We previously addressed what happens to your vehicle in bankruptcy from the liquidation perspective – is there unprotected equity? This time we will discuss your bankruptcy options regarding your auto loan. The following assumes there is no equity in the vehicle collateral.
Chapter 7 Bankruptcy
What most people have in mind when they think of Bankruptcy is actually a Chapter 7 Bankruptcy.
Retain the Vehicle and Reaffirm the Auto Loan
- If you are current on the vehicle payments and wish to retain the vehicle, then the auto lender will ask that you reaffirm the auto loan. A reaffirmation agreement will make the auto loan survive the bankruptcy – your personal liability to make the vehicle payments will not be discharged by the bankruptcy.
- The reaffirmation agreement protects the auto lender. If you fail to make the auto payments after the bankruptcy, then the auto lender can repossess the vehicle and sue you for any deficiency after selling the vehicle. Unfortunately, auto lenders generally require the reaffirmation agreement in order for the debtor to retain the vehicle.
- You must demonstrate to the Court that you can afford the auto loan payments. If you do not have sufficient funds to make the auto payments, then the Court will not allow the reaffirmation agreement.
Redeem the Vehicle
- Alternatively, you may redeem the vehicle. Redemption, however, requires payment lump sum the fair market value of the vehicle to the auto lender.
- EXAMPLE: You owe $20,000 on the auto loan but the fmv of the vehicle is $10,000. Redemption allows you to pay $10,000 lump sum to satisfy the auto loan and retain the vehicle.
- Funding is the problem. How do you come up so much money lump sum? There are lenders that specialize in redemption lending. Ordinarily, the vehicle must be worth significantly less than the auto loan balance. And, the redemption lender will require a high rate of interest on the redemption loan.
Surrender the Vehicle
- Lastly, you may surrender the vehicle to the auto lender. And, you do not have to worry about any vehicle deficiency.
- This may be a good option for a number of reasons:
- you cannot afford the auto payments,
- you cosigned for someone else’s vehicle,
- the vehicle is worth a lot less than the auto loan,
- you no longer need the vehicle.
Chapter 13 Bankruptcy
Chapter 13 Bankruptcy is a repayment plan through the Bankruptcy Court for a period of no less than 3 years and no more than 5 years.
Retain the Vehicle and Pay Auto Loan in Full with Interest
- You may retain a vehicle by proposing a plan, which pays the auto loan in full with interest.
- You may lower your rate on interest.
- The auto lender is entitled to the prime rate of interest plus 1-3% in Chapter 13 Bankruptcy. The prime rate of interest is subject to change. The prime rate is currently 3.5%. A plan paying interest at 6.5% will save you money when you have a high contract rate of interest.
Retain the Vehicle and Value the Collateral
- You may retain a vehicle by proposing a plan, which only pays the auto lender the value of the vehicle plus interest.
- If the vehicle is worth less than you owe, then “valuing” the vehicle will save you money.
- You can also lower your interest rate when “valuing” the vehicle.
- EXAMPLE: The vehicle is worth $10,000. You owe the auto lender $20,000 with a contract rate of interest at 15%. The plan pays the auto lender $10,000 plus 6.5% interest.
- LIMIT: This option is not available if you purchased the vehicle within 910 days of filing the bankruptcy case.
Surrender the Vehicle
- You may surrender the vehicle in Chapter 13 Bankruptcy, too. However, the auto lender may file a deficiency claim after selling the vehicle. The deficiency claim must be treated the same as other general unsecured creditors – like credit cards, medical bills, and unsecured loans.
Conclusion
Your transportation is very important. You should contact an experience bankruptcy attorney if you are considering filing a Chapter 7 or 13 Bankruptcy case. The Law Office of Brent M. Myer, PLLC offers free consultations.
Call today for your free consultation!
