We like to discuss goals in our free initial consultations. After all, as financial counselors, we can’t effectively assist our clients if we don’t understand their goals. When it comes to a car, we have a few options to consider.
(1) Keep the car.
This is, of course, the most frequent goal. Roughly half of our clients enter bankruptcy current on their car loan payments. Car loan payments are high priority, so these are kept current even as other loans don’t get paid. As long as the payments on the car loan are kept current and the vehicle doesn’t have any non-exempt equity, there won’t be any significant issues in keeping the car. Reaffirmation agreements bind both parties to the original terms and help repair credit post-bankruptcy by reporting on-time payments.
However, if the goal is to keep a car in which the payments are delinquent, then we have to take a delicate approach. It may be possible to catch up with the missed payments and go forward as if nothing has happened. But more often we’ll look to pay the vehicle through a Chapter 13 plan. Getting 60 months to make payments will usually free enough cash flow to make a plan payment work and let everyone breath easier.
(2) Surrender the car.
We can do this through a reorganization plan like a Chapter 13 or a Chapter 7. While debtors in these bankruptcies can’t physically require a lender to pick up a surrendered vehicle, we can get the ball rolling by stopping all payments and making arrangements for a surrender on terms our clients can live with. No more excessive payments, no more large insurance payments.
(3) But let’s say we want to keep it, just not at the current terms.
The interest rate or monthly payment is too high, the car is too far underwater (worth way less than what is owed on the balance of the loan). As we mentioned before, a Chapter 13 plan could be helpful to spread payments out over time. But we also pay secured lenders at a “Till” rate or special rate of interest. This means we pay somewhere between 4 to 7 percent, instead of the double digit contract rates of interest.
We can also, in Chapter 7, “redeem” vehicles. To do this, you need to have someone friendly with money. There are special companies that provide this service, but friends or family members can finance these redemptions too. The redemption is effectively a refinance, with the principal being the fair value of the vehicle. The new car loan for the redemption might be at a higher interest rate, but you may end up saving thousands through lowered principal.
Discussing your car goals is important in the free initial consultation offered with one of our knowledgeable bankruptcy attorneys at WM Law. To set up a free initial consultation, call 913-422-0909.