Mistakes to Avoid–Don’t Surrender Your Vehicle or Get It Repossessed
July 22, 2013
What if you could pay less per month, lower the interest, and pay less until you owned your vehicle free and clear?
Bankruptcy as A Game-Changer
Bankruptcy is full of surprises, mostly pleasant ones. The most important reason to see a bankruptcy attorney sooner rather than later is that you will then more likely be able to take advantage of those pleasant surprises.
Vehicle Surrender or Repossession Almost Never Good
Whether or not bankruptcy can save your car or truck, surrendering it without having a well-informed plan about what you are going to do next is almost never a good idea. And putting yourself into a situation in which it gets repossessed can really hurt, both immediately and long-term.
Almost always, if you surrender your vehicle, you will owe money on the debt after your creditor sells the vehicle and credits your account the sale’s proceeds. And you will usually owe much more than you think you will. Sometimes shockingly more.
That’s partly because the vehicle will likely be sold for less than it is worth. The creditor is not trying to be unfair about this, but it’s usually efficient for it to sell repossessed vehicles at an auto auction, where most of the purchasers tend to be used car dealers who can only pay enough for the vehicle to be able to make a profit when they re-sell it. On top of a low selling price, your creditor will tack onto your balance all of its repossession and sale costs, which can really add up. The end result is that you will likely owe a lot of money, and will likely get sued to make you pay it. Once wage and bank account garnishments start, you will probably be forced to consider bankruptcy. As you will see, it’s much better to consider it BEFORE surrendering or losing your vehicle to repossession.
Escaping Your Catch-22
If you need your vehicle, but just can’t afford the monthly payments, you could very sensibly believe you don’t have much choice but to let the vehicle go. You know your contract requires you to make the payments or lose the vehicle. You may have been struggling for months to keep the payments current, putting up with late fees and constant notices or phone calls from the creditor. You might even be thinking about how you can do without this vehicle, especially if you have already fallen behind.
How Chapter 7 Can Help
The main way Chapter 7 “straight bankruptcy” can help is by discharging (legally writing off) all or most of your other debts so that you can more easily afford your vehicle payment. If you are a month or two behind on your payments, filing the bankruptcy case would put an immediate stop to any approaching repossession. You would then have a month or two, sometimes more, to catch up. Chapter 7 allows you to focus your financial energies on your most important debts. If for you that’s your vehicle loan, and if getting rid of your debts would help enough, filing Chapter 7 BEFORE losing your vehicle could well be your best move. Also, if you owe a lot more on the vehicle than it is worth (maybe you rolled in the balance due on an old car loan into the new car loan when you traded in you old vehicle), your bankruptcy attorney may be able to find a new lender to finance the vehicle at its current value (it’s called “redemption”) and you can get rid of the old loan in the bankruptcy. I have done this several times for my clients.
How Chapter 13 Can Help
But admittedly that may not be enough help. You may be able to afford the monthly payments if you had no longer had any other debts, but have no way to make up the missed payments that quickly. Or you might have other important debts that you’re behind on, like taxes or child support, and can’t see hanging on to your vehicle in the midst of all these financial pressures. And you might not even be able to quite afford the monthly vehicle payments even with no other debt obligations.
Chapter 13 may be able to cut through ALL of these problems.
First, Chapter 13 can give up to 5 years to catch up on the back payments. Under some circumstances, you might never even need to catch up on them.
Second, Chapter 13 often allows you to pay your vehicle payment first, before other important debts like taxes and support.
And third, if your vehicle loan was entered into more than 910 days before your Chapter 13 case is filed (that’s about two and a half years), you can do a “cramdown” on the vehicle loan: lower your monthly payment, and likely pay less overall for the vehicle before owning it free and clear. How much the monthly payment can be reduced depends on a bunch of factors, but especially if your vehicle is worth significantly less than you owe on it, the payment can often be made much lower.
And if you qualify for a “cramdown” and you’re behind on your vehicle loan at the time you file your Chapter 13 case, you don’t ever have to catch up on those missed payments. They are just part of the re-written, new “crammed down” obligation.
Take Charge and Choose Your Best Option
So you can see that you might NOT want to surrender a vehicle or allow it to be repossessed, if instead you could keep that vehicle through either Chapter 7 or 13. That may be especially true if you qualified for a lower monthly payment under the Chapter 13 “cramdown.”
Often, having a reliable vehicle is essential to achieving a successful re-start of your financial life. Before you lose that essential part of your financial plan, come see us to find out your options.