Attorney Carla M. HandyI recently wrote a blog on how creditors can seek to excuse themselves from the protection of the Automatic Stay in bankruptcy by filing a Motion for Relief from Stay.  One of the ways a creditor can be excused from the Automatic Stay is if a Debtor fails to maintain  insurance on collateral securing a loan, like a home or a vehicle.  I wanted to write in more detail about this topic because this can be an important issue for anyone in the planning stages of filing for bankruptcy relief.  As a bankruptcy practitioner, one irony I have observed is that a creditor may possibly never complain about whether a car or a home is insured or adequately insured before a bankruptcy petition is filed.  But, upon the filing of a bankruptcy petition, that same creditor may use the lack of insurance or inadequate insurance coverage as a reason to ask the court to return the collateral to the creditor.

When a person finances the purchase of a vehicle or a home, the contract signed by the buyer will likely contain a provision that requires comprehensive insurance coverage of the collateral, i.e. the vehicle or home.  Comprehensive coverage, as opposed to merely “liability coverage,” simply means there is insurance coverage in place to pay off a debt owed on the collateral (or to replace the collateral is there is nothing owed on same) in the event a car is wrecked or a home is damaged.  Comprehensive coverage is often referred to as “full coverage.”  So if a Debtor files for bankruptcy relief under Chapter 7 and wishes to retain a car and reaffirm the debt owed on the car with the creditor, the creditor may not agree to reaffirm if liability coverage is the only insurance in place for the vehicle.  If the creditor will not agree to reaffirm due to the lack of adequate insurance coverage, the Debtor may ultimately lose the vehicle.

In a Chapter 13 the costs of comprehensive or full coverage insurance, as opposed to mere liability coverage, is a factor the client must consider in deciding to file under this bankruptcy chapter.  The Chapter 13 requires a regular payment be made by the Debtor for repayment of his or her debt over three or five years.  Anyone contemplating Chapter 13 must also factor in the cost of maintaining full coverage insurance on a home or a car in determining whether he or she will have sufficient money available to keep plan payments current.   A budget must be feasible in Chapter 13 and the cost of insurance can be an important factor in this feasibility requirement.

An experienced bankruptcy attorney can help a person contemplating filing for bankruptcy relief in determining if there is any foreseeable problem with insurance coverage in the case.  If you are considering a filing for bankruptcy relief and wish to consult with a qualified bankruptcy attorney about your options, please contact one of our locations nearest you in Alabama, Mississippi or Tennessee for a free, confidential consultation.

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