Are Paying Debts a Moral Obligation?

Yes, you have a moral obligation to pay your debts. But do you have higher moral obligations to release yourself from those debts?

 

You could consider the choice whether or not to file bankruptcy to simply be a “business decision.” Merely a weighing of the costs and benefits of filing and not filing. This weighing would go beyond just the immediate dollars and cents by including intangible factors like the impact on your credit record. But still, in this approach your focus is on “the bottom line,” on what’s “in your best interest.”

That’s fine as far as it goes. After all, corporations of all sizes file “strategic bankruptcies” all the time. Their very smart and well-informed managers decide that bankruptcy is the best way to reduce debt and streamline their operations, so that the business can survive and hopefully thrive into the future.

And who doesn’t want to survive and thrive?

But you are more than a business. More than a corporation. For you, the human costs and benefits have to be added into the equation.  

And that’s where morality comes into the decision. We humans are moral creatures. That means that our important choices are often moral choices, between doing what’s right and doing what’s wrong. To strip this away from our decision about whether or not to file bankruptcy is to dehumanize us. If we don’t engage in the moral component of this choice, we are less likely to make a good decision. And we will likely feel unsettled afterwards regardless how we decide.

So what do you need to do to make a good moral decision?  

First, accept the choices that you made—good and bad, sensible and short-sighted, intentional and forced—and the circumstances that got you where you are now. Accept that you made a series of legal commitments to pay your debts, consider how much choice you had at the time about them, and in hindsight what you would have done differently, if anything. Why are you now not able to keep those commitments?

Second, consider both the moral costs and benefits of continuing to try to meet those financial commitments. The benefit would be keeping your promises to pay, which may be more or less strong of a commitment depending on the circumstances (for example, the carefully considered purchase of a home or vehicle versus incurring an emergency ambulance bill).  What would be the costs in terms of your physical and emotional health, your marriage and family relationships, and whatever other responsibilities you have to your community? You have moral obligations not just to your creditors, but also to yourself, to your spouse, to your kids, and to society in general. Do you have a realistic chance of successfully paying off your debts, and even if so, what would be the likely human costs while doing so? And if you do not have a realistic chance, how do you weigh the benefit of putting up a good fight against the costs that come from just delaying the inevitable?

Third, recognize that you now have both the opportunity and obligation to make a good decision about whether to continue trying to meet those commitments. To just accept the status quo without facing the situation honestly and bravely is making a decision by default, which is likely neither your morally best nor practically wisest move.

Fourth, get advice so that you know your legal options. You might not think you have a moral obligation to do this, but you cannot make morally good choices about how to deal with your legal commitments without knowing your legal alternatives about each of those commitments. You cannot know whether there are more morally acceptable ways to deal with your creditors—such as to file a Chapter 13 payment plan instead of a “straight” Chapter 7—if you don’t know your legal options. When you see the legal structure within which your choices have to be made, that often helps make the moral choices much clearer.

And fifth, look at each of your legal options, and weigh them in light of your different obligations—to each of your creditors, to yourself, your spouse, your family, and anyone else affected.  On one hand, this is an entirely personal decision. You need to look yourself in the mirror and be satisfied that you are doing the right thing. But as with any important decision, you can and most of the time should get help from the right people and resources. As appropriate, talk to your closest friend, your pastor, your accountant, write in your journal, or pray or meditate about it--do whatever you know helps you make a good decision. And although your bankruptcy attorney is primarily your legal advisor, and will respect that the final decisions are up to you, he or she has counseled countless people wrestling with these decisions and so will be able to help you with yours.

Henry David Thoreau said that the “price of anything is the amount of life you exchange for it.” What is “the amount of life” you are giving up until you decide that you’ve got to make a good decision and you go get the legal advice you need so that you can do so?

Can I Do a "Cramdown" on Collateral Other than My Home or Vehicle?

If you buying something on time and want to keep it, you often can do so for less money IF you bought it more than a year ago.

