What Is Bankruptcy and the Differences Between a Charge Off and Repossession in Bankruptcy

The purpose of bankruptcy is to find a way forward with people who have large amount of debt while treating their creditors in a fair and equitable manner. The debtor often sees this process as a “fresh start” without the specter of looming bills.

Chapter 7 Bankruptcy

When you agree a trustee can take and sell some assets and/or property to pay back debt in exchange for wiping away the debt that qualifies for Chapter 7 Bankruptcy. You can also maintain property that is exempt and protected by state law.

This “fresh start” wipes out debts such as medical bills, personal loans and credit card balances taking a streamlined approach without the demands of a monthly plan for repayment. For this to happen the debtor must agree the person appointed as the bankruptcy trustee can sell what is known as non-exempt property. The proceeds are then sent to the creditors according to a system to rank their priority.

It is not needed for the debtor to relinquish all their assets. What you need to maintain your home and continue working, with a reasonable vehicle. Often the debtor may keep all of their personal property but what can be kept does differ from state to state.

The following is considered non-dischargeable debt under Chapter 7 Bankruptcy:

• Student loan debt unless I can be demonstrated it would be incorrect to repay
• Awards originating from wrongful death or injury from being intoxicated while operating a vehicle
• Unpaid income taxes accrued over the last three years (and in some cases longer)
• Child support, spousal support and obligations for domestic support

Both individuals and businesses can utilize Chapter 7 Bankruptcy and the process usually takes between four to six months to complete.

Eligibility

You will not be able to file a Chapter 7 Bankruptcy is most of your debt is consumer debt and you have sufficient income to finance a Chapter 13 plan for repayment. You can also only do this once every eight years.

Property

As we said above you can keep what you need to maintain your home and continue working, with a reasonable vehicle. Often the debtor may keep all of their personal property but what can be kept does differ from state to state.

Secured Debt

You will have the option of allowing the creditor to repossess a secured debt or to maintain ownership of the property as well as maintaining the payments as per the sales contract.

Non-dischargeable Business Debt

Business debt is not wiped out in Chapter 7 Bankruptcy. Other than sole proprietors it is seldom a business will even file for this kind of bankruptcy as there are easier ways to wind down a business enterprise. When assets need to be sold in a manner that is transparent it may be a good option, however.

Chapter 13 Bankruptcy

This form of bankruptcy helps high-income earning individuals reorganize their debt. With this form of bankruptcy. Although you can retain your property, creditors must be repaid as part of a three to five-year Chapter 13 Bankruptcy plan as well as any income that is discretionary going towards the total owed as defined by the rules of bankruptcy.

Repayment

You will have to propose a plan for repayment detailing your debts for the last three to five years and how you intend to pay them. The minimum amount for this is based on how much you earn, how much you have to repay as well as how much is owed and the value of your property that is non-exempt.

Debt Limitation

The maximum limit for secured debt is $1,257,850 and no more than $419,275 in debt that is not secured.

Mortgage And Car Payment Arrears

Chapter 13 Bankruptcy can also be used to pay car and house payments that have fallen in arrears to avoid both repossession and foreclosure.

Other Bankruptcy Reorganization Options

There are two other options known as Chapter 11 Bankruptcy and Chapter 12 Bankruptcy. Chapter 11 bankruptcy is normally used by businesses to reorganize their financial affairs when they are struggling to survive. Individuals whose total debt exceeds the amount offered by Chapter 13 Bankruptcy can also file for Chapter 11 Bankruptcy. Chapter 12 bankruptcy has similar qualities but a minimum of 80% of your debts must be from running a family owned fishery or farm. To pursue this form of bankruptcy, speaking to a lawyer is essential.

A charge off and a repossession are two very different things—although both could happen to one debt. In this article, you’ll learn what each term means, as well as how the bankruptcy court handles these events in Chapter 7 and Chapter 13 bankruptcy.

What Is a Charge Off?

“Charge off” is an accounting term that simply means that the account has been removed from the company’s books because no payments have been made in 120 to 180 days (depending on the type of account.)

Most people come across the term “charge off” after reviewing a credit report. Because a charge off is associated with an unpaid debt, many assume that charged off means that the debt is no longer collectible and that you no longer owe the money. That’s not the case.

A notation of a charge off indicates that the lender is no longer showing the account as a bad debt on the bottom line. That usually doesn’t stop the lender’s collection efforts. The lender can continue trying to collect the debt. Often the lender will transfer or sell the debt to a collection agency. In turn, the collection agency either collects the debt for the lender or, if the collection agency purchased the debt, collects it for its own benefit. Either way, a charge off is merely an accounting term, and you still owe the debt.

The Federal Reserve requires a lender to charge off a credit card debt when it is 180 days late. A car loan or installment loan must be charged off when it is 120 days late.

Can a Charged Off Loan be Reinstated?

