20 Jun New Bankruptcy Law Hurts Car Lenders And Debtors Too
One of the changes in bankruptcy law that was in the 2005 Bankruptcy Act (“BAPCPA”) was to prevent debtors filing Chapter 13 from reducing the amount paid to car lenders on car loans taken out within 910 days of filing for bankruptcy. Because of this, more debtors are unable to keep those cars, and the cars are being turned in to lenders to be sold – usually for much less than the value that debtors would have paid in pre-BAPCPA Chapter 13 bankruptcy.
Prior to October 16, 2005, debtors could file Chapter 13 and pay lenders the fair market value of the car, usually based upon retail book value. This was more than the lender would get if the car was repossessed and sold, but debtors were given a break by not having to pay more than the car was worth. Anything over the value could be written down if the debtor couldn’t afford to pay more.
I read the article “Foreclosure On Wheels” posted by Kent Anderson on June 18, 2008 on the Bankruptcy Law Network describing how many cars are being turned back into car lenders now and thought “Well, what did they expect?”.
Bankruptcy used to allow people to keep the car and pay less, but only if they couldn’t afford more. The old law required debtors to pay what they could afford for a minimum of three years so only those who couldn’t pay more were able to reduce their payments in Chapter 13 bankruptcy.
Chapter 7 bankruptcy didn’t reduce the debt and debtors who wanted to keep their cars, paid what was owed. This seemed like a fair compromise to me, protecting debtor’s cars (and jobs) but paying the creditor more than they would have recouped if they had sold the car after repossession.
Within my adult life, lenders moved away from the long standing practice of protecting themselves from loss by making loans secured by collateral that is worth more than the loan and requiring a down payment. The lenders figured out that they could make more loans if they weren’t so strict so they began financing cars for 100% of the sales price, soon followed by loans that added to the loan the outstanding balances on cars being “traded in.” People were in loans for cars that were $10,000 or more over the value of the car they were driving!While the sellers and lenders were able to make more sales this way, more buyers ended up with car payments they couldn’t afford.
By changing the bankruptcy laws to require 100% repayment of these car loans, many Chapter 13 bankruptcy debtors have no choice but to turn in the keys now. If they are able to make the payments to keep the car, the higher amount paid to the car lender often comes straight out of the pocket of other creditors who would have shared in a higher payout.
By Susanne Robicsek, Bankruptcy Attorney NC
See also In Love With A 1996 Saturn by Wendell Sherk MO Bankruptcy Attorney
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