 

Background:

• A creditor which has rights to collateral is called a “secured creditor.” Your obligation to pay what you owe to this creditor is secured by rights it has to take possession and ownership of the collateral if you don’t make your payments on the debt. 
• In bankruptcy, secured creditors have a lot more leverage against you because of the collateral than do creditors without any collateral—“unsecured creditors.”
• If you want to keep the collateral, Chapter 7 is sometimes is your best choice, but in many circumstances Chapter 13 can give you more options.
• Secured debts in which the collateral is your home or your vehicle are governed by special rules because of how important those kinds of collateral are to most people. See my blogs of last week and earlier about some of these special rules.
• But you will not find many blogs talking about secured debts where the collateral is something other than your home or vehicle. The main secured debts of this type are probably furniture and appliance purchases, money loans secured by your own personal assets, and business loans secured by business and/or personal assets.

Cramdown:

• This tool applies only to Chapter 13—it can’t be done in Chapter 7.
• If the collateral securing a secured debt is worth less than the balance on that debt, then you may be able to divide that debt into two parts: the secured part—the amount of the debt up to the value of the collateral, and the unsecured part—the rest of the debt beyond the value of the collateral. An example will make that clear. Let’s say you owed $1,000 on a refrigerator, in which the purchase contract gave the creditor the right to repossess that refrigerator if you didn’t make the agreed payments. If the present value of that refrigerator is $600, then the secured portion of that debt would be $600, and the remaining $400 of that debt would the unsecured portion.
• In a Chapter 13 “cramdown” you pay not the total debt, but only the secured part of the debt. You pay the unsecured part of the debt only at the percentage that all the rest of your regular unsecured creditors are paid. That is usually less than 100% and can sometimes be a low as 0%. In the above example, the $1,000 total refrigerator debt is crammed down to $600, and the remaining $400 part of the debt is lumped in with the rest of your unsecured creditors. So if in your Chapter 13 plan your unsecured creditors are receiving 0%, then you would pay only the $600 secured portion, the remaining unsecured portion would get nothing and would be discharged (written off) at the end of your Chapter 13 case. Or if your unsecured creditors are receiving 50%, then you would pay $200 of that unsecured portion of $400, and the rest would be discharged at the end of your case. Note that you would still pay interest, but only on the secured portion instead of on the entire balance.  

THE cramdown rule with collateral other than your home or vehicle:

• “[I]f the debt was incurred during the 1-year period preceding [the bankruptcy] filing” then you cannot do a cramdown on collateral that is neither your home nor your vehicle. See the last sentence of Section 1325(a) of the Bankruptcy Code (tucked in right after subsection (a)(9)). This means that if the debt is any older than 1 year, you CAN do a cramdown.

So, if you have a debt, more than 1 year old, secured by something other than your home or vehicle(s), in which the collateral is worth less than the debt, you can cram down the debt to the value of the collateral. If so, then because this can only be done under Chapter 13, that would be one factor in favor of filing under Chapter 13 instead of Chapter 7. Talk to your attorney to see if this applies to you, and to find out all the other Chapter 7 vs. Chapter 13 factors to weigh in your situation.

Keeping Your Wheels in Bankruptcy

Under Chapter 7, you can pay your vehicle loan mostly by getting rid of all or most of your other debts. Under Chapter 13, you can pay your vehicle loan ahead of most of your other creditors.

Bankruptcy law is all about balancing the rights of debtors and creditors. When you file bankruptcy you gain a lot of leverage against your creditors. But exactly how much leverage depends on the kind of debt and certain crucial details about it. With a vehicle loan, you get much less leverage than with some other types of debts because the lender has a right to its collateral--your car or truck. But if you want to keep your vehicle, you can often use the lender’s rights over your collateral to your advantage.

That’s because bankruptcy is also about sorting out the rights of the creditors among themselves. So if you WANT to keep your vehicle, you are able to favor that vehicle lender over most of your other creditors.

Let’s see how this works under Chapter 7 and then under Chapter 13.

