Auto Debt and Bankruptcy

Many people today have a high debt-to-income ratio, with automobile loans comprising a significant portion of this debt. Car dealers have offered attractive financing deals in recent years, and tens of millions of Americans have taken out car loans to purchase new vehicles. According to USA Today, the average household debt currently includes over $29,000 in automobile loans.

Unfortunately, an increasing number of these folks are “underwater” on their car loan, with the vehicle worth far less than the balance owed. And, since auto loan financing always includes a lien against the purchased vehicle, debtors can’t get away with missing payments for long. The lender has the legal right to repossess a financed car or truck, typically after three months of delinquent payments.

Since auto loan defaults are higher than they have been in five years, rising to 4.1% of active accounts at the end of 2017, a growing number of debtors are searching for relief in bankruptcy court. Is this strategy effective? In many cases, bankruptcy can help you keep your car and potentially restructure your original loan.

How Bankruptcy Affects Auto Debt

If you are struggling with an overall financial problem, bankruptcy protection can give you time to get back on your feet or allow you to start over. Depending upon your individual circumstance, bankruptcy can help you ...

·         Stop a creditor (temporarily) from repossessing your car – Once you have filed Chapter 7 or Chapter 13, the bank must wait until the case is resolved (or the judge orders repossession).

·         Negotiate to recover a vehicle that has already been repossessed –Sometimes, the only legal option is to redeem the car by paying the full balance due; alternatively, you may be able to pay the “current value,” a much lower amount.

·         Modify your loan agreement to reduce payments or improve terms – Based upon the car’s actual value, you may able to renegotiate with the lender or obtain a new post-bankruptcy loan with a different lender.

Chapter 7 Bankruptcy Options

Chapter 7 liquidation bankruptcy is for people who wish to wipe out debt rather than restructure it. It is best for lower-income debtors who do not possess valuable assets. If your auto loan payments are up to date when you file Chapter 7, you should be able to keep your car. This is usually accomplished with a reaffirmation agreement between the debtor and lender, which may include more favorable terms.

In some cases, a reaffirmation agreement can save your car even if you are behind on payments.  Alternatively, you can choose to surrender your vehicle under Chapter 7 and you will be released from any further responsibility for the debt of the loan.

Chapter 13 Bankruptcy

In Chapter 13, the filer seeks to reorganize his or her finances in an effort to work free of unmanageable debt.  Chapter 13 filing places an immediate “stay” that prevents repossession of your car and, in many circumstances, allows you to keep your property.  (If you own a luxury vehicle, the court may not consider this a “reasonable” expense.)  If you are behind on your automobile or truck payments, you can have the arrearages incorporated into a Chapter 13 repayment plan, which extends over three to five years. You also may be able to reduce your loan in line with the actual value of your vehicle. (So, if your car is worth $12,000 but you owe $18,000, your balance could be reduced by $6,000.)

Legal Matters

Most lenders will not negotiate new car loan terms without a reaffirmation agreement, which is a legal document that must be filed with the court and approved by the judge. In exchange for keeping your vehicle, this binds your promise to repay some or all of the debt. Similarly, a “motion to redeem” with a new car loan requires sign-off by a judge, and the original car lender may dispute the car’s fair market value. These scenarios are best handled by a qualified attorney.

If you are sinking in debt because of your auto loan, speaking to a lawyer can help you determine your best course of action. A bankruptcy attorney can assess your situation, point you in the right direction, and offer legal representation that can help you make the best of a tough situation.

 

From the Author: Debt Relief

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