The Facts on Car Loans: Eight Questions
When I meet with an individual considering bankruptcy who has one or more car loans, I ask a number of questions. These questions provide an essential outline of car loans in bankruptcy.
Do you want to keep the car?
While many people want to keep a car and are looking for bankruptcy options compatible with that goal, it might also be the case that someone is stuck with an unaffordable or unreliable automobile and has no interest in paying to retain it. Bankruptcy, both chapter 7 and chapter 13, can facilitate surrender of the collateral (car) and discharge of the unpaid deficiency balance of the car loan.
Is the car loan current?
If a borrower is current on a car loan and not otherwise in default on the loan agreement, the greatest range of options for treating the car in bankruptcy are present. This is especially true for chapter 7. If the loan is pretty much current (less than a month late), some further consideration is often warranted on the objectives and risks that might be present. If the loan is delinquent, chapter 13 comes to the forefront as a means to pay off the loan over time.
How much do you owe?
The balance owed on the car loan is important primarily in two respects:
- It's necessary to know the balance to compare it against value. One might pursue different options if a loan is underwater (car worth less than balance of loan) or if there is substantial net equity (car worth much more than balance of loan).
- In chapter 13, the balance is often an important consideration in calculating a potential chapter 13 plan payment.
What kind of car is it, exactly?
The model and particulars of the car suggest its value (e.g. 2004 Honda Accord LX 4-door V6 140,000 miles or 2005 Ford Explorer Limited 4x4 80,000 miles). In the jurisdictions I practice in, the NADA values of the car tend to be the presumptive values. Having that value in hand allows comparison against the balance owed on the loan.
When did you purchase the car? Is the loan from the purchase or a refinance?
Chapter 13 doesn't treat all car loans the same. Some loans, the full balance has to be paid. Others, only the value of the car needs to be paid. When a car is worth less than the balance of the loan, the option to pay value only to the creditor can save the debtor significant money. This more favorable treatment is available if (1) the loan wasn't used to purchase the car; or (2) the purchase loan is more than 910 days (about 2.5years) old as of the date the bankruptcy is filed.
What's the interest rate and payment?
- In chapter 7, interest rate and monthly payment suggest whether or not a car loan is affordable (together with other monthly budget items). This is especially important if the borrower is interested in remaining liable on the car loan after bankruptcy by way of reaffirmation agreement.
- In chapter 13, payments are normally through the chapter 13 plan. The term of the loan would be stretched out over the 3 to 5 years of the plan, and the claim typically paid at the trustee's interest rate (5.25% as of writing). The existing rate and payment allow calculation of monthly and life-of-loan savings provided by the chapter 13 process.
Are there any second liens?
Second liens on cars aren't terribly common. If one was present, both chapter 7 and chapter 13 provide tools remove or pay on favorable terms many second liens on automobile titles.