Favoring your vehicle loan in a Chapter 7 “straight bankruptcy”

Between you and the vehicle lender, your leverage is that you have the right to simply surrender your vehicle to the creditor and pay nothing. The bankruptcy discharges (writes off) any remaining debt. Usually the lender does not get paid enough from selling the vehicle to cover the full balance on the debt—especially after accounting for the costs of repossession and resale.  Rarely the vehicle is worth more than the loan balance, such as towards the very end of a loan term, when the balance is low and the vehicle has retained some value. But, most of the time a vehicle depreciates faster than the balance goes down. So the lender usually loses money on a surrender.

This means that sometimes we can use the threat of surrender to improve the vehicle loan’s terms, maybe even reduce the balance to an amount closer to the current fair market value of the vehicle.

But unfortunately, most major vehicle lenders don’t see it that way. They made a decision at some point that they make more money by requiring all their Chapter 7 customers to pay the full balance on the vehicle loans, and then take losses on those who aren’t willing to do that and instead surrender their vehicles. Talk with your attorney about whether your creditor is one which will require you to stick to the contract terms, or instead one who might be more flexible.

As between your vehicle lender and your other creditors, in a Chapter 7 case you will likely be able to discharge the debts of most or even all those other creditors. The vehicle lender has leverage—its lienholder rights against the vehicle that you want to keep—greater than most of your other creditors. With the exception of other creditors which have other collateral you want to keep, and those relatively few creditors whose debts aren’t discharged in bankruptcy, during and after filing the Chapter 7 case you will be able to focus all of your financial energy on paying the vehicle loan.

Favoring your vehicle loan in a Chapter 13 “payment plan”

Between you and the vehicle lender, your leverage is both lesser and greater under Chapter 13 than under Chapter 7.

You have less leverage in threatening surrender if your Chapter 13 plan is paying anything to your unsecured creditors. That’s because the vehicle lender would recoup from you at least some of its losses upon surrender, instead of none.

And if your vehicle loan is two and a half years old or less, if you want to keep the vehicle you must pay the full balance of the loan, regardless of the value of the vehicle compared to the loan balance.  

But you have more leverage in two ways. With any vehicle loan, including those two and a half years old or less, you do not have to cure any arrearage, and can change the monthly payment, as long as the balance is paid in full by the end of the case.

And if the loan is more than two and a half years old, you can do a “cramdown”—reduce the amount you pay to the fair market value of the vehicle, plus whatever percentage you’re paying to the pool of unsecured debt, if any.

As between your vehicle lender and your other creditors, in a Chapter 13 case if you want to keep the vehicle and you follow the above rules, most of your other creditors generally can’t object to how much you’re paying for the vehicle instead of to them. Other creditors secured by other collateral have their own rights to their collateral, and whatever payments arise from that. And “priority” creditors are generally entitled to be paid in full. And there are other rules you must follow in Chapter 13. But unless the vehicle you want to keep is unreasonably expensive, or is an unnecessary extra vehicle, you will be allowed to make the required payments so that you can keep it.

 

Debts You Really Care About, and WANT to Pay

In bankruptcy, are you allowed to favor: 1) creditors with collateral, so that you can keep the collateral; 2) creditors toward whom you have special loyalty; and 3) creditors who have extraordinary leverage against you?

When clients first talk with me about filing bankruptcy, they are often very concerned about what will happen to debts that they want to keep paying. In fact sometimes people believe that bankruptcy is not a serious option for them because they are afraid of what will happen with these debts that are so important to them. As their legal counselor, my job is to respect and understand these fears.  Then I can make recommendations about how to best deal with these debts.

These special debts fall into three categories.

1. Debts You Care About Because of Crucial Collateral

Before getting to the point of seriously considering bankruptcy, you may have been doing everything possible to keep current on your home or vehicle. You may have made the decision that holding on to your home for the sake of your family is your absolutely highest priority. Or you may feel the same way toward your vehicle, because you need to be able to get to work and/or to keep your family or personal life sane.

Chapter 7 and Chapter 13 both have ways that you can help keep your home and vehicles. Sometimes these involve not paying other creditors so that you can pay the mortgage or vehicle loan. In other situations you may be able to keep your home and vehicle while paying significantly less to do so. Overall, bankruptcy usually allows you to focus your limited financial resources on these kinds of debts if they are your highest priority.

