In nearly all Chapter 7 cases, our clients have one or more automobile loans. In our region of the country, owning a reliable automobile is a necessity. Determining how to deal with those loans can have a major impact on your quality of life after your bankruptcy. You have options, and we’ve attempted to explain those options here to assist you in your decision-making.
1. Reaffirm the debt owed on the automobile. This means that you agree to pay the car loan in full by making payments just as if you had never filed bankruptcy. If you are happy with your vehicle, you are current on your payments, your loan has a reasonable interest rate and you are not significantly “upside down” (you owe more than the car is worth), then reaffirming your loan is probably the best option for you, assuming your lender asks you to reaffirm. By reaffirming, however, you lose the protection from collection of this debt that your bankruptcy provides. You can rescind your reaffirmation within 60 days of signing a reaffirmation agreement. Reaffirmations are voluntary for the lender. Just because you want to reaffirm the auto loan does not require the lender to enter into a reaffirmation agreement. For example, if you are consistently late with your payments or otherwise a problem client, the lender may decide to cut its losses and repossess the vehicle rather than to offer you a reaffirmation agreement. Lenders usually require you to be or become current on your loan before they will agree to a reaffirmation. If you sign a reaffirmation agreement and later default on your loan, your lender can repossess your car and try to collect any remaining deficiency from you after the car is sold by the lender and the debt is not paid in full from the sale proceeds. If your lender sends a reaffirmation agreement, they will send our office the agreement. We will sign it and forward it to you. If you do not want to sign it, you are not required to do so. Legally, your refusal to sign a reaffirmation agreement entitles a lender to repossess your car.
2. Keep making your payments without signing a reaffirmation agreement. Keep in mind that reaffirmation agreements are for the lender’s benefit, not yours. If your lender does not ask you to sign one, you should not volunteer to do so. As a practical matter, lenders very seldom repossess cars on which payments are current. So, if you stay current on your car payments, the lender will almost always allow you to keep the car even if you refuse to sign a reaffirmation agreement. The reason for this is very simple: lenders lose money whenever a car is repossessed. By allowing you to keep the car when payments are current, they are at least giving themselves the opportunity to avoid a loss on your car. The big advantage to you in not signing a reaffirmation agreement is that you cannot be held liable for any deficiency in the car’s value versus the amount still owed on the loan. For example, if you owe $10,000 on your car loan and you are involved in an accident that totals the car, but the car is only worth $7,000, then your insurance will probably only pay $7,000 of the $10,000 loan. If you reaffirmed that debt, you would be responsible for the remaining $3,000. The same thing goes for trading in a vehicle. If you owe more on your car than what it is worth as a trade in on a new vehicle, you ultimately will pay more for your new car. If you do not reaffirm the debt, however, you can simply surrender your old car to the lender and start fresh with your new car loan.
3. Surrender your car. If you are unhappy with your car or if you cannot afford it, it may be best to surrender it to the lender. Typically, you can drive your car through the end of your bankruptcy, as most lenders do not attempt to ask you to return it for fear of violating the Automatic Stay issued by the bankruptcy court to protect you from creditors. By surrendering your car, you get rid of the entire debt owed on the car. You can enjoy freedom from car payments or start fresh with a new car that better suits your needs. If your income is very limited, you should consider purchasing a “no frills”, older vehicle, provided that it is reliable and you can pay cash for it. Your ego may suffer a bit and you may spend a little more time and money on repairs than you would with a newer vehicle, but you will save money. Many people fail to consider all of the true costs of vehicle ownership: sales tax on purchase, property taxes, insurance (full coverage required for loans), maintenance and depreciation. All things considered, these costs will be lower with a cheap, but reliable car. Once you’ve recovered more fully from your bankruptcy, you can get a more expensive car. However, if you must have a newer or more expensive vehicle, then you will probably have a difficult time finding a reasonable loan. Your best option is to find a friend or relative with good credit that will co-sign your loan for you. If you don’t have that option, be wary as you enter the “world of sub-prime lending”. Remember that you are at the mercy of the car dealer right after a bankruptcy. Be very wary of the price you are paying for the car, the condition of the vehicle, the interest rate on the loan and any “extra charges” on the loan or purchase price of the vehicle.
4. Redeem the car. A little known section of the Bankruptcy Code, 11 U.S.C. §722, allows you to “redeem” your vehicle from the lender for cash at the vehicle’s fair market value, with any amount remaining on your loan to be discharged by your bankruptcy. So, if you owe $4,000 on your car, but the book value on it is only $1,500, then you can “buy” your car out of the loan for $1,500, provided you can pay the $1,500 in cash to the lender during your bankruptcy. This means that you will either have to scrape together or borrow enough money to pay the book value to the lender within about 90 days of filing your case. You must give us enough notice of your intent to redeem your vehicle so that we can file a “Motion to Redeem” your vehicle within 45 days of filing your case. We charge $400 as a flat rate for filing such a motion and obtaining an “Order of Redemption” for you. If you cannot possibly scrape together enough money to redeem your car, (for example the book value on your car is $10,000) there are two companies that will lend you money to buy out your loan, and then you will have a different car loan with one of these two companies. These companies will also lend you the $400 in attorneys’ fees for our work in obtaining the redemption motion and order. These “redemption loans” have helped many people save money on their automobile loans, but the interest charged on these loans is quite high.
The best decision for you will depend on several factors, including the condition of your current car, your car’s suitability to your lifestyle, your income, your family size, your mechanical ability, your willingness to accept risk and your commuting requirements.
By Jeff Wagoner
W M Law Attorney, President