Foreclosure on Wheels
By Kent Anderson, Oregon Bankruptcy Attorney on Jun 18, 2008 in Debts Not Dischargeable
Analysts are calling it a foreclosure crisis on wheels. A large proportion of the roughly fifty million cars and light trucks financed in America in the last three years are under water, and people are increasingly walking away from these unaffordable loans, cheerfully surrendering vehicles worth thousand of dollars less than the balance owed on them.
While underwater car loans are nothing new, the absolute numbers, dollar amounts of deficits, and numbers of people unable to continue making payments have all skyrocketed in the last year.
Two sets of independent factors – the collapse of the housing bubble and the huge recent increases in gasoline prices – intersect to produce an acute, precipitous decline in American auto markets. During the past decade, many Americans used overextended credit to finance lifestyles that included multiple gas-guzzling vehicles, and relied on home equity as a cushion, entering into questionable subprime home refinances whose affordability (assuming the contract was affordable at all) depended on rapidly rising real estate prices. These people are now stuck with multiple debt obligations they are unable to meet.
In the past, downsizing the cars has been an obvious and commonly-used solution to individual bankruptcy situations. With a growing trend towards zero-down or even negative financing and longer repayment periods on new vehicles, lenders were seeing greater losses on vehicles surrendered in bankruptcy. The 2005 bankruptcy reform act responded to this by allowing lenders to collect the undersecured portion of an underwater auto loan made within 910 days of bankruptcy . This benefits the auto lender only when the debtor keeps the car and continues to make payments on the loan.
Financial institutions holding large numbers of auto loans have cause for concern. Credit Unions, most of which were not heavily involved in the mortgage market and therefore have so far escaped the worst effects of its collapse, are seeing mounting losses because of defaulted auto loans.
As gasoline prices rise, fewer and fewer people are interested in buying large fuel-inefficient vehicles at any price. The market for light trucks is strongly tied to the building trade, and is correspondingly depressed. The resale value of SUVs has plummeted, and both new and used oversized vehicles clog sales lots throughout America. Unlike houses, most of which retain their basic intrinsic usefulness regardless of present cash value, these gas hogs are true dinosaurs.
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