Vehicle Loans and Bankruptcy Options
CHAPTER 7 OPTIONS
KEEPING YOUR VEHICLE – If you are in the process of purchasing a vehicle and want to retain possession of your vehicle; you can still file a Chapter 7 bankruptcy (if you are eligible), eliminate as much of your other debt as possible, and retain possession of your vehicle. You cannot eliminate the debt against your vehicle, however, as Creditors who finance automobiles generally retain title to the vehicle until it is paid in full. If you desire to retain a vehicle you are in the process of paying for, you must take the following steps:
- FILE A STATEMENT OF INTENTION. Under Section 521(a)(2) of the new Bankruptcy Code, Debtors are required within 30 days of filing their bankruptcy petition, to specify their intent to either surrender, redeem, or reaffirm a debt secured by their vehicle. (Note: Statements of Intention are generally filed with the statements and schedules you file with the Court when you initiate your bankruptcy case.)
- PERFORM YOUR INTENTIONS. Not later than 45 days after the first meeting of creditors, Debtors must either SURRENDER or REDEEM the vehicle, or enter into a REAFFIRMATION AGREEMENT with respect to the underlying debt. See Section 521(a)(6). Somewhat inconsistent with the previous Section cited, Section 362(h) provides that if you fail to perform your stated intention within 30 days of the first meeting of creditors, the automatic stay will be terminated (with certain exceptions), permitting a car creditor to repossess your vehicle — therefore, you should either SURRENDER, REDEEM or enter into a REAFFIRMATION AGREEMENT within 30 days after the first meeting of creditors, and not wait 45 days.
- REAFFIRMATION: You can execute a new agreement with a car creditor under the terms of which you agree in writing to continue to make payments to the Creditor. Depending on the Creditor, the Creditor may agree to reduce the balance owing on your car and/or the interest rate, or bring you current if you are behind in payments, as part of a reaffirmation agreement. Entering into a reaffirmation agreement is a serious financial decision which you should evaluate carefully and discuss with your attorney. Under the revised Bankruptcy Code, an extensive set of disclosures are required for any reaffirmation agreement in Section 524(k). You will also be required under this Section to demonstrate that you have sufficient income available to pay the debt which is to be reaffirmed.
- REDEEM: You have the absolute right in bankruptcy to purchase your vehicle from a car creditor for an amount equal to the cost of replacing the property, without deducting costs of sale or marketing, and if the vehicle was purchased for personal, family or household purposes, then the replacement cost will be the retail price for property of similar age and condition. For example, if a car lot or other retail merchant could get $3,000 for your car by putting it on the market, but you owe $6,000 on it, you can acquire it from the creditor for $3,000 if you can come up with the cash to purchase it. There is no bankruptcy mechanism in Chapter 7 to force a car creditor to finance the redemption. You may be able to borrow funds to redeem a vehicle and certain lending institutions provide financing to individuals in bankruptcies who desire to redeem their vehicles. The interest rates tend to be high however (about 21%).
PREVENTING REPOSSESSION – If you are behind in payments on your vehicle loan, a Chapter 7 bankruptcy filing can temporarily protect your vehicle from repossession. From the instant you file your Chapter 7 case with the bankruptcy court, the automatic stay prevents Creditors from taking action of any kind to repossess your vehicle without Court permission; and if they have already repossessed your vehicle, they are prohibited from selling it without further Court order. Provisions regarding the automatic stay (Section 362) are dramatically modified under the revised Bankruptcy Code. For example, if a Debtor has filed a previous case within one year of the current filing which was dismissed, the automatic stay terminates within 30 days of filing as to leases and secured creditors. (The Court may extend the stay after a hearing under certain circumstances.) If a Debtor has been in two dismissed cases within the year prior to filing, there is no automatic stay. (Again, the Court may impose the automatic stay after a hearing under certain circumstances.) As discussed above with regard to reaffirmation agreements and redemptions, if you fail to perform your stated intentions concerning your vehicle within 30 days of the meeting of creditors, the automatic stay terminates automatically.
GETTING RID OF YOUR VEHICLE & THE DEBT AGAINST IT – If you owe more money on your vehicle than it is worth; you can rid yourself of the vehicle and the debt against it through Chapter 7 proceedings by surrendering the vehicle to the Creditor. Also, if you find that the monthly payments on your vehicle loan are really more than you can afford, you can eliminate this obligation in a Chapter 7 case, and surrender the vehicle to your Creditor. If you desire to surrender your vehicle back to the Creditor, your must do so within 45 days of the initial bankruptcy hearing which will be conducted 30-40 days after your case is initiated. A Creditor can force an earlier surrender of the vehicle by obtaining Court permission to repossess it.
PRESERVING A PAID-FOR VEHICLE IN CHAPTER 7 – If have a significant amount of equity in your vehicle, or if your vehicle is fully paid for, you may still file a Chapter 7 and retain value of $2,500 per individual (or $5,000 per couple). The vehicle exemption cited is based on the Utah Exemptions Act which may or may not be applicable in your case. (See information on this website regarding “Property Debtor Keeps”. If your equity exceeds exempt values, you may be able to file a Chapter 13 case, restructure your debt, and retain your vehicle. You could also attempt to arrange to purchase non-exempt equity from the bankruptcy trustee assigned to your case at the time of filing.
