Bankruptcy to Save a Car or Workout an Auto Loan
Most of North Carolina is suburban or rural, and a car is essential transportation for employment, commerce, and recreation. Losing the family car to repossession can have disastrous consequences on finances and lifestyle. Fortunately, bankruptcy provides a number of tools to address car loan problems.
Bankruptcy stops threats of repossession. The bankruptcy automatic stay halts collection activity, and the lender must obtain court permission to repossess a car after bankruptcy has been filed. In chapter 13 bankruptcy, you can pay off a car loan, even if you are behind on payments. Sometimes, chapter 13 provides improved financial terms for paying the car lender.
Reworking car debt has long been one of the reasons debtors have turned to chapter 13 bankruptcy, as chapter 13 provides certain options for altering secured loans. One aspect of chapter 13 treatment of a car is to stretch payments over up to five years. Stretching payments can reduce the monthly car expense, but should be done with care if the car is older and unlikely to last the full stretched term. Another aspect of chapter 13 plans is adjusting the interest rate on the car loan. In many cases, the debt will be paid at the "trustee's rate" or "Till rate," which may be lower than the contract interest rate. Car loans with high rates may see a substantial reduction in monthly payments under the plan.
Perhaps the most powerful chapter 13 tool is a strip-down to value of the collateral. When available, the plan pays the value of the asset at the date of bankruptcy, not the higher amount of money owed on the loan. Unfortunately, such restructuring of auto loans is one area where a debtor's options were curtailed by BAPCPA, the 2005 new bankruptcy law. Under the so-called "hanging paragraph" or "910 day rule," vehicles purchased within 910 days (about 2 1/2 years) prior to the bankruptcy cannot be paid at value. This means that if car is being kept in a chapter 13 bankruptcy that was purchased within the 910 day period, the debt owed must be paid in full. On the other hand, if the car was purchased outside the 910 day period, the value of the car is a cap on the amount that must be paid as a secured claim in the chapter 13 plan.
As with other debts, the automatic stay created upon the filing of the bankruptcy petition halts collection activity by the lender. Without first obtaining court permission, a creditor cannot repossess a car when the automatic stay is in effect. In some cases, a car that has already been repossessed will be returned to the debtor following a bankruptcy filing. If your car has already been repossessed, this is an urgent situation and you should consult an attorney immediately.
The most common way that chapter 7 debtors keep a car on which they owe money is to reaffirm the debt. A reaffirmation agreement is a contractual arrangement between the debtor and creditor made shortly after the bankruptcy filing, where the debtor agrees to continue being responsible for the debt after the bankruptcy discharge. This has the effect of making it as if the bankruptcy was never filed as it relates to that car loan. If the main reason why you cannot make a car payment is other debt obligations, a chapter 7 reaffirmation may be an effective way to keep your car.
The clearest case for reaffirmation is when the debtor is current on the car payments and willing and able to make the same payment in the future. It's largely up to the creditor if to offer changes to loan terms or allow curing past missed payments.
Another tool under chapter 7 is a redemption of the loan. When redeeming a loan, the debtor pays to the creditor the value of the asset in one lump sum after filing bankruptcy. If the car is worth a lot less then the loan balance, this can save the debtor a lot of money. The obvious downside is that a redemption requires a large amount of cash upfront. Occasionally debtors will obtain commercial redemption loans; more often they have obtained money from a friend or relative. Redemption is also used to address second priority liens, which arise when a car is pledged as collateral for more than one loan. Notably, if the car is worth less than the balance on the senior loan, the junior loan can be redeemed for $0, as no value in the car is available to that lender.
Getting Rid of Cars in Bankruptcy
Not everyone wants to keep every car they owe money on. The payments may be too high to be affordable, or the car might not be well suited for the owner's present circumstances. Debtors have the option to release or surrender cars to the lender in bankruptcy. If the car is not worth enough to satisfy the entire balance of the loan, the remainder is an unsecured claim in the bankruptcy. Such an unsecured claim will be paid proportionally with other unsecured claims, if at all, and is generally discharged by the bankruptcy discharge.
Are you ready to do something about a problem car loan? Start today with a free bankruptcy evaluation.