Over the past several months, we have been reading that consumer spending is skyrocketing in two areas: spending on new automobiles and student loans. Until recently, the average age of the vehicles on the road was 11 years, so naturally, many people are now replacing those 11-year-old cars with newer vehicles that they are financing. However, what happens if you miss payments on this new vehicle?
After you fall behind approximately three months, the lender will reposes the vehicle. They do this without any notice and, usually, it occurs in the hours shortly after midnight. The lender is then required to hold the car for 15 days, and to provide a letter indicating that the vehicle has been repossessed and that the owner has 15 days to pay the entire balance owed on the loan. Most lenders do not allow the owner to simply pay the delinquent payments, late charges, and repossessing fees. They normally require that the entire balance be paid, plus the late charges and the repossession fees. This is a huge amount of money that most people cannot afford to pay in a lump sum.
If the vehicle ultimately is sold, it will be sold at an auction, where only dealers can come and bid. The dealers are buying the car in “as is” condition with no warranties and, of course, they want to make a profit in the future. Therefore, the car will normally sell for approximately half of the amount that is owed. This then leaves a huge deficiency balance and the lender can then contact the former owner to collect this huge amount of money. The lender can ultimately sue, obtain a judgment, and start seizing other assets and freezing bank accounts. Therefore, if you have a car that is repossessed, and it is sold for a large deficiency, that is another debt that can be discharged in a Chapter 7 bankruptcy filing, along with charge cards, personal loans, medical bills, and utility bills.
On the other hand, if the car is repossessed, and you want to have the car returned, it may be possible to do so by filing a Chapter 13 reorganization. If you file Chapter 13, the lender must return the vehicle and you have the opportunity to file a repayment plan through the bankruptcy court that will allow you to keep this vehicle and pay it off in full. The amount owed can be stretched over a longer period of time in order to lower the payments and the interest rate can sometimes be lowered if the interest rate is greater than 6% per year. In this case, you still retain possession of the car, and pay the entire balance that is owed, but the payment is lower each month since the interest rate is reduced and the time period of repayment is extended.
Should you have questions regarding Chapter 7 or Chapter 13, and especially if your car is repossessed, please give us a call at Steidl and Steinberg.