Can I file for bankruptcy to include a repossessed car?
When I think of buying a car, I think of it as a fun experience. When you find the car that’s right for you, though, the next step is figuring out how you’re going to pay for it. If you default, though, and the car is repossessed, can you file bankruptcy for a repossessed car?
The Car Dealership Experience
I’ll be vulnerable here. Earlier this year, my car was giving me trouble. My transmission had already been replaced once under warranty, and now that I was outside factory warranty coverage, I realized that my transmission was about to go again. I decided that, before it gets worse, I will buy a new car.
I narrowed down my options to about three cars, and used some online sites to compare prices. I found one unbelievable deal, so I decided to head to the dealer one afternoon. It wasn’t a car brand dealer, but rather one of those smaller dealerships with lots of used cars parked in their lot.
When I arrived to the dealer, I was greeted by a sales rep. I had printed out the listing of the car I was interested in, and he took my right to it. The car looked to be in beautiful condition. He gave me the keys to start it up, and it sounded lovely. The interior was nice and clean. I popped open the hood to look for any major work done (I’ve dabbled with my own cars in the past, everything from simple oil changes to ‘almost’ replacing a timing belt).
So far, everything about this car looked to be on the up and up, so we took it for a test drive. Everything about the test drive went as well as it could go, so I told the salesperson that I’d like to move forward with discussing financing. This is where the experience – an experience that you may have had as well – went south.
After filling out some initial forms, and getting a quote for my trade-in, I was asked to wait to meet with the finance person, that he should be available shortly. I kid you not, I waited there for over 2 hours to meet with this guy. As I was there waiting, all the while I wondered if this was part of the sales funnel. Years ago, I went with my dad to buy a car from a dealer, and the thing happened. We had to wait for a couple of hours to meet with a finance person. All of the sitting, and waiting, and sitting and waiting, it has to be to wear you down mentally.
Finally, after over two hours of waiting, and at this dealership for over three hours since I arrived, I met the finance guy.
When I sat down, he apologized for the long wait, that he was working with another customer (although I didn’t see anyone in or out of his office). He went to work on his computer to tell me how much this car was going to cost. First was the base price, then came a warranty, then came VIN etching, then came dealer fees and DMV costs. There was an additional almost $5,000 in costs that were not anticipated. (I actually pulled the car ad from a website that offers “true” car pricing with no hidden costs or fees – yeah, right.) When he was done telling me what this car would cost me each month for the next five years, because I was so tired, I almost agreed to move ahead with the purchase. Some how, some way, I managed to tell him that I wasn’t interested, and that I was leaving.
I share that story not to share my bad car buying experience, but I think that experience is common, and people will often move forward with what could be a challenging purchase just because of the experience you had leading up to the financing part.
In dealing with people that are interested in filing for bankruptcy, a car that was repossessed is often in the conversation. You may have co-signed on a loan with a family member, friend or then-significant other. You may have tried on your own to purchase, but the high interest rate made it hard to keep up with payments. Whatever the reason, a financed car is often in the story of someone filing for bankruptcy.
Repossession and Bankruptcy
This brings us back to the original question of whether you can file for bankruptcy for a repossessed vehicle. A financed vehicle is one where you agree to take a loan out to pay for the automobile, and to provide security for the loan, the bank is allowed to put a lien against the title to the vehicle. Thus, for a financed vehicle, there are two components to it – an unsecured loan (the note), and the security agreement (the lien).
When you file for bankruptcy, the discharge operates to preclude debtors from enforcing or trying to collect debts against you, the individual. It DOES NOT stop a secured creditor, however, from enforcing their rights against the collateral (in this case, the car) unless there is a court order preventing them.
When it concerns a vehicle that has already been repossessed, the lender has already enforced their rights against the collateral, which is to repossess the property. Usually, after repossession occurs, the bank “sells” the car to itself for a nominal amount. They still have rights, however, under the note. This is where people really struggle with a repossessed vehicle.
By way of example, let’s say you bought a car and the total was $25,000.00, and the loan term was 5 years, paying $250 per month. You made payments for 12 months, but then lost your job, and stopped making payments. At the time of repossession, you still owe $22,000 on the loan. The bank sells the car internally for $500.00. Thus, you now owe them $21,500 (plus costs of sale). This is the debt that the lender will go after you for, and it is known as a deficiency claim.
A deficiency claim is an unsecured claim because the lender has already enforced its rights against the collateral, so the only rights remaining are against the borrower. Thus, a deficiency claim that exists after a vehicle has been repossessed and sold by the lender is comparable to a credit card claim, and is dischargeable in a bankruptcy case.
When you finance a vehicle purchase, the loan generally includes two parts, the note and the security agreement. The note creates your personal liability, and the security agreement gives the lender the right to the collateral (the car) if you default. Upon default, the lender will usually repossess and sell the car. After offsetting the sale price against the balance of your loan, what’s left is a deficiency claim. A deficiency claim is an unsecured claim, comparable to a credit card debt, that is dischargeable in bankruptcy. So, ultimately, if your car is repossessed, you can include the claim in a bankruptcy.
If you or someone you know is dealing with a deficiency claim from a repossession and would like to discuss bankruptcy, feel free to contact the Law Office of Richard Kistnen at (718) 738-2324, or email rkistnen@LORK.nyc. If you’re interested in filing for bankruptcy on your own, and want some guidance, then you may want to check out the Chapter 7 Bankruptcy Webinar that I will be hosting!