Once a loan is charged off, don’t count on the loan showing up on the company’s books again. Even if you offer to pay it, chances are it’s been transferred or sold and the original company no longer has an interest in it. If you pay the debt, the company that purchased the account should show that you paid it off, but unfortunately, the original lender can continue reporting the charge off for seven years.

How are Charge Offs Treated In Bankruptcy?

When you file for bankruptcy, you agree to disclose your entire financial situation in exchange for the benefits provided by the chapter that you file. (Find out which bankruptcy will be better for you in What Is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?)

You must list all debts when you fill out your bankruptcy paperwork—including charged off accounts. If you don’t list them, you risk the debts not being discharged (wiped out). All kinds of debt can be charged off, including car loans and other debt secured by collateral, and unsecured debt, like a credit card balance, medical bill, or personal loan. If you file for Chapter 7 bankruptcy, you can expect the court to discharge the charged-off debt within three to four months (the average time it takes for a Chapter 7 case to end). In a Chapter 13 bankruptcy, you’ll pay any discretionary income—the amount remaining after paying allowed monthly expenses—to your unsecured creditors over the course of your Chapter 13 bankruptcy payment plan. All eligible unsecured debts get discharged when you complete your plan.

If the charge off is a secured debt—such as a car loan or mortgage—then you’ve likely already lost the collateral (the house or the car) through repossession (see below) or foreclosure. In that case, you’ll list the account as an unsecured debt in your bankruptcy paperwork.

If a debt has been charged off but you still have the collateral, and you’d like to keep it, you should speak with a bankruptcy attorney as soon as possible.

What Is a Repossession?

A repossession occurs when a creditor takes possession of the collateral—usually a car—that you put up when taking out a loan. Here’s how it works.

Before a lender agrees to lend you money for a car purchase, you must agree to guarantee payment of the loan with the vehicle. The contract creates a lien in favor of the lender. The lien allows the lender to take the car, sell it, and apply the sales proceeds to the loan if you default on your payment. If the auction price isn’t enough to pay off the loan, you’ll still owe the remainder called a “deficiency balance.” (The lender releases the lien on the car after you pay the loan balance.)

Can a Loan on a Repossessed Car be Reinstated?

If you lose the car to repossession, most state laws will give you some time to get the car back. The process is called “reinstating the loan.” Reinstatement requires you to pay any past-due amount, as well as the lender’s costs for the repossession.

Repossessions can occur with property other than cars as well. Furniture, jewelry, and other personal property pledged to secure a loan can be repossessed, as long as the lender follows the state laws.

Can a Car Loan be Charged Off Without a Repossession?

It’s possible to charge off a loan without having the dealer repossess the car. As stated earlier, car loans are supposed to be charged off if no payment has been made for 120 days. But, unsecured debt, like credit cards or medical accounts, can stay on the books until they’re 180 days old. Usually, a lender will repossess the collateral and sell it, long before 120 days pass. Almost always, the proceeds of the sale won’t be enough to cover what’s owed on the loan, and most lenders will need to charge off the remaining balance.

No law requires the lender to repossess the collateral before charging off the loan. The lender could choose to do it the other way around or could choose not to repossess the car at all. The lender might be forced to forgo repossession if the car can’t be located or if the car’s value is less than it would cost to sell at auction (for instance, if the car was totaled in an accident). The lack of a repossession doesn’t alter the need to charge off the loan or prevent the lender from selling the charged off loan to a debt buyer.

How are Repossessions Treated In Bankruptcy?

If your car is repossessed before the bankruptcy is filed, you might be able to reinstate the loan and regain possession of the car, but you have to work quickly. You’ll have to file a Chapter 13 bankruptcy case and propose a three to five-year repayment plan.

In Chapter 13 bankruptcy, it’s possible to reinstate a loan by including it in your repayment plan. In fact, this is one of the key benefits of a Chapter 13 bankruptcy case. Not only will it stop a repossession (or a foreclosure) in its tracks, but you can spread out your payment arrearages over the repayment plan rather than paying the entire overdue amount right away. You’ll have to continue paying your monthly payments, too, but by the end of the payment plan, you’ll own the car free and clear. If you don’t want to keep the car, the balance owed will get discharged (wiped out) with other qualifying debt at the end of your plan.

Filing a Chapter 7 case instead will not help you get your car back, because Chapter 7 has no mechanism for getting you caught up or reinstating the loan.

Which is Worse: Charge Off or Repossession?

If you default on your car loan, you could suffer a charge off, a repossession, or both. It’s hard to know whether the charge off or the repossession looks worse on your credit report. Credit scores are based on all the information in your credit report, good and bad, and the credit reporting agencies and companies that produce credit scores like the FICO score keep their scoring models a secret. Someone having trouble with one account like a car loan often has difficulty keeping other accounts in line. Your credit score can take a hit from late car payments, repossessions, past due credit card payments, judgments, tax liens, and other negative or derogatory entries.