Taxi medallion owners face overwhelming challenges these days. After they make their loan payments and operating expenses, they have nothing left to support their families. While Chapter 7 bankruptcy (surrender your medallion and wipe out your debts) works if you have no other assets, there are times when filing Chapter 7 creates too much risk.
That is where Chapter 13 may be useful. There are ways to use Chapter 13.
SURRENDERING THE MEDALLION :
if you are prepared to surrender your medallion, but have non-exempt assets, you could keep your assets if you paid the value of the non-exempt portion over time. This type of bankruptcy requires you to make monthly installment payments to a Bankruptcy Trustee for 5 years. If you have equity in property that cannot be protected in chapter 7, then, rather than losing that property, you can keep it if you pay your equity over the term of the chapter 13 plan.
For example, say you own a home worth $600,000, have a $200,000 mortgage, leaving $400,000 in equity. If the house is owned by you and your wife (and has been in both names since you bought it, or for at least 6 years if you added your wife’s name to the deed), then we can protect $331,000 of the $400,000 in equity as a “homestead exemption”.
If you file chapter 7, you will have to pay the Bankruptcy Trustee the $69,000 of non-exempt equity, or your house will be sold.
But if you file chapter 13, you can keep your house if you pay that $69,000 over 5 years. You don’t have to pay interest, but you will pay a 10% Commission to the Trustee. Your monthly payments will be about $1,300,
You surrender your medallion to the lender, get rid of your debt for the loan, and keep your house. The $69,000 goes to all your creditors (including the bank which lent you the money against the medallion), divided pro-rata, and distributed by the Trustee over the 5 years.
The same thing applies if you have an investment property. You can’t have a homestead exemption in investment property, but you can keep it if you pay the Chapter 13 Trustee the equity in 60 equal monthly payments.
Suppose you gave a child money to buy a house. If you file chapter 7 right now, your child could be sued by a Bankruptcy Trustee, if you gave them the money within six years. But if you file chapter 13, you can pay the money to the Bankruptcy Trustee over 5 years, without risk to your child.
If you are current on your medallion loan and stil have years to go before the balloon, it might be best to wait, but if you are facing a balloon payment within the next year, it might make sense to consider chapter 13.
KEEPING THE MEDALLION
If you want to keep the medallion for at least three years, and are prepared to keep up with your payments to the bank, this might be a way to survive in the short-term, and give you an exit strategy if you can’t make the payments after that time. During this time you will also have to make a monthly payment to the Chapter 13 Trustee to pay your credit cards and other unsecure debts. If you have little or no non-exempt equity, your monthly payment to the Trustee can be relatively small. Sometimes you might even be able to pay less than 100% of your unsecured debt. If your household income is too high for a 3-year plan, you might have to make payments to the Trustee for 5 years.
There are limits on chapter 13, though. You can’t have more than approximately $1.1 million in secured debt (mortgages on real estate, plus taxi loan), or more than $394,000 in unsecured debt.
Yes, it is complicated, but it you think it might be a good idea for you, please call for a free bankruptcy consultation. 718-442-4424. Paul Hollender. Board-Certified Bankruptcy lawyer. 40 years experience.