2. Debts You Care About Because of Moral Obligation

Many of my clients feel different levels of loyalty to different creditors. Some even feel guilty about feeling that way. But it is perfectly human to feel differently about a personal loan owed to a family member than about a credit card balance owed to a national bank. Or how you feel towards a medical debt owed directly to your long-time family doctor compared to how you feel towards a debt that is now at a second or third collection agency and you don’t even know which medical provider they are collecting for. 

If you feel an absolute moral obligation to pay a debt regardless whether or not you file bankruptcy, there are safe ways to do so and very dangerous ones. I’ll tell you about this in an upcoming blog. In any event, be sure you tell your attorney about this because it can effect whether you file a Chapter 7 or a Chapter 13 case, and sometimes also the timing of your filing.

3. Debts You Care About Because of Extra Creditor Powers

Although one of the most basic principles of bankruptcy law is that your creditors must be treated equally, the more accurate version of that principle is that legally equal creditors must be treated equally. And because the law is filled with legal distinctions among creditors, some debts are more dangerous than others, both inside and outside of bankruptcy. You may well have heard about or directly experienced the extraordinary collection powers of the taxing authorities, support enforcement agencies, or student loan creditors, for example. You may also be aware that some debts cannot or might not be written off in bankruptcy. Understandably you’re concerned what will happen with these debts if a bankruptcy won’t help you with them.

The reality is that usually a bankruptcy will help you with even the most aggressive creditors, even those whose debts will not be discharged. Almost always there are sensible ways to deal with these special creditors. Sometimes it involves using the bankruptcy system’s own substantial powers to gain important advantages over these creditors. Sometimes it involves reasonable payment arrangements after completing a Chapter 7 case, when you have no other debts. Sometimes it involves directly favoring these creditors by paying them before or instead of other creditors in a Chapter 13 case, while under continuous protection from the bankruptcy court. Overall, usually bankruptcy provides you a manageable way to handle these legally favored creditors.

The next few blogs will give you specific information on how bankruptcy can help you keep valuable collateral, satisfy your moral obligations, and deal with your most aggressive creditors.

Options with Your Vehicle Loan under Chapter 7

Your car or truck loan may be the most important debt you have. Chapter 7 puts you in the driver seat for dealing with this debt.

As I said in the last blog, when you think about secured debts—those tied to collateral like a vehicle—it helps to look at these kinds of debts as two deals in one. You made a commitment to repay some money lent to you, and then agreed to back up that commitment by giving the creditor certain rights to your collateral.

The first deal—to repay the money—can almost always be discharged (legally erased) in bankruptcy. But the second deal—the rights you gave up in the collateral, here a lien on the vehicle title—is not affected by your bankruptcy. So, you can wipe out the debt, but the creditor remains on the title and can get your vehicle. Your options in Chapter 7, and the creditor’s, are tied to these two realities.

Keep or Surrender?

As long as you file your Chapter 7 case before your vehicle gets repossessed, the ball starts in your court about whether to keep or surrender it.

Surrender the Vehicle

In most situations, if you want to surrender the vehicle, then doing so in a Chapter 7 bankruptcy is the place to do it. That’s because in the vast majority of vehicle loans, you would still owe part of the debt after the surrender—the so-called “deficiency balance”—often a shockingly large amount. That’s because you usually owe more than the vehicle is worth, but also because the contract allows the creditor to charge you all of its costs of repossession and resale. Surrendering your vehicle during your Chapter 7 case allows you to discharge the entire debt and not be on the hook for any of those costs.

To be thorough, there is a theoretical possibility that the vehicle loan creditor could challenge your discharge of the “deficiency balance,” based on fraud or misrepresentation when you entered into the loan. These are rare, and especially so with vehicle loans.

Keep It

Whether or not you are current on the loan payments does not matter if you are surrendering the vehicle. But if you want to keep it, whether you are current, and if not how far behind you are, can make all the difference.

