How to Resolve Car Loan Default in Bankruptcy
You love your car but have fallen behind on your monthly car payments. What can you do?
One option is to do nothing. You can let the auto lender repossess the car, sell it at auction, apply the proceeds to your account, and eventually sue you for the deficiency balance on your account. The problem with doing nothing is that it could result in a money judgment against you, which will have a huge negative impact on your credit rating. The lender could also collect on that judgment by garnishing your wages, levying your bank account, or filing a lien on your house.
Another option is to file a bankruptcy petition to resolve the matter once and for all, with less of an impact on your credit and the possibility of retaining your car and perhaps paying less for it than what you owe. Read on to find out how a Chapter 7 or Chapter 13 bankruptcy attorney can help you deal with your car loan or lease.
How Chapter 7 Bankruptcy Resolves Your Car Loan Default
What is Chapter 7 Bankruptcy?
Chapter 7 is a liquidation process by which a debtor discloses his or her income, expenses, assets, and debts, and is discharged of personal liability for unsecured debt such as credit card debt or medical bills.
Once a debtor files a Chapter 7 petition, the “automatic stay” is in place, meaning creditors are “stayed” or stopped from collection efforts. Car repossession also stayed. At the close of the case, the discharge order prohibits collection attempts on discharged debt.
Federal or state “exemptions” are applied to the debtor’s personal and real property to keep that property out of the bankruptcy estate and out of the reach of the Chapter 7 Trustee, who otherwise could seize and sell that property for the benefit of the debtor’s creditors.
Redeeming Your Car in Chapter 7
If you file a Chapter 7 bankruptcy petition, you have the power to “redeem” your car. Redemption entails paying the auto lender the current market value of the vehicle in one lump sum. Market value is very often much less than what is owed on the car loan, especially as a loan matures.
Redemption can be useful if you’ve come into some money, but not enough to pay off the car loan entirely. You and your attorney can negotiate with the lender to arrive at a payoff amount that suits you both.
Surrendering Your Car in Chapter 7
If you simply cannot afford your monthly car payments, whether it is a loan or lease, it may be time to “surrender” the car. When you surrender a car through bankruptcy, the auto lender or lessor must accept the car and you are discharged of the underlying debt in full.
While there will likely be a deficiency balance after the lender sells the car at auction and applies the proceeds to your account, the lender is prohibited from trying to collect that debt from you by your Chapter 7 discharge order.
How Chapter 13 Bankruptcy Resolves Your Car Loan Default
What is Chapter 13 Bankruptcy?
Chapter 13 is for debtors who have a regular income stream and need to catch up on car loan or mortgage arrears. Chapter 13 debtors and their attorneys disclose all of the debtor’s income, expenses, assets, and debts, and craft a three- or five-year repayment plan to catch up on loan arrears. The debtor must be able to afford and continue to pay the regular monthly car payments outside the Chapter 13 plan.
Curing Your Auto Loan Arrears in Chapter 13
The arrears on the auto loan are amortized over the length of the debtor’s plan. The debtor pays a certain amount to the Chapter 13 Trustee each month, who in turn repays debtor’s creditors. At the conclusion of the plan, the debtor is caught up on the auto loan, discharged of whatever other unsecured debt he or she has, and keeps the car as long regular monthly payments continue to be paid.
Chapter 13 Auto Loan Cram Down
If your car is worth less than the amount you owe on your auto loan, or, yoru interest rate is very high, consult your bankruptcy attorney about whether “cram down” would be of benefit to you.
Chapter 13 debtors have the power to force their auto lender to accept market value of the vehicle plus Till interest – prime plus 1-3% – in lieu of the loan, payable over the life of the plan. As long as the debtor pays the plan payment in full and on time each month, he or she will own the car once the plan is complete.
While filing a bankruptcy petition does have a negative effect on your credit score, your score will eventually rise because you have dealt with your car loan or lease arrears, and your debt-to-income ratio has improved because your debt was discharged. Doesn’t this sound preferable to doing nothing?