AUTOMOBILE LEASES – If you are leasing a vehicle at the time you initiate a bankruptcy case, you have the option of continuing to make payments under the lease, or surrendering the leased vehicle back to the Creditor. If you choose to surrender the vehicle, all penalties related to the early return of the vehicle and any other obligation pertaining to the lease, will be eliminated in your bankruptcy.
CHAPTER 13 OPTIONS
CRAM DOWN – If Debtors acquired their vehicle PRIOR to 910 days (2.5 years or 30 months) before they initiate their bankruptcy case, the Debtors are required to repay the debt under a Chapter 13 Plan ONLY to the extent of the value of the underlying collateral. In other words, the debt against the vehicle can be re-written.
For example, if Debtors acquired their vehicle over 910 days prior to the date of filing their bankruptcy case, and owe $12,000 against their vehicle, yet the actual value of the vehicle is only $8,000, in a Chapter 13 case, the car loan lien is stripped down to $8,000 and the Debtor must fully repay only $8,000 against their vehicle over the life of the Chapter 13 Plan (three to five years). In this example, the debt against the vehicle has a secured and an unsecured portion. The debt is secured to the extent of the value of the vehicle ($8,000); and unsecured as to the $4,000 balance. In a Chapter 13 case, the Debtor would generally re-pay only a fraction of the $4,000 unsecured portion of the debt.
CRAM DOWN NOT AVAILABLE FOR “910 PROPERTY” – Under the new laws at Section 1325(a)(9), if Debtors acquired their vehicle within 910 days of the date of filing their bankruptcy case for personal use, the debt against the vehicle cannot be modified unless the car creditor consents to or accepts such a modification. This represents a dramatic change in the law. Under the old laws, cram down was available in almost every instance.
REDUCE INTEREST RATES – Based on a 2004 U.S. Supreme Court case, Till v. SCS Credit Corp., the interest rate on secured debt including a vehicle loan paid through a Chapter 13 Plan may be significantly reduced. A Chapter 13 Debtor must pay interest on the secured portion of the debt only. The interest factor contemplated in the Till decision is prime plus some increment designed to reflect the risk of the new loan. Presently, the rate applied to Chapter 13 cases is about 6-7%.
CONSIDER THIS CHAPTER 13 ADVANTAGE – In a Chapter 13 case, almost all of a Debtor’s debts (with the exception of long-term liabilities such as home mortgages and certain other debts), are consolidated and paid through the Chapter 13 Plan in one single monthly payment. This single monthly payment includes any secured vehicle loans, possibly reduced as explained in the above example. Very often, the amount of the SINGLE MONTHLY PAYMENT paid by a Debtor in a Chapter 13 case is LESS THAN THE MONTHLY INSTALLMENT THE DEBTOR WAS PAYING ON THEIR VEHICLE ALONE BEFORE THEY FILED BANKRUPTCY.
For example, a Debtor’s monthly payment on their 1996 Toyota Camry $365 per month; yet under the terms of their Chapter 13 Plan, the Debtors make a single monthly payment of only $300 to pay off all of their debts, including the debt against their Camry. The Debtors in this example have only $300 left each month after paying their reasonable living expenses; and therefore have only $300 per month to apply toward repaying their Creditors.
VEHICLE LEASES IN CHAPTER 13 CASES – Obligations for leased vehicles cannot be consolidated in a Chapter 13 Plan and must be paid outside of any Chapter 13 Plan you formulate with your bankruptcy attorney. You have the option in Chapter 13 of assuming the vehicle lease and continuing to pay for it, or rejecting the lease. If you reject a vehicle lease in a Chapter 13 case, the creditor will sell the leased vehicle, apply the sale proceeds to all obligations pertaining to the lease, and file a claim in your bankruptcy case for the lease deficiency. Such lease deficiencies are treated as non-priority unsecured claims and would be paid the same percentage as all of your other unsecured creditors in this category (commonly 10 to 20 cents on the dollar with no interest).
NO INFORMATION CONTAINED HEREIN IS INTENDED TO CONSTITUTE LEGAL ADVICE, AND IS NOT APPLICABLE TO ANY SPECIFIC SET OF FACTS, ESPECIALLY AS TO ANY INDIVIDUAL’S PERSONAL SITUATION. THE INFORMATION CONTAINED HEREIN NOR THE PERUSAL OF IT DOES NOT ESTABLISH NOR CONSTITUTE AN ATTORNEY-CLIENT RELATIONSHIP WITH HUNTSMAN LOFGREN & ASSOC. OR ANY OF ITS ATTORNEYS. THE INFORMATION SET FORTH ABOVE IS BASED ON NEW BANKRUPTCY LAWS WHICH BECAME EFFECTIVE OCTOBER 17, 2005 KNOWN AS THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005 (BAPCPA). BECAUSE OF THE COMPLEXITY OF THE NEW LAWS, PLEASE REFER TO THE ACTUAL BANKRUPTCY CODE AND RULES AND/OR CONSULT WITH A BANKRUPTCY PROFESSIONAL TO EVALUATE THE APPLICATION OF THE ABOVE INFORMATION TO YOUR SPECIFIC SITUATION.