Learn About Loans
Learn About Loans
Know your options if you're having financial difficulty. Find out about various types of loans and their particular properties. Some types of loans can be discharged completely in certain circumstances.
Financial stress can result in difficulty making car payments. There are several options for the car owner confronting financial difficulty, including loan extension or modification, sale of the vehicle, repossession of the vehicle, surrendering the vehicle, a “cramdown” of the car loan in Chapter 13 bankruptcy, or reaffirmation or redemption of the loan in Chapter 7 bankruptcy.
Auto loans are secured debt, with the car itself used as collateral for the loan. Lenders can repossess vehicles as loan collateral without a court order, soon after default on a loan. The loan is in default the next day after a missed payment, and the car can show up in the collection queue as soon as ten days after default.
Time is of the essence, for both lender and borrower. For the lender, it’s the rapid decline in the value of the car, and for the borrower, it’s the lender’s haste that forces timely action to avoid or address a possible default.
Failure to maintain insurance on a vehicle can also cause the loan to go into default, even if the payments are current.
If you’re going to be late on a payment, call the lender ahead of the due date and try to arrange an extension, change the payment date, or get the loan rewritten for lower payments over a longer term (resulting in more interest paid). If you’ve missed the deadline, try to catch up on payments as soon as possible. Hiding the vehicle or otherwise thwarting repossession will only add more to your liability when the car is repossessed, or a judgment is obtained. Buyers are responsible for collection, towing, storage and auction fees if a car is repossessed.
When a repossessed car is sold, the proceeds may not cover the outstanding loan balance and fees. In this case, a deficiency will exist for which the holder of the loan will be held responsible. (A deficiency is the difference between the outstanding loan balance and the proceeds collected by sale or liquidation of the asset.) This deficiency is unsecured debt, and can be discharged in a bankruptcy.
Another option is a “cramdown” of the loan in Chapter 13 bankruptcy. The loan balance can be marked down to the market value of the vehicle, and pooled with other debt in the debtor’s Chapter 13 repayment plan. The total paid may be less than the balance on the loan, and on completion of the payment plan under Chapter 13, the buyer will own the car free and clear.
In the event of a Chapter 7 bankruptcy, the option to reaffirm the loan exists, if the car payment is judged to be affordable by the court. In the event of a default after reaffirmation, the buyer is responsible for the debt, including a deficiency in the event of repossession and sale. If a vehicle is surrendered (that is, returned to the dealer) a deficiency will be wiped by the Chapter 7 filing.
Another option in Chapter 7 for the car owner is a “722 Redemption,” in which the car loan is marked down to the market value of the vehicle and the dealer paid the reduced amount arbitrated by the bankruptcy court. The lien is released with no deficiency. It can be difficult for an owner to come up with a lump sum, but there are lenders who specialize in making loans in these circumstances. The loan is not discharged in the bankruptcy, and can enable the owner to keep the car.
Todd Murphy Law is experienced in dealing with issues related to auto loans in financial difficulty. Get help choosing your best course of action. Call Todd Murphy Law today for a free evaluation.
Most credit card debt is unsecured, with the exception of cards issued against a line of credit on a house or other asset. Millions of consumers are carrying more consumer debt than they can afford, making minimum payments or carrying balances at high interest rates. Even when this is not the case, a change in circumstances such as loss of employment or medical emergency can result in late payments, lowered credit scores, and a snowballing cycle of spiraling debt and default.
Consolidation of credit card debt onto a lower-interest card can be helpful. Many consumers have taken advantage of home equity credit lines or second mortgages to consolidate credit card debt, converting unsecured debt to secured debt – and increasing risk to their home in the process. If a borrower is in difficulty, adding unpaid credit to their mortgage balance may offer temporary relief and lower payments, but it’s likely that the unsecured debt will increase again, with the now-higher mortgage obligation decreasing available income to repay it.