Keep the Vehicle When Current

As you can guess, it’s simplest if you are current. Then you would just keep making the payments on time, and would usually sign a “reaffirmation agreement” to exclude the vehicle loan from the discharge of debts at the end of your Chapter 7 case.

Most conventional vehicle loan creditors insist on you signing a reaffirmation agreement, at the full balance of the loan—it’s a take-it-or-leave-it proposition. If you want to keep the car or truck, you need to “reaffirm” the original debt, even if by this time the debt is larger than the value of the vehicle. This can be dangerous because if you fail to keep up the payments later, you could still end up with a repossession and a hefty remaining balance owed—AFTER having passed up on the opportunity to discharge this debt earlier in your bankruptcy case. So be sure to understand this clearly before reaffirming, especially if the balance is already more than the vehicle is worth.

Some creditors—more likely smaller, local lenders—may be willing to allow you to reaffirm for less than the full balance, so that the creditor avoids taking an even bigger loss if you surrender the vehicle. Talk to your attorney whether this is a possibility in your situation.

Keep the Vehicle When Not Current

If you are not current on the vehicle loan at the time your Chapter 7 case is filed, most of the time you will have to get current quickly to be able to keep the vehicle—usually within a month or two. That’s in part because for a “reaffirmation agreement” to be enforceable, it must be filed at the bankruptcy court before the discharge order is entered. Since that happens usually about three months after the case is filed, the creditor needs to decide quickly whether you will be able to catch up on the payments and reaffirm the debt.

Again, certain vehicle creditors may be more flexible, perhaps letting you skip some earlier missed payments, or giving you more time to cure the arrearage. Your attorney will know whether these may apply to your creditor.

Stronger Medicine through Chapter 13

But what if you are behind on your payments more than you can catch up within a month or two after filing? If you have decided that you really need to keep the car or truck, discuss the Chapter 13 option with your attorney. Depending on various factors, you may not only have more time to pay the arrearage, you may also reduce your monthly payments, the interest rate, and the total amount to be paid on the debt. The next blog will get into this Chapter 13 option.

 

Are You Eligible for Chapter 7? Chapter 13?

Eligibility can turn on 1) who is filing the bankruptcy, 2) the kinds and amounts of debts, 3) the amount of income, and 4) the amount of expenses.

1) Who is filing the bankruptcy:

If you are a human being (or a human being and his or her spouse), you can file either a Chapter 7 or 13 case.

If you are a part owner of a partnership or corporation, that partnership or corporation cannot file a Chapter 13 case. But it can file a Chapter 7 one. And it can do so whether or not you also file one individually.

2) The kinds and amounts of debts:

If you have “primarily consumer debts” (more than 50% by dollar amount), then you have to pass the “means test” to be allowed to be in a Chapter 7 case. (More about that below.)

Chapter 7 has no restriction on the amount of debt allowed. In contrast, Chapter 13 is restricted to cases with a maximum of $360,475 in unsecured debts and $1,081,400 in secured debts.

3) Amount of income:

The “means test” in Chapter 7 is quickly satisfied if your income is no more than the published “median income” for your family size and state.

Chapter 13 requires “regular income,” which is defined in somewhat circular fashion to be income “sufficiently stable and regular” to enable you to “make payments under a [Chapter 13] plan.” Also, if the income is less than the “median income” applicable to your family size and state, then the plan will generally last three years; if the income is at the applicable “median income” amount or more, the plan will last five years.

4) The amount of expenses:

In Chapter 7, if you are not below “median income,” then you enter into a largely mathematical test involving your expenses to see if you pass the “means test” and are eligible for filing a Chapter 7 case.

In Chapter 13, a similar calculation largely determines the amount you must pay monthly into your plan to satisfy the requirements of Chapter 13.

 

Choosing between Chapter 7 and 13 can often be very simple and obvious. But there are at least a dozen major differences among them, ones that you may well not be aware of. So when you come in to see me or another attorney, be clear about your goals but also open-minded about how to reach them. You may well have tools available that you were not aware of.