According to Experian, roughly 20% of current auto loans are considered to be subprime. These loans are geared for those with poor credit and have high interest rates. The best course of action for handling an existing auto loan as you approach bankruptcy requires that you and your attorney evaluate your specific circumstances. Assuming that you require a vehicle for transportation, you will need to either retain your existing vehicle or purchase (or otherwise) obtain another. The options differ based on whether you are filing a Chapter 7 or Chapter 13 bankruptcy. Either way, the majority of filers are able to retain their vehicle if wishing to do so.
Auto Loans: Negative Equity & Repossession
The average interest rate nationally for a 60-month auto loan is 4.21%. If you initiated your auto loan at a time where your credit was more favorable, you likely have a rate under 10%. The purchase price of vehicles continues to rise, which encourages buyers to select longer term loans in order to have a more affordable monthly payment. Vehicles depreciate rapidly, meaning their value declines each year. Negative equity occurs when you owe more on the balance of the vehicle loan than the car is worth. This creates a problem if wanting to simply “get out of the loan” by selling the car to satisfy the balance. The same is true in a repossession scenario. If you fall behind on your payments, the lender will reclaim the vehicle and sell it at an auction. The sales price they receive is likely less than the loan balance creating a deficiency balance that they are likely to pursue from you, thus creating more unpaid debt.
Chapter 7 Options to Get Out of a Car Loan
In a Chapter 7 bankruptcy, you are essentially discharging all current unsecured debt. Chapter 7 filers have three primary choices for a car with a current loan:
Surrender the vehicle: Those qualifying for a Chapter 7 who owes more than the vehicle is worth may choose to return it to the creditor. After the lender sells the vehicle there will likely be a deficiency balance remaining; however, the balance may then be discharged through the bankruptcy.
Reaffirm the loan: If you wish to retain the vehicle and are current with the payments, you may reaffirm your intentions with the lender before the bankruptcy is processed and continue with your agreement.
Redeem the vehicle: Under limited circumstances, the court may approve redemption if the lender does not oppose. The debtor would pay the lender a lump-sum payment (if they have the funds) equivalent to the fair market value of the vehicle and be released from the loan agreement with the initial lender. The vehicle is then more affordably financed with a different lender. This option is not common and your attorney will advise you if it makes sense based on your circumstances.
Those emerging from a Chapter 7 bankruptcy seeking to finance a vehicle may be able to do so through subprime lending. It will require that you have verifiable income. Lenders are typically willing to finance those emerging from a Chapter 7 because they likely have minimal debt consuming their income and because the lender may earn high rates of interest on the loan.
Chapter 13 Options to Get Out of a Car Loan
Those entering a Chapter 13 modification plan struggling with a vehicle loan that has a high interest rate and a balance that exceeds the vehicle’s value have an opportunity for some relief. In your debt modification plan the vehicle loan interest rate may be reduced to approximately 6% and the balance owed adjusted to a lower amount equivalent to the vehicle’s current market value. In order to qualify for these adjustments, known as “cramming”, the debtor must have purchased the vehicle more than 910 days earlier and the court must deem that the debtor can afford the payments. Keep in mind that this loan modification is voided if the debtor does not complete the bankruptcy process.
Losing a Car in Chapter 13
There are three common ways that a vehicle is lost in a Chapter 13:
The existing loan balance is too high for feasible repayment through the Chapter 13 modification plan.
The debtor fails to maintain insurance on the vehicle and the lender repossesses it to avoid potentially being left with a useless asset if the vehicle were damaged.
The payments are not being made according to the Chapter 13 repayment plan and the lender asks the court for permission to repossess.
Debtors considering bankruptcy that want to retain their vehicle should keep their car payments current. If you are behind on payments or are in a loan wi80th unfavorable terms, you might consider attempting to negotiate with your lender. Depending on the circumstances, the lender may rather make some adjustments to increase the loan’s affordability and avoid the repossession process. Keep in mind that voluntarily surrendering your vehicle is likely to negatively impact your credit in the same manner as a repossession would, as you did not adhere to the terms of the loan agreement. Also, if you surrender the vehicle or have it repossessed and do not proceed with a bankruptcy, the lender may begin collection activity on the deficiency balance.
Attorney for Bankruptcy in Georgia
There are many options and strategies to potentially consider when you have a vehicle loan involved in bankruptcy. The decisions you make during this difficult financial period are critical to your future and having an experienced attorney to represent your best interests is important. We have over 20 years of experience practicing Georgia bankruptcy law and encourage you to contact the Law Office of Jeffrey B. Kelly at (770) 809-3099 for a complimentary case evaluation today.