Financial stress can result in difficulty making car payments. There are several options for the car owner confronting financial difficulty, including loan extension or modification, sale of the vehicle, repossession of the vehicle, surrendering the vehicle, a “cramdown” of the car loan in Chapter 13 bankruptcy, or reaffirmation or redemption of the loan in Chapter 7 bankruptcy.
Auto loans are secured debt, with the car itself used as collateral for the loan. Lenders can repossess vehicles as loan collateral without a court order, soon after default on a loan. The loan is in default the next day after a missed payment, and the car can show up in the collection queue as soon as ten days after default.
Time is of the essence, for both lender and borrower. For the lender, it’s the rapid decline in the value of the car, and for the borrower, it’s the lender’s haste that forces timely action to avoid or address a possible default.
Failure to maintain insurance on a vehicle can also cause the loan to go into default, even if the payments are current.
If you’re going to be late on a payment, call the lender ahead of the due date and try to arrange an extension, change the payment date, or get the loan rewritten for lower payments over a longer term (resulting in more interest paid). If you’ve missed the deadline, try to catch up on payments as soon as possible. Hiding the vehicle or otherwise thwarting repossession will only add more to your liability when the car is repossessed, or a judgment is obtained. Buyers are responsible for collection, towing, storage and auction fees if a car is repossessed.
When a repossessed car is sold, the proceeds may not cover the outstanding loan balance and fees. In this case, a deficiency will exist for which the holder of the loan will be held responsible. (A deficiency is the difference between the outstanding loan balance and the proceeds collected by sale or liquidation of the asset.) This deficiency is unsecured debt, and can be discharged in a bankruptcy.
Another option is a “cramdown” of the loan in Chapter 13 bankruptcy. The loan balance can be marked down to the market value of the vehicle, and pooled with other debt in the debtor’s Chapter 13 repayment plan. The total paid may be less than the balance on the loan, and on completion of the payment plan under Chapter 13, the buyer will own the car free and clear.
In the event of a Chapter 7 bankruptcy, the option to reaffirm the loan exists, if the car payment is judged to be affordable by the court. In the event of a default after reaffirmation, the buyer is responsible for the debt, including a deficiency in the event of repossession and sale. If a vehicle is surrendered (that is, returned to the dealer) a deficiency will be wiped by the Chapter 7 filing.
722 Redemption
Another option in Chapter 7 for the car owner is a “722 Redemption,” in which the car loan is marked down to the market value of the vehicle and the dealer paid the reduced amount arbitrated by the bankruptcy court. The lien is released with no deficiency. It can be difficult for an owner to come up with a lump sum, but there are lenders who specialize in making loans in these circumstances. The loan is not discharged in the bankruptcy, and can enable the owner to keep the car.
Todd Murphy Law is experienced in dealing with issues related to auto loans in financial difficulty. Get help choosing your best course of action. Call Todd Murphy Law today for a free evaluation.
