How Bankruptcy Can Solve Your “Too Expensive Car” Problem
Next to home mortgages, motor vehicle loans are often your most expensive purchase. According to USA Today, the average transaction cost of a new car or truck sold in the U.S. was around $33,500. Lenders are now extending vehicle purchase loans to 6 years or longer, and when interest rates are factored in, you can easily find yourself responsible for $40,000, $50,000 or more.
Unlike real estate purchases, motor vehicles are depreciating assets. If you finance your car or truck over 4 to 6 years, there is a good chance that you will owe more on your vehicle until year 3 or 4 of your contract. This means that in the event of a financial crises such as an illness or job layoff, you won’t be able to eliminate your financial obligations by selling your vehicle.
If you “roll over” your loan into a new loan for a less expensive car, you’ll just delay your day of reckoning because you will end up owing far more on the less expensive car than it will ever be worth.
Further, your installment payment is not your only vehicle expense. Insurance costs can rise quickly and unexpectedly if you or a family member has an accident. Routine maintenance and service such as new tires and brakes can add to your cost of ownership.
In sum, an unexpected job loss or change, illness, insurance claims or any number of other factors could turn that shiny new car into a major financial headache.
Bankruptcy and Car Loans
Personal bankruptcy offers a number of options to address this “too expensive car” problem. The easiest choice would be to use the power of bankruptcy to cancel contracts and surrender your vehicle back to the lender. In a Chapter 7, any deficiency balance will be discharged as an unsecured debt, and in a Chapter 13, any deficiency balance will be paid as an unsecured debt, often at pennies on the dollar – if the lender even bothers to file a proof of claim.
Another option would be to use the cram down provision in the Bankruptcy Code to restructure your vehicle installment loan as part of a Chapter 13 bankruptcy. Applicable if your loan originated more than 910 days (about 2 ½ years) prior to filing, a Chapter 13 cram down allows you to modify the interest rate (usually) and to reduce your outstanding principal balance to equal the fair market value of your vehicle.
If you owe substantially more than the value of your vehicle, this cram down can save you thousands of dollars.
Even if you cannot cram down your loan, you can still reduce your monthly payment by including the unpaid balance in your Chapter 13 plan and setting a payment to the vehicle lender that fits your budget. You are not obligated to pay the contract rate to the vehicle lender in a Chapter 13.
Obviously the decision to file a Chapter 7 or Chapter 13 should be made in consultation with an experienced bankruptcy lawyer and with full knowledge about how bankruptcy will impact you.
However, if you are having or foresee problems with payments due one or more vehicle lenders, you should certainly learn about and consider your bankruptcy options.