Most people who file any Chapter of bankruptcy
have a car, or some other vehicle. Or more than one.
Which, more often than not, have a lien on them, meaning that my client still owes money on the car.
Auto lending was one of the few types of credit that did not dry up during the financial crisis. It now stands at more than $1.1 trillion.
One of the car bankruptcy merry go rounds is, insurance is expensive, especially for bad drivers, who usually also have bad credit. So they fall behind on the car payment, the car is in an accident, no insurance, car gone, car debt still there.
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With mortgages, people could turn in the keys to their house and walk away. But with auto debt, there is increasingly no exit. Repossession, rather than being the end, is just the beginning.
“Low-income earners are shackled to this debt,” said Shanna Tallarico, a consumer lawyer with the New York Legal Assistance Group.
There are no national tallies of how many borrowers face the collection lawsuits, known within the industry as deficiency cases. But state records show that the courts are becoming flooded with such lawsuits.
Car Debt in Bankruptcy
Most of the people in the article can file Chapter 7 and get rid of car debt that is a deficiency on a repossessed, or otherwise long gone, car.
Now, if you want to keep a car after you file Chapter 7 bankruptcy, you still have to pay for it.
The lender will happily keep taking your money, but is not likely to reduce the balance to what the vehicle is worth.
You have the right to redeem a vehicle in a Chapter 7 bankruptcy case, but you have to pay the value of the car in a lump sum, that is, not monthly payments over time.
Had a client just do that for a car with 293,000 miles on it, so, it was worth only $500. The credit union was happy to take the $500 rather than pay to have it repossessed, stored, then sold at auction with them getting whatever might be left. Maybe nothing.
Of course, most Chapter 7 clients do not have access to lump sums of money.
If purchased within 910 days of filing bankruptcy, you have to pay the balance in a Chapter 13 bankruptcy.
Car debt for a vehicle purchased more than 910 days before filing can be crammed down. That is, your
Chapter 13 plan can pay the value of the vehicle, plus interest, and any balance goes in with the rest of the unsecured debt.
In either bankruptcy Chapter you can, give the vehicle back and pay nothing.
Which should be done with lots of the sub-prime vehicles out there.