In the event of financial calamity, unsecured debt should receive a lower priority for repayment than taxes, home, car or student loans. It may be possible to negotiate a lower interest rate with your lender, or if you’ve gone into default, credit card companies will offer settlement on a reduced balance. The difference between the settlement and the balance may be declared as a payment to you by the credit card company via a 1099, giving you a potential tax liability.
Credit card debt settlement companies charge huge fees to negotiate settlements with credit card companies, often without successfully settling the debts. If you’d like to try to settle a debt, direct negotiation with your lender is often the best option. If your circumstances are serious enough, consult with a qualified attorney to find out if a bankruptcy filing is your best option. If this is the case, your attorney will advise you to stop paying all unsecured debt and have it managed in the bankruptcy proceeding. Your debt may be wiped completely in a Chapter 7 bankruptcy filing, or partially repaid in a Chapter 13 plan that allows you to restructure your finances.
Personal loans are unsecured debt. Often given by family members or friends, the borrower may feel a particular obligation to the lender and wish to make a particular effort to repay the loan.
In cases of financial difficulty – and a bankruptcy filing – the court insists on equal treatment of creditors. If a personal loan is paid back just prior to a Chapter 7 bankruptcy filing, the court may attempt to recover the repaid funds from the family member or friend, claiming them for the pool from which all creditors are repaid in bankruptcy. A borrower taking such an action may subject himself to higher payments in his Chapter 13 payment plan and otherwise less favorable treatment from the court.
If you’ve taken a personal loan, don’t repay it if you anticipate you might need to do a bankruptcy filing, unless you’re making equal payments to your other creditors.
The court requires that all debts, including personal debts, be disclosed. This is for the protection of the borrower as well as all of his creditors. In a bankruptcy, the court’s responsibility is to distribute liquidated assets evenly among the creditors without special favor. If a personal debt is not declared in a bankruptcy, the borrower may sue to recover afterwards, claiming it was not covered in the bankruptcy settlement, and may obtain a judgment for the full amount.
The borrower may wish to repay personal loans that have been discharged in bankruptcy. He has the option to do so after bankruptcy is completed.
Everybody wants to send their kids through college, but the economic collapse of 2007 has left most families unable to pay for it out of savings or home equity. Student loan debt in the US has quintupled since 1999 with growth exploding since 2005. In a difficult employment environment, individuals may also seek trade or occupational certification from a school in response to advertisements promising employment, and take out student loans in order to do so.
Common perception has been that student loan debt is inescapable because it’s Government-backed. By law, student loan lenders have avenues of recourse not available in other types of debt, including the seizure of Federal tax refunds, Social Security benefits, Social Security Disability benefits and wage garnishment for as long as the debtor is alive. The 20-year statute of limitations on other debt doesn’t apply to Federally-backed Student Loans.
There are avenues of recourse for the borrower in financial difficulty, however. Student loans can be extended, restructured, forgiven, cancelled, or discharged in certain limited circumstances. As with any other kind of debt, taking action sooner is better, offering more options. A qualified attorney can help in the process, which involves dealing with the US Department of Education Ombudsman and/or your lender. A qualified attorney familiar with the options and your circumstances can guide you toward a resolution you can afford, even if you’ve gone into default on the debt.
Deferment is a postponement of payment obligation that can be granted if the borrower is enrolled in school, unemployed, in the military or Peace Corps, or suffering economic hardship, and is not more than 270 days behind in loan payments. Interest will not accrue during a deferment.
Forbearance is another form of postponement that can occur in the event of financial difficulty, health problems, personal problems, or if the payments are more than 20 percent of monthly income. Interest does accrue in forbearance.
Cancellation can occur if the school attended closes during the course of study, if you become employed as a teacher or some other public service jobs, or if your school misrepresented your likelihood of employment and you don’t have a diploma or GED.
Discharge can occur in a bankruptcy filing, although, usually, courts will not discharge student loan debt unless certain specific conditions are met. Ask your attorney about the Brunner test. If you’ve shown good faith in attempting to repay, your poverty is likely to persist, and you just can’t afford it, you might meet the test for discharge. If the loan is from an occupational or trade school and fraudulent claims were made by the school or lender, discharge will be considered.