Tina and Tony are a married couple who are in a Chapter 13 bankruptcy. They are paying their plan payment on time, and things are going great until their car experiences serious issues. Their mechanic estimates that it will cost $2,500 or more to fix the issues with the car. Tony and Tina agree they would like to move on from the car, surrender the car to the lender, and get a new car.
There’s just one issue with this plan. When Tina and Tony car shop, they find great cars….at interest rates of 20-25%. That means the small SUV or large sedan they need for their family could cost them $500 per month, which would put their budget in a squeeze. This is a real-life conflict that many debtors face during Chapter 13 plans or immediately after Chapter 7 bankruptcy discharges until their credit scores improve.
Interest that lenders charge to finance homes, cars, and other large purchases is supposed to be based on risk. Even if we loan money to Elon Musk or Jeff Bezos, there’s still a risk that they could decide not to pay back our loan. When most lender see bankruptcy, they assume (wrongly) that people in bankruptcy are higher risks than those without bankruptcies.
In fact, borrowers who have just exited Chapter 7 or are repaying their debts through a Chapter 13 plan are often better risks because they have their budgets in order and fewer debt pressures. Tina and Tony, in our example above, might be great risks. If they both work and have steady income, they have their creditors under control, and are getting rid of an older car, they should be well equipped to pay their new car loan outside of bankruptcy (while probably lowering their bankruptcy payment as well).
This is where friendly lenders come in. Tina and Tony contact her aunt Betsy, who has enough wealth to where she can afford to loan the couple $15,000 or so and wait for repayment. In exchange, Tina and Tony grant Aunt Betsy a security interest on their car (so she has her lien properly recorded on title). This means that if Tina and Tony default, Aunt Betsy can exercise her rights under state law and even repossess the car, though she doesn’t think that will be necessary. Betsy wants to make some money from her investment, so Tina and Tony agree that a 10% interest rate is fair under the circumstances.
If we were representing Tina and Tony, we would gladly draw up a very simple contract, advise Aunt Betsy to have it reviewed by an independent lawyer, and counsel Tina and Tony on signing it and obtaining the vehicle. We can then get approval for borrowing the money (necessary in a Chapter 13) and make the car purchase process much easier.
In this case, everyone wins. Tina and Tony get their new car at a much nicer interest rate, and Aunt Betsy gets an interest rate higher than most investments. She also gets the satisfaction of knowing she helped out family. Unless she was an early investor in Bitcoin or the latest hot stock, she’s going to make more money by exploiting the problems with financing companies. They don’t understand that bankruptcy debtors are often good candidates for financing, so they treat recent bankruptcy consumers rudely.
When creditors and debtors meet each other fairly, everyone wins. At WM Law, we can work with friendly creditors to help our clients. That’s one of the many ways in which we are…here to help.