Dealing With Vehicles in Bankruptcy

There are 6 alternative ways to deal with a car loan when you are declaring bankruptcy:

Alternative 1: You can let your vehicle be repossessed

Alternative 2: You can surrender the vehicle.

Alternative 3: You can keep the vehicle and reaffirm the loan.

Alternative 4: You may be able to keep the vehicle and “Pay and Retain”.

Alternative 5: You may be able to keep the vehicle and Redeem.

Alternative 6: Get a Ride Through Order.

Alternative one (letting your vehicle be repossessed) is certainly one approach. You simply stop paying the lender for the vehicle. Eventually, the lender finds your vehicle and repossesses it. Typically, the value of the vehicle is less than the amount you owe. The difference is called the Deficiency. You then receive a bill from the lender for the amount of the deficiency plus the costs of the repossession. If you file for bankruptcy you will not owe this amount.

But you probably need a vehicle. You may be able to purchase a replacement vehicle while you are in bankruptcy. There are companies out there that may provide financing. You might want to check them out. One is Fresh Start Loan Corporation. Another one is called Friendly Finance Corporation.

Alternative 2 is just like Alternative 1 except instead of waiting for the lender to repossess the vehicle you either drive it over to the lender’s office or you tell them to come and get it. The discussion about the deficiency is equally applicable here.

Alternative 3 or Reaffirmation means that you make a new promise to pay the vehicle loan. In other words, the bankruptcy discharges the original loan but you make a new promise to pay the loan. If you do this you remain personally liable for the vehicle loan even after bankruptcy. If, say 6 months after the bankruptcy you default then the lender will probably sue you. You won’t be able to discharge that debt for 8 years after the original bankruptcy filing. This is the alternative that your lender will prefer. After you file for bankruptcy your lender will probably offer you this “opportunity”. Reaffirmation papers must be filed with the court. Here’s a link to the Southern District of California form.

There is something that is tricky about reaffirmation.  In part D of the Reaffirmation Agreement form, you are asked to state whether or not there is a presumption of undue hardship.  There is also a place in part C for your attorney to state whether or not there is a presumption of undue hardship.

There is a presumption of undue hardship if your income and expenses as set forth on page 1 of the Reaffirmation Agreement show that you won’t have enough money every month to make the payments.  If there is a presumption of undue hardship the court will require a hearing before the reaffirmation goes into effect.

The problem is that  In order to meet the income ceiling test required for chapter 7 you had to show in your petition that after you filed bankruptcy you would be operating at a monthly budget deficit.  So if your bankruptcy petition says that after filing bankruptcy you’d be operating at a monthly deficit how can you show that you can afford the monthly payments of the vehicle?

The solution is that you explain how you can now afford to pay for the vehicle and your attorney certifies that, in your attorney’s opinion, you can afford it.  A typical explanation might be “my expenses have reduced since I filed bankruptcy so now I can afford to pay for the vehicle”.  That way the court will most likely approve the reaffirmation agreement without a court hearing.

Alternative 4 “pay and retain” means that you continue to make your monthly payments on the car loan but you do not sign a reaffirmation agreement. This is better for you because if you default all the lender can do is repossess the vehicle. The lender can not sue you. (All this is assuming you are declaring bankruptcy). This used to be the way I advised my clients to deal with these car loans (unless a redemption made better sense). But there is a problem with this approach. Buried in your vehicle loan papers is a provision that says something like this: “If the borrower files for bankruptcy he is considered to be in default.” This is sometimes called an Ipso Facto Clause. Many vehicle lenders, especially credit unions, are now enforcing this Ipso Facto Clause. They threaten that if you do not sign the reaffirmation agreement they will repossess the vehicle – even if you are current on the payments. If the lender makes this kind of threat then you will probably have to sign the reaffirmation agreement if you want to keep the vehicle.

I usually write the vehicle lender a letter like this:

“Thank you for sending the reaffirmation agreement. Would you allow my client to “pay and retain”? In other words, will you allow my client to keep the vehicle provided my client remains current on the monthly payments?

Thank you in advance. I look forward to hearing from you.”

Many times the lender will allow the client to pay and retain.

Alternative 5 Redemption, is often used when you owe more on the vehicle than it’s worth but you want to keep it. A redemption allows you to pay off the loan for the fair market value of the vehicle. I may even be able to get you a new loan to pay the lender the fair market value of the vehicle. One company that helps arrange the financing for these redemptions is 722 Redemption Funding. You might want to take a look at their web site.

Alternative 6 Try and get the bankruptcy judge to issue a Ride Through Order. With this approach, we tell the court in your bankruptcy petition that you intend on reaffirming. The vehicle lender sends a reaffirmation agreement. When you complete the reaffirmation agreement you truthfully list your expenses as higher than your income. The court will usually set a hearing on the question of whether the court should or should not approve the reaffirmation agreement. In many cases, the judge will not approve the reaffirmation agreement if it looks like you can’t afford it. Some judges will then issue a Ride Through Order. The Ride Through Order states that under the case of Moustafi, 371 B.R. 434 (Bankr. D. Az. 2007) the lender may not repossess your vehicle so long as you remain current on your payments. This is a tricky procedure and difficult to explain to the client but we often use this tactic.

As your San Diego Bankruptcy attorney, I welcome the opportunity to discuss these alternatives with you and advise you of what makes the best sense for your particular situation.