments on your existing car loan. After you receive a discharge you can probably purchase and finance a new car if you have steady income.

Guest blogger Leon Bayer practices bankruptcy law in Los Angeles, California.  He is a partner at Bayer, Wishman & Leotta.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Octomom’s Chapter 7 Bankruptcy Dismissed

In May, the bankruptcy court dismissed Octomom’s Chapter 7 bankruptcy. This high profile case provides some basic bankruptcy lessons.

Octomom (Nadya Suleman) hit the news in 2009 after giving birth to octuplets.  She already had six children. She made the news again in the spring of 2012 when she filed for Chapter 7 bankruptcy, allegedly to save her home from foreclosure. Apparently, she was far behind in mortgage payments and had little income coming in. Her case is a good primer on a few basic bankruptcy concepts:

1.  The Emergency Petition.  Octomom filed a bare bones bankruptcy petition, called an “emergency bankruptcy” or a “skeleton petition.”  If you need to file for bankruptcy in a hurry, this is perfectly acceptable. By filing a few simple forms, you can enjoy the immediate protection of the bankruptcy court. But you must file the rest of the paperwork within 14 days. Octomom failed to do this, so the court dismissed her case. (Learn about the steps in filing an emergency bankruptcy petition.)

2.  If You Are Facing Foreclosure, Chapter 7  Usually Won’t Help Save Your Home.  Chapter 7 bankruptcy does not provide a method for catching up on mortgage arrears. While filing for Chapter 7 bankruptcy puts a  stop to all collection efforts (called the automatic stay), including a pending foreclosure, this reprieve is temporary. The mortgage lender can, and will, ask the court to lift (remove) the automatic stay so that it can proceed with the foreclosure. If you don’t have the money to pay the mortgage arrears, the court will allow the lender to foreclose on your home. (Learn more about what happens to your home and mortgage in Chapter 7 bankruptcy.)

Chapter 13 is usually the better choice if you are facing foreclosure and want to save your home. Through your Chapter 13 repayment plan, you can catch up on mortgage arrears. But in order to propose a feasible Chapter 13 plan, you must have a certain amount of money coming in the door. It appears that Octomom didn’t have enough money to meet the Chapter 13 plan requirements. (Learn about saving your home from foreclosure with Chapter 13 bankruptcy.)

3. If a Bankruptcy Case Is Dimissed, the Automatic Stay Is Limited in Future Bankruptcy Filings.  This is probably the most important lesson to learn from Octomom’s bankruptcy filing and subsequent dismissal. If the court dismisses your bankruptcy case and you file again within one year, the automatic stay will only last for 30 days. After that period of time, creditors can resume collection efforts. You can ask the court to extend the automatic stay (you must do this by filing a formal motion with the court), but you’ll have to show that your circumstances have changed and that you aren’t filing repeatedly in order to abuse the bankruptcy system. For example, if the court thinks that Octomom is repeatedly filing for bankruptcy in order to delay foreclosure, it would not extend the stay. (See Losing the Automatic Stay for Repeat Bankruptcy Filings.)

So what did Octomom gain by filing for Chapter 7 bankruptcy?  A few weeks of time.  And what did she lose?  Her filing fee, the time and hassle involved in filing the papers, and  possibly the long-term protection of the automatic stay if she needs to file for bankruptcy in the near future.