How Does Bankruptcy Affect Vehicle Loans?
The number of auto loan delinquencies recently hit a twenty-year high. Over seven million borrowers are at least 90 days delinquent. Legally, most creditors may begin the repossession process after just one missed payment. So, after three missed payments, the tow truck is probably on the way.
Unfortunately, there is more bad news for people with auto loans. The Supreme Court recently removed some of the consumer protections in the Fair Debt Collection Practices Act. As a result, some moneylenders are even more aggressive than they were before.
As a result, if you are more than a month or two behind on a car loan and cannot quickly erase this delinquency, a bankruptcy attorney might need to intervene. It is relatively easy to stop repossession before it happens, especially in bankruptcy. However, it’s very difficult to undo a repossession.
Bankruptcy’s Automatic Stay
Typically, as soon as debtors file voluntary petitions, Section 362 of the Bankruptcy Code takes effect. So, debtors need not show negligence, fraud, or anything else to prevent adverse actions like:
- – Repossession,
- – Foreclosure,
- – Collection lawsuits, and
- – Wage garnishment.
Generally, the Automatic Stay remains in effect as long as the bankruptcy is pending. Therefore, debtors usually have plenty of time to make income-based catchup payments. Unless the debtor threatens the collateral (e.g. “I’m going to drive the truck off a cliff”), bankruptcy judges usually do not give creditors permission to violate the stay.
As mentioned, a wrongful repossession claim is much more complex. To prevail, the borrower must usually prove fraud, and that’s not easy to do. So, early intervention may be critical.
Property Exemption
Contrary to popular myth, debtors do not give up all their assets when they file bankruptcy. That outcome only happens in Monopoly and other board games.
Specifically, Indiana has a very large wildcard exemption which can be applied to cars, trucks, RVs, boats, and any other type of vehicle. Section 34-55-10-2(c)(2) of the Indiana Code provides up to $10,250 of equity protection.
Note that the amount of equity, and not the vehicle’s value, is what matters. Most new vehicle owners have practically no equity. Used cars may have lots of equity. But they usually have almost no financial value, especially if they need any work at all.
The cost of repair often deters the trustee from repossessing the vehicle, even if it is technically not exempt. After the trustee pays repossession, storage, repair, marketing, and other costs, there may be nothing left to distribute to creditors.
Debtor Options in Bankruptcy
Bankruptcy keeps your family car safe. Bankruptcy also gives debtors options which make the vehicle more affordable in the long run.
If the debtor is hopelessly upside-down on the note, property surrender may be an option. Generally, the debtor is not liable for the remainder of the loan. The creditor gets the vehicle, and that’s it. The debtor then starts over with a new, more affordable vehicle.
Most debtors reaffirm their vehicle loans. Since these are secured obligations, if the debtor stops paying, the creditor will repossess the collateral. Reaffirmation gives your attorney an opportunity to renegotiate the loan terms. These renegotiated terms often include a lower interest rate.
Finally, especially if the debtor filed Chapter 13, redemption may be an option. If the debtor pays the vehicle’s current fair market value, the lender must write off the remainder of the loan. So, if Miguel owes $5,000 on a vehicle that’s only worth $2,000, he can pay the fair market value, own the car free and clear, and save three grand.
Count on Experienced Lawyers
Bankruptcy may save your car in the short term and make it easier to own in the long term. For a free consultation with an experienced Chicago Chapter 7 bankruptcy attorney, contact the Bentz Holguin Law Firm, LLC. We routinely handle matters in Indiana and Illinois.
Resource:
nyfed.org/2I8A98h
/specific-issues-in-a-grey-bankruptcy/
