Bankruptcy can save your vehicle various ways. Wipe out other debts. Likely pay less for it. So avoid surrendering your vehicle.
The Pleasant Surprises of Bankruptcy
Most of the time people go to see a bankruptcy attorney they are pleasantly surprised by what options are available to them. An important reason to see a bankruptcy attorney sooner rather than later is because then you will more likely be able to take advantage of those options. That’s very much true when it comes to your vehicle loan.
Surrender or Repossession Is Usually Very Expensive
Whether or not you should use bankruptcy to save your car or truck, surrendering it without having a well-informed game plan about what to do next is almost never a good idea. And worse is putting yourself into a situation that it gets repossessed.
Almost always if you surrender your vehicle or it gets repossessed you will end up owing money on the debt. After your creditor sells the vehicle and credits the sale proceeds against your account you will usually owe much more than you expect. Often shockingly more.
A big part of this is because your vehicle will likely be sold for less than it’s worth. The creditor is not necessarily trying to be unfair about this, because getting the debt paid as much as it can out of the sale proceeds—instead of chasing you for it—is in its own self-interest. But there’s a lot of hassle selling a repossessed vehicle, and the creditor wants to get money out of it quickly. So usually the most efficient way is to sell your vehicle at an auto auction. Most of the purchasers there tend to be used car dealers who don’t pay much because they need to make a profit when they re-sell your vehicle.
Besides selling at a low price for its own efficiency, your creditor will pile onto your balance all of its repossession and sale costs, including attorney and court fees when it sues you. These add-ons, along with late fees and whatever else its one-sided contract allows, can really pile up.
Between selling low and adding all these costs, the end result is that you will likely owe an amazing amount of money. And very likely you will get sued to make you pay it, often quickly if you have a job or own a home. Or you’ll get sued as soon as you get a job.
Once your wages and/or bank account starts getting garnished, you may well be forced to consider bankruptcy. So it’s usually much better to consider your bankruptcy options BEFORE a surrender or repo.
If you need your vehicle, but just can’t afford the monthly payments, it may seem that you don’t have much choice but to let the vehicle go. You know your contract requires you to make the payments or you lose the vehicle. You’ve probably been struggling for months to not fall behind, putting up with late fees and constant notices or phone calls from the creditor. You’ve been forced to consider how you can do without this vehicle.
How Chapter 7 “Straight Bankruptcy” Can Help
The main way the most common type of 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 payments. If you are a month or two behind on your payments, filing the bankruptcy case would put an immediate stop to a pending repossession. You would then have a month or two, usually, 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 a Chapter 7 case before losing your vehicle could be your best option.
How Chapter 13 “Adjustment of Debts” 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 then couldn’t also make up the missed payments within a month or two. Or you might have other important debts that you’re behind on and would still owe after a Chapter 7 bankruptcy, such as income taxes or child support, and so can’t afford your vehicle with all these continuing financial pressures. Or you might simply not be able to afford the monthly vehicle payments even without your other debt obligations.
Chapter 13 may be able to solve all of these problems:
- Chapter 13 can give up to 5 years to catch up on the back payments. You might not even need to catch up on them, ever.
- Chapter 13 often allows you to pay your vehicle payment first, even ahead of other important debts like income taxes and back child/spousal support.
- If your vehicle loan was entered into more than two and a half years ago and the vehicle is worth less than what you owe, you can do a “cramdown”: lower your monthly payment, and pay less overall for the vehicle.
How much the monthly payment can be reduced through “cramdown” depends on a bunch of factors. But especially if your vehicle is worth a lot less less than you owe on it, the payment can usually be made much lower. And you can often save thousands of dollars on the loan before owning your vehicle free and clear.
Choose Your Best Option and Keep Your Vehicle
So avoid surrendering your vehicle, or letting it be repossessed. Keep it through either Chapter 7 or 13. Often the sooner you act the better, especially if you qualify for a lower monthly payment under Chapter 13 “cramdown.”
Having a reliable vehicle is often essential to achieving a successful re-start of your financial life. It’s only sensible to get advice about your options before you lose this key to your return to financial health.