Bankruptcy Can Make Cars More Affordable

Car payments seem to be unavoidable. Unless you’re one of the rare people who have the luxury of being able to ride a bicycle to work, you must have a car. Everyone knows that the value of a car drops as soon as you drive it off the lot and as a result, many people who drive financed vehicles owe more to the lender than the asset is worth. Wouldn’t you love to be able to pay what you vehicle is worth right now, rather than what you owe on it? You can, and here’s how:
11 USC 722 allows a bankruptcy debtor to pay the secured portion of the debt owed on the car to satisfy the lien. “Security” for a loan the physical asset which can be exchanged to satisfy a lien. A typical security is a house or car. If you stop paying on the lien, the lender can take the house or car to satisfy the lien amount. Any value in the house or car above and beyond what is required to satisfy the lien (and associated fees) is returned to the borrower. A “Deficiency” occurs when the house or car sell for less than the lien amount. Deficiencies are unsecured debts for which a lender may sue. Deficiencies are very typical in the housing market these days.
When a debtor elects to use 11 USC 722, the court bifurcates the lender’s single claim into two claims, one secured which is equal to the fair market value of the car and one unsecured which represents the remainder. This way the borrower can discharge the unsecured portion, pay the secured portion and keep the vehicle. This is relatively easy in a Chapter 13 because the debtor can re-amortize the secured debt to be paid over the length of the Chapter 13 repayment plan, typically over five years. However, in Chapter 7 the payoff must occur immediately which is often impossible for people who’re already bankrupt.
Those in Chapter 7 generally have three options when it comes to redemption: they can use their exemptions to hold onto a sufficient amount of cash to pay off the redemption, they can have a relative or friend pay off the balance or lastly, they can find third party financing. One might thing that third party financing for someone in a bankruptcy is difficult to find, but there are actually several businesses who specialize in financing 11 USC 722 payoffs. Yes, the interest rates for these transactions are high at around 28% but since the debtor no longer has to pay the unsecured portion of the debt they can still make economic sense.
I look at various third party finance companies to see if taking a third party loan and electing to use 11 USC 722 makes sense. If you’re considering bankruptcy and want to make sure you put yourself into the best possible economic situation once the case is over, contact us at (904) 685-1200 for a free consultation.