When you fall behind on your car payments, you never know when the repo man might show up. You worry about the embarrassment of a repossession at work, the inconvenience of a repossession when the car is full of newly-purchased groceries, or the extra towing and storage charges added to the past-due payments. Clients often complain that they have not received prior notice of the repossession. However, car creditors are allowed to repossess the vehicle bases on the security contract they have with you without giving any notice. If they would give notice of the pending repossession it would make it more difficult for them to find the car because many people might hide it from the repossession man. We advise however, to stay in contact with your car creditor when you fell behind with your payments and ask what the status of your account is. The costumer representative will often tell you when your car is in repossession status, but you would have to ask, they do not tell you before the car creditor hires a towing company for your vehicle.
Will filing for bankruptcy stop the repo man? Filing for bankruptcy will stop repossession, buying you time to find alternate transportation or negotiate a payment arrangement. If your delinquency is recent, and you have a good history with the creditor, your lawyer may be able to negotiate a loan modification, especially if you want to reaffirm the debt and keep the car.
When you file a chapter 7 bankruptcy case, you have the option
- to reaffirm your car loan, that means you sign a new contract with your car creditor most often under the same terms as your original contract,
- to redeem your vehicle, that means for vehicle that qualify (normally car that have less than 100,000 miles and are not older than 7 years), you obtain a new car loan with the help of your bankruptcy attorney. Most bankruptcy attorneys work with 722redemption.com. Through their website you can check if your vehicle qualifies for redemption. The new car loan will be only for the value of your vehicle not for the original contract, the difference will be wiped out through the bankruptcy. Your loan balance is in most cases lower but the interest rate might be higher. Redemption is often a good alternative to reaffirming your old car loan.
- The third option is to surrender your vehicle. That means you return the vehicle to the car creditor or make arrangements for them to pick it up. Sometimes, when the car is nearly paid for, needs repairs and does not have a high resale value, the car creditor might not want the car returned. In these cases, the city might tow the car from a public street or you could dispose of it in other ways. It will be difficult in these cases to sell the vehicle because the lien of the car creditor is still on the title of the car. When you surrender your vehicle in bankruptcy whether the car creditor takes it back or not, you are not liable for the vehicle loan anymore. The car creditor can demand money and the debt is being wiped out through the bankruptcy case.
When you file a chapter 13 bankruptcy case, this is most often the best option when you are behind with your car payments,
- You can keep your vehicle: You will pay the loan balance over the length of the chapter 13 plan with the court interest rates. This lowers the payment in most cases significantly. If your vehicle was purchased 2.5 years before filing of your bankruptcy case, you have to pay only the value of the car, similar to redemption in a chapter 7. The difference between value and loan balance is treated as unsecured and does not get paid in most cases. At the end of your chapter 13 bankruptcy case, it is wiped out through the discharge together with your other debt. This is called cram down, because you are cramming down your debt to the value of your vehicle.
There are two types of debt in bankruptcy: secured and unsecured. Most home and car loans are secured by the property, while credit cards and medical bills are unsecured. The “security interest” gives the creditor the right to repossess the property. However, filing bankruptcy creates an “automatic stay” where the creditor has to immediately stop all collection efforts, including repossession. So the creditor cannot repossess the car without permission of the bankruptcy court.
One important factor to consider is the value of the car compared to the balance owed on the loan. Many people are “upside-down” on both car and home loans–the balance owed is more than the property is worth. Another factor to consider is the condition of the car. Will it need major repairs before the loan is paid in full? If it is not worth to keep the car, you might consider surrendering the vehicle. Often, clients are concerned about getting qualified for a new car loan. Our office is working together with a car creditor whose financing partner is specialized in helping people who are in bankruptcy. Many clients qualify for a car loan after filing for bankruptcy.
It’s important to understand how vehicle repossession works when making your decision. If you don’t file bankruptcy and the creditor repossesses your vehicle, he usually sells it at auction for significantly less than the balance due on the loan. The creditor can then sue you for the difference. The only way to avoid the “deficiency judgment” is bankruptcy. In most bankruptcy cases, all the creditor will get is the return of the vehicle.
But if you reaffirm the debt, and the vehicle is later repossessed, you have no protection from the deficiency judgment.
Your bankruptcy attorney may be your best source of advice to help you decide whether or not to reaffirm your car loan and keep the car or include it in the bankruptcy and voluntarily surrender it.