Many New Yorkers have difficulty with auto loans. In some cases, the car’s value has depreciated significantly, making resale difficult, and in others the car was over-financed to begin with, which is more common when the dealership plays the role of lender as well. Unlike the underwater mortgage, the bankruptcy code offers solutions that are more practical than those for underwater homeowners, but they differ based on which chapter you choose to file in. There are two doctrines in this scenario: redemption in Chapter 7, and cramdown in Chapter 13.
Redemption in Chapter 7. Chapter 7 is the most common one people use when filing bankruptcy. It’s meant to discharge excess credit card debt and any other unsecured debts. One option it offers auto-owner debtors is the right to redeem their vehicles by paying the market value of the car to the lender in a single lump-sum payment. The petitioner benefits from this because he or she does not pay the total principal value of the vehicle when it was purchased, or any remaining interest on the loan. The problem, though, is that unless the car’s market value is very low, most petitioners will not have the cash on hand to redeem the vehicle. But they may be able to borrow money from a redemption lender to purchase their vehicles.
Nevertheless, redemption gives debtors leverage in negotiations with the lenders. The debtor can offer the option of a reduced monthly payment as an alternative to redemption, and the lender may be better off with the former.
Cramdown in Chapter 13. If debtors who bought their vehicles within the last 910 days (two-and-a-half years) file bankruptcy, then they will have to repay the full balance of the loan according to the Chapter 13 repayment plan the parties ultimately arrive at. This means, there’s a minimum amount of time debtors must own their vehicles if they wish to take advantage of the Chapter 13 cramdown. For cars older than 910 days, the bankruptcy court will adjust the monthly payments to reflect the car’s current market value. The court is “cramming down” the loan because it’s reducing the total interest and principal owed on the loan, and unlike houses (in most years), cars do not appreciate in value, meaning the lender will be forced to accept the loss. Like redemption, the cramdown power gives automobile owners the option to leverage a deal with their creditors if they so choose.
The vast majority of Americans need their automobiles to go to work or buy groceries, and losing a job or suffering a medical misfortune makes the need for an automobile even more acute. In these circumstances, a high auto loan is not something that debtors should tolerate if they do not wish to.
For more questions about auto loans, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy attorney Brooklyn NY Bruce Weiner for a free initial consultation.