Daily Archives: February 2, 2016

What Happens To My Car Loan If I File Bankruptcy?

Car loans are going to be in a lot What Happens To My Car Loan If I File Bankruptcy?more bankruptcy cases, as the

vehicle loan bubble bursts.

As Tommy Behnke writes for the Mises Dialy web site in the linked to article:

In order to generate more vehicle purchases, these companies have incentivized consumers with hot, hard-to-resist offers, similar to the infamous “liar loans” and “no-money down” loans of the 2008 recession. Dealerships have increased spending on sales incentives by 14 percent since last year alone, and the banners in their shops now proudly proclaim their acceptance of any and all loan applications — “No Credit. Bad Credit. All Credit. 100 Percent Approval.” As a result, auto loans have increased by nearly $80 billion since 2009, many of which have been given to individuals with far-from-stellar credit scores. Today, almost 20 percent of all auto loans are given to individuals with credit scores below 620:

Yes, it is the mortgage loan bubble all over again.  And the student loan bubble.

A bubble is a bubble is a bubble, and the only way a bubble resolves is, when it bursts.

Not only are more auto loans being originated, but they are also increasing in duration. The average loan term is now sixty-seven months (that’s 5.58 years) for new cars and sixty-two (that’s 5.16 years) months for used cars. Both are record numbers.

So, in a Chapter 7 bankruptcy, you have 3 options on a car loan.

First, you can surrender it, give it back, and pay nothing.

You can keep making the payments and keep the car, if the lender agrees.  Which they virtually always do.  They are money companies, not car companies.

Depending on the lender, you may keep and pay, or, reaffirm, which makes you personally liable for the debt.

So, if the car is repossessed in the future, you are stuck for any deficiency.

And with these long car loans, there will be a deficiency that was NOT discharged in your bankruptcy.

Third, you have the right to redeem the property, which means you pay the fair market value, what the car is worth, and the rest of the debt is discharged with your other unsecured debt.

As a practical matter, you will have to borrow the money to do this, but there are a couple of companies that do it.

I have a client now with a vehicle worth about $18,000, but she owes $25,000 on it.

If she can borrow the $18,000, she gets rid of the other $7,000 and keeps the car.

Next post will deal with car loan options in Chapter 13 bankruptcy.

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