According to the Consumer Financial Protection Bureau, the average price consumers paid for new vehicles reached a record high of $48,182 and monthly payments are up 19% from 20211. More importantly, the study demonstrates that majority of those who were delinquent on their auto loans were low- to middle-income borrowers, and with subprime credit scores (credit scores of 580 and 619).
In light of the rise of auto loan delinquencies, how can the filing of a bankruptcy help? Unbeknownst to many, the filing of a bankruptcy can help if:
- you are behind on your payments and need to surrender the car
- you are behind on your payments and want to get caught up;
- your car was repossessed, and the bank is suing you for the difference; and
- your car payment is too high and need to reduce the interest rate and/or car payments.
In this blog, we will explore your options if any of the above examples applies to your situation.
Surrendering Your Car
When a vehicle is repossessed, lenders will sell the vehicle at auction and attempt to recover enough sale proceeds to cover the loan balance that was owed at the time of repossession. However, recovering enough proceeds to cover the balance is rarely the case. The difference between the balance owed at the time of repossession and the sale proceeds recovered by the lender (referred to as a deficiency balance) can become problematic because If the lender cannot recover enough sale proceeds to cover the balance, the lender will sue the debtor for an amount equal to the deficiency balance and obtain a judgment.
Bankruptcy, on the other hand, provides car owners with an ability to eliminate their liability on a debt they can no longer afford to pay. This means that bankruptcy allows you to surrender your car back to the bank. The biggest difference between surrendering the vehicle in a bankruptcy, and a voluntary repossession (outside of the bankruptcy) is the following: If you surrender a vehicle in a bankruptcy, the bank will not sue you for the deficiency you may owe on the car loan. This is an important tool for those who can’t afford to make their car payments, do not want to deal with a lawsuit, and do not want to have a repossession on their credit report.
A Chapter 13 Bankruptcy Can Help You Get Current with the Car Loan Payments
More often than not, when a person has fallen behind on their car payments, the finance company expects a full payment of the arrears in order to avoid a repossession of the car. For obvious reasons, this can be extremely difficult for most. This is where a Chapter 13 bankruptcy can serve as a great tool.
In a case where a debtor has fallen behind on car payments, the debtor would propose a Chapter 13 plan whereby the debtor continues to make the regular car loan payment outside of the bankruptcy, and a portion of the plan payment would be disbursed to the vehicle financing company to pay for the arrears owed on the car loan.
For example, your monthly car payment is $350 a month but you’re behind on three car payments ($1,050). In a Chapter 13 bankruptcy, you would continue to make the regular payment of $350 and the $1,050 would be paid through the Chapter 13 plan spread over a 3 to 5-year period. This will not only help you avoid repossession of the vehicle, but it will also provide a breathing spell from having to pay all of the arrears owed in one single payment.
A Chapter 13 Bankruptcy Can Help You Lower the Car Loan Payments
On average, a car’s value decreases by 20% to 30% by the end of the first year and continues to depreciate in value by 15% to 18% each subsequent year2. With this in mind, it is not uncommon to owe more on the car loan than what the car is actually worth. This is where a Chapter 13 bankruptcy can help.
With the help of a Chapter 13 plan, the debtor can then propose to pay the “value” of the car as of the date of the filing as opposed to paying the full loan balance – this is referred to as a “cram-down”. In order to do this, you would have to have financed the vehicle for more than 2 ½ years or 910 days, and you must pay the value of the vehicle within the timeframe of the Chapter 13 plan (3 to 5 years). Of course, the rate of depreciation varies depending on the vehicle, but if your car depreciates in value faster than others, or if you’ve financed a used vehicle, this can be beneficial to you because you may be able to substantially lower your monthly car payments by only paying the value of the vehicle instead of paying the full loan balance.
Finally, if you haven’t had the car for more than 2 ½ years, you may be able to reduce the interest rate to 4% to 6% through a Chapter 13 plan and pay this lowered interest rate for the remaining life of the loan. This is extremely beneficial for subprime borrowers who pay a high interest rate due to their lower credit scores.
Conclusion
The purpose of this blog is to shed light and bring some hope to those individuals who have fallen behind on their car payments or have had their vehicle repossessed. If this sounds anything like you, the best thing for you and your peace of mind is to speak with an experience bankruptcy attorney to discuss your options for your particular situation. Give me a call today for a free consultation.
