Losing Assets in Minnesota Bankruptcy
Will I lose my house if I file bankruptcy or will I lose my car if I go bankrupt?
Many people think that they automatically will lose their house, their car and most of their possessions when they file for bankruptcy. That is not the case. Congress has set up the bankruptcy laws to allow people to protect most if not all of their assets. The reason being, bankruptcy is designed to give people a fresh start, not to throw them on the street and make them dependent on state assistance. There are 2 sets of laws we can use to protect assets. These sets of laws are called “exemptions.” There are the federal exemptions and the state of MN exemptions. We can use only one or the other, we can’t use part of both. Each set of exemptions is set up categorically with a value limit. For example, under the federal rules we can protect up to $3,450 of equity in a vehicle for each spouse. Under the MN exemptions, we can protect up to $4,400 in vehicle equity per spouse. We typically prefer to use the federal exemptions, because in addition to the regular categories: vehicles, household goods, homestead, jewelry, etc., we also have up to $11,975* of “wildcard” protection per spouse to protect assets that are not otherwise protected under a category (ex: tax refunds, money in the bank on the date of filing, recreational vehicles such as motorcycles or boats). However, if you have more than $43,250 of equity in your homestead, then we use the MN exemptions which allow us to protect up to $360,000 of equity in a homestead. A few things to keep in mind about how the exemptions work: (1) you have to protect equity, not necessesarily full value. EX) You own a vehicle that bluebooks at $8,000, but is encumbered by a $6,000 loan, then there is only $2,000 of equity to protect. (2) You can only use the exemptions of the spouse(s) that are on the title for the asset. EX) if you jointly own the vehicle, then you each have a 1/2 interest in the vehicle, therefore, you each “own” 1/2 of the $2,000. We would have to use $1,000 of husband’s vehicle exemption and $1,000 of wife’s vehicle exemption to protect the equity. We could not use $2,000 of husband’s protection to protect his share and wife’s share. As a result of this, if there is more than 1 vehicle and at least one is jointly owned, then you must use wildcard to protect the remaining vehicles. If you have to use the MN exemptions to protect your homestead and don’t have wildcard protection, then that vehicle is non-exempt – meaning that you cannot protect it under the laws. If you have non-exempt assets, you either have to turn them over to the trustee or pay the trustee it’s value. Mike will advise you at your free consultation if you have any non-exempt assets.
Losing assets is only an issue in chapter 7 bankruptcy. In chapter 13 bankruptcy, the focus is not on whether you have any unprotected assets, but rather how much you can afford to pay to your creditors over a 3 to 5 year period. However, we still report your assets to the court for 2 reasons: (1) you may convert your case to a chapter 7 in the future if you lose your income and cannot continue your chapter 13 payments; and (2) the chapter 13 trustee will conduct a best interests analysis of your chapter 13 plan. In a nutshell, the best interests analysis looks at the total amount your unsecured creditors will receive under your chapter 13 plan and compares it to the hypothetical amount your creditors would have received in a chapter 7 had you had non-exempt assets. If you would like to learn more about the difference between chapter 7 and chapter 13, call Atlas Law Firm to schedule a free consultation.
Regardless of whether you file for chapter 7 or chapter 13 bankruptcy protection, if you have secured debt that you wish to keep (i.e., mortgage or car loan) you may do so. Most Retail Installment Contract and Security Agreements (i.e., auto loan contracts) have “ipso facto” clauses which state that the contract is cancelled or terminated upon the buyer filing for bankruptcy protection. There is a mechanism in bankruptcy to keep your auto loan called a “reaffirmation.” By reaffirming on the auto loan, you are signing a new contract (presumptively with the same or better contract terms) to re-obligate yourself under the auto loan contract and therefore keep the car. Prior to the Bankruptcy Abuse and Consumer Protection Act of 2005 an informal mechanism was commonly used by auto lenders and buyers to keep cars after a bankruptcy, called a “ridethru.” A ridethru is nothing more than an understanding between the lender and the buyer that as long as the buyer continues to make payments on time, the lender will not exercise their repossession rights. Congress tried to do away with ridethrus by passing BACPA and promoting the reaffirmation process. Many large auto lenders like Ford Motor Credit followed suit by officially requiring reaffirmations for bankruptcy filers to keep their vehicles after bankruptcy. However, ridethrus are still very common place for many lenders. Why would you not always reaffirm? By reaffirming on the auto loan you are obligated under the contract and if after your bankruptcy you fall behind on car payments and the car is repossessed, you could be liable for a deficiency balance (i.e., the amount still owed on the auto loan after the lender auctions the vehicle and applies the proceeds to the balance of the loan.) That is not the case after a ride thru, because the buyer has not re-obligated himself to the auto loan contract and the bankruptcy discharges the unsecured portion of the contract, while the auto lender retains the lien in the vehicle. There is also a mechanism in bankruptcy called a redemption. This requires taking out a new loan to refinance the old loan. Because the new loan is a post-bankruptcy debt, you are completely obligated under its terms. You may have guessed that because you have to get this redemption loan before you’ve had an opportunity to rebuild your credit, the terms are not ideal. If you are considering bankruptcy, you should ask the attorney you meet with what option they recommend for you to keep your vehicle. If the attorney appears unsure, get a second opinion. Call Atlas Law Firm to schedule a free consultation to learn more.
*Note that the amount of wildcard can be as little as $1,150 and as much as $11,975 depending upon the amount of the homestead exemption you use.
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