Clients often find themselves in need of debt relief because a car loan went wrong.
Modern society needs to own and maintain a car which sometimes becomes a devastating financial burden. Lenders rush to finance vehicles knowing that borrowers place high priority on car transportation over most other financial obligations. Even bad credit borrowers are bundled into high-interest auto financing packages to compensate aggressive lenders for the added risk.
Financial difficulties often arise from car financing. The happy car buyer pulls his new vehicle off the nearly 100% financed lot. As the saying goes, almost immediately after that, the new vehicle depreciates in value by several thousand dollars before it even hits the road.
Car transportation costs between $ 4,000.00 and $ 6,000.00 a year, including auto loan payments, liability and collision insurance, repairs and maintenance, and gasoline.
The chaos begins when an unexpected car repair not covered by the warranty, or a car accident, unexpectedly and substantially decreases the value of the vehicle well below the outstanding balance of the loan owed to the bank. Or, perhaps more harmlessly, in a trade-in for a new vehicle where car salesmen and eager lenders agree to take your old vehicle to trade in and throw away the remaining outstanding balance on your old car loan (for a fee a little higher) in the bottom portion of their new car loan, leaving the new car buyer considerably “upside down” in purchasing the new car.
These situations leave the borrower in a situation where a significant portion of the income is dedicated to covering an unsecured auto debt obligation that is not enough to support the modest costs of the necessities of family life.
In certain circumstances, relief from these devastating financial problems can be obtained by filing for bankruptcy.
CHAPTER 13 CRAM DOWN PROVISIONS
Under Chapter 13 of the United States Bankruptcy Code, borrowers can “reduce” the unsecured portion of their auto loans to the fair market value of the vehicle that guarantees the loan. This requires debtors to pay only the secured portion of the auto loan, but the unsecured balance is treated as a general unsecured creditor providing a substantial benefit to the Debtor, allowing the Debtor to pay only a small fraction of the amount. unsecured portion of auto loan debt. that is due.
As an example, let’s say our debtor owns a car worth $ 10,000.00 and there is a car loan with a liquidation balance of $ 20,000.00. In this scenario, the loan is only partially guaranteed. The auto lender is insured only for the value of the vehicle or $ 10,000.00. The remaining balance of $ 10,000.00 on the loan is not guaranteed. In this situation, the Bankruptcy Code gives the Debtor the right to cut off the unsecured portion of the auto loan and treat that portion of the loan as unsecured. Therefore, if general unsecured creditors only received a 20% dividend, the auto lender would receive only $ 2,000.00 on their unsecured portion of the auto loan.
These situations become difficult between the debtor and the lender because disagreements often arise as to the correct value of the vehicle. Your bankruptcy attorney will need to negotiate an agreement on the appraisal prior to the confirmation of the Debtor’s Chapter 13 plan.
The valuation is governed by the provisions of the United States bankruptcy code, specifically Article 11 of the United States Code § 506 – Determination of Insured Status.
11 USC §506 (a) (2) specifically states:
“If the debtor is an individual in a Chapter 7 or 13 case, such value with respect to personal property that warrants a permitted claim will be determined based on the replacement value of such property as of the date the petition is filed. without deduction.for selling or marketing costs.With respect to property acquired for personal, family or household purposes, the replacement value will mean the price that a retailer would charge for such a property considering the age and condition of the ownership at the given time “emphasis added
The Cram Down provision of the bankruptcy code also provides for a reduction in the interest rate on the auto loan. Often times, debtors find themselves shelling out huge car payments that are used to cover exorbitant interest rates that auto lenders often charge risky borrowers.
An interesting exception was enacted under the 2005 Amendments to the United States Bankruptcy Code prohibiting crowds where the loan to buy with car money originated within 910 days (2 ½ years) of the filing date Chapter 13 bankruptcy. [see 11 U.S.C §1325(a)(9)]. Debtors should consider filing Chapter 13 if they want to escape the burden of heavy auto loan debt. Bankruptcy rules require that auto loans obtained within 2½ years of filing for bankruptcy must be repaid as agreed.
CHAPTER 7 REDEMPTION
Groceries are not allowed under Chapter 7 bankruptcies (or ‘simple bankruptcies’). But, Chapter 7 debtors can ‘redeem’ personal property under 11 USC §722.
11 USC §722 states the following:
“An individual debtor may … redeem tangible personal property intended primarily for personal, family or household use, from a bond that secures a dischargeable consumer debt, if such property is exempt under section 522 of this title or has been abandoned under section 554 of this title, paying the owner of said link the amount of the guaranteed claim allowed by said owner that is guaranteed by said link in its entirety at the time of redemption “. emphasis added
However, the swap can be difficult under Chapter 7 because debtors must pay a lump sum of cash upfront and in full, an amount sufficient to pay the guaranteed portion of the auto loan as measured by the fair market value of the vehicle. at the time the Debtor seeks to redeem. the vehicle. Chapter 7 does not allow a loan restructuring, but sometimes the auto lender will accept payments over time, but usually in the short term.
CONCLUSION
If your vehicle is worth less than it owes, bankruptcy options can be advantageous in allowing you to keep your vehicle and move toward better financial health.
Chapter 13 can reduce or “clutter” your loan balance and interest rates, lowering your automatic payment and making it affordable. Chapter 13 also allows you to restructure past due car payments and distribute them over the term of the Chapter 13 plan so that you can afford to catch up on past due payments within your personal financial means.
Chapter 7 bankruptcy does not allow restructuring of loan repayments, but the §722 redemption provisions allow debtors to purchase their vehicles out of bankruptcy for the fair market value of the vehicle, leaving the unsecured portion of the debt. discharged under Chapter 7 bankruptcy.