Keeping a vehicle and its debt is sometimes not the best option. Chapter 7 and Chapter 13 can both give you a safe way out.
The last two blog posts have been about ways of dealing with your vehicle loan that enable you to keep the vehicle. Chapter 7 “straight bankruptcy” usually allows you to enter into a “reaffirmation agreement,” making you continue to be liable on your vehicle loan in return for being able to keep the vehicle. Chapter 13 “adjustment of debts” can give you more time to catch up if you’re behind and, if you qualify for “cramdown,” may reduce your monthly payments and reduce the total amount you would pay for your vehicle.
But it’s very important to recognize that bankruptcy also gives you an extraordinary opportunity to get out of your vehicle contract and its debt. Even if at first you really believe that you should keep your vehicle, it’s often worth reconsidering this.
Your Opportunity to Escape the Debt on the Vehicle Loan or Lease
Sometimes a bad vehicle purchase or lease is one of the main things dragging you down financially. The Chapter 7 or Chapter 13 options give you a unique opportunity to undo the deal.
You may regret having made the purchase or lease. Maybe you were talked into it by a pushy salesperson. You may have been surprised when you qualified for the credit and figured that if they thought you could afford it, you should grab the opportunity. You may have had second thoughts about being able to afford the car or truck from the beginning. Bankruptcy is your chance to get out from under the pressure of the payments.
Or maybe instead the purchase really did make sense at the time but doesn’t so much anymore. The vehicle may have turned out to be untrustworthy and not a good value. Your financial situation may have changed so you can no longer afford its monthly payments and other costs. Because of the vehicle’s fast depreciation, you may also owe way more than it’s worth. You wish you could just get out of the obligation.
The “Deficiency Balance”
You may not realize how difficult it is to just get out of a car or truck purchase or lease. You probably know that you can’t just take the vehicle back, give them the key, and call it good. You know it’ll cost you something. What you may not know is how much it’ll cost you.
Usually when you surrender your vehicle to the creditor you are left owing money—the “deficiency balance”—the difference between what you owe on the contract and what your creditor would get for your vehicle as a credit on your account. Returned and repossessed vehicles are usually sold at auto auctions, where the purchasers are mostly used car dealers. They need to make a profit when re-selling the vehicle so they aren’t willing or able to pay much for it. Plus the potential buyers don’t have much opportunity or desire to check out the condition of the vehicle. Since it’s surrendered or repossessed, you can understand that they assume it hasn’t been particularly well cared for. So the amount your vehicle is sold for and the amount credited to your account is often pathetically small.
On the other side of the ledger, the amount you owe is often much more than you expected. Your contract almost always allows the lender or lessor to tack onto your account ALL kinds of s additional costs. All of its costs of surrender or repossession, and of the re-sale process are piled on, item after item, each one adding to the amount you owe.
In the end the amount you still owe after giving back your vehicle–the “deficiency balance”—is often shockingly high.
You Will Be Sued
Most of the time your lender/lessor will waste little time going to court to make you pay off that deficiency balance. It no longer has any collateral backing up the debt. It knows that paying this debt is not likely your highest priority. Sometimes the law gives it a relatively short time to sue or lose out on the chance to make you liable on the remaining debt. You will be forced to deal with the debt one way or the other.
Almost always, Chapter 7 “straight bankruptcy” gives you the ability to “discharge”—permanently get rid of that debt—without paying anything.
The vast majority of the time you don’t lose any of your assets to your creditors when you file a Chapter 7 case. That’s because everything you own is “exempt”—protected from the bankruptcy trustee and your creditors. So you keep what you own and nothing goes to your creditors, including to your vehicle loan lender or lessor.
The deficiency balance is discharged virtually always. The very rare exceptions are if you somehow purposely cheated this creditor by intentionally lying on the credit application, or through some other kind of direct misrepresentation. Even then the creditor would have to formally accuse you of this within about 3 months after your Chapter 7 case was filed or else the debt would be forever discharged anyway.
Bottom line: a Chapter 7 case would almost always get rid of whatever you owe on your surrendered car or truck. Filing the case would stop any collection efforts or lawsuit, and within 3 or 4 months the debt would be gone.
The Chapter 13 “adjustment of debts” isn’t as quick but in the end should have the same result of giving you the opportunity to give your vehicle back and discharge the remaining debt.
Because Chapter 13 takes much longer—usually 3 to 5 years—you would be filing one for benefits not related to your vehicle. But it’s good to know what does happen to your deficiency balance under this option.
Filing a Chapter 13 case would stop any collection efforts and lawsuit the same as a Chapter 7 filing. Then the debt would be lumped in with the rest of your “general unsecured” debts—those at the “bottom of the barrel” that are generally paid only as much as you can afford to pay after paying your other more important debts.
What’s important to realize is that in most cases the deficiency balance does NOT add to what you would pay under your Chapter 13 payment plan. You may think Chapter 13 doesn’t make sense as far as what you continue owing on your vehicle because you’re paying something on that debt instead of paying nothing in a Chapter 7 case.
True, your remaining vehicle debt itself is better handled most of the time under Chapter 7. But if you have other reasons to be doing a Chapter 13 case, don’t sweat about the deficiency balance getting paid something instead of nothing. That’s because usually you end up having to pay a certain amount to ALL of your “general unsecured” creditors, and having the deficiency balance debt usually does not increase that amount. What your former vehicle lender/lessor receives just subtracts from what the other “general unsecured” creditors receive, leaving you paying the same—whatever you can afford to pay over the life of your Chapter 13 payment plan.
Then at the end of your successful Chapter 13 case, regardless how much your deficiency balance was paid or not, the remaining amount is forever discharged.