In the world of bankruptcy, nothing is more important than the value of what you own. Too much and you’ve got one kind of problem, too little and there are others. Welcome, my friends, to the world where underwater means more than a dip in the pool.
When you have an object of value – a car, piece of real estate, or person property – that value is yours to do with as you see fit.
If you’ve got a loan against the property, that loan chips away at that portion of the value which is yours free-and-clear.
For example, you own a car worth $20,000. You have a loan in the amount of $15,000. You, therefore, own $5,000 worth of car whereas the lender owns $15,000 worth of car. If you decide the sell the vehicle, the lender gets the first crack at the proceeds. We touched on this when we talked about security interests.
Now let’s keep with the automobile but change the situation a bit. The vehicle is still worth $20,000 but you’ve got a loan in the amount of $24,000 on it. The automobile is, therefore, worth less than the amount needed to pay the loan in full. In this situation, you are underwater on the car.
Underwater Property And Means Testing Issues
Remember that part of the means test takes into account your payments on secured debts that due within the next 60 months. If you’re underwater, chances are good that the loan payments are higher than if you had a chunk of equity (bigger balance means bigger payment amount). For some, that higher payment stream could bring you into the safe zone as far as means testing is concerned, paving the way for a Chapter 7 bankruptcy.
In Chapter 7, Underwater May Be Good
If you’re thinking about Chapter 7 bankruptcy, you’ve got to worry about exemptions – those valuation limits on property you can keep when you file your case. If you’re underwater on a home or car, you can file for Chapter 7 bankruptcy without worrying that the trustee is going to take it from you.
That’s not to say the lender won’t take the property from you if it’s underwater in a Chapter 7 bankruptcy. If you’re behind on payments, fail to reaffirm an automobile loan or let your insurance lapse, the lender may elect to take back the property. That’s a different story, but not necessarily one related to the Chapter 7 bankruptcy.
Chapter 13 And The Underwater Property
If you’re underwater, you may look into Chapter 13 bankruptcy. In Chapter 13 you may be able to strip off a second mortgage lien and treat it as unsecured, bringing your head (closer to) above water. If it’s a car that’s worrying you, Chapter 13 may be able to help cram down that lien (subject to that doggone 910 day limit).
As With Anything, It’s All A Matter Of Perspective
Being underwater is bad because it means you made a poor investment decision. But in the world of bankruptcy, you could end up with a significant benefit as a result of being underwater.
Depends on whether the glass is half full or half empty, I suppose.
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