Chapter 7 Bankruptcy: What Happens With Car Financing?

When a debtor files Chapter 7 bankruptcy in California, the debtor will likely be requested to reaffirm their car financing debt.  Most consumer credit agreements for cars include a provision that defines filing bankruptcy as an act of default.  If the debtor is current on payments, and the only default is filing bankruptcy, this is known as “ipso facto” default.  Unlike some states, California does not have a law that prohibits a creditor from enforcing ipso facto default in a consumer credit agreement.  So a creditor, like Ford Motor Company, can enforce an ipso facto default in California.  In other words, the creditor can repo the car if the debtor files a chapter 7 bankruptcy and does not agree to complete and sign a Reaffirmation Agreement.

If the debtor signs a reaffirmation agreement that is approved by the bankruptcy court, the "ipso facto" default dissolves.  To execute a Reaffirmation Agreement in Chapter 7 means the debtor is agreeing that he/she will owe an outstanding balance on the car.  The order that discharges the debtor's other debts will not apply to the reaffirmed car loan debt.

A debtor does not have to reaffirm the debt.  Sometimes its better to not reaffirm debt, especially when the financing terms are very expensive compared to the present value of the car.  For instance, if a car is financed for $15,000 at 5% interest with 4 years of payments remaining, and the car is only worth $8,000, it would be in the debtor's interest to not reaffirm the debt.

If the debtor refuses to timely enter into a reaffirmation agreement, then the automatic stay terminates on day 31, as per 362(h).  That means that the creditor would have recourse to repo the car anytime thereafter.  

Sometimes, the bankruptcy Judges in Fresno will not let a debtor reaffirm a car loan debt.   A judge can find undue hardship to the debtor if the debtor would take on the old car loan debt. If this happens, the car could be repo'd by the car lender, as explained above.  Just because the lender has the legal right to repo a car, does not mean that it will.  Many times a car lender will hold off on exercising this right so long as the debtor is current with payments.  The choice of whether a car gets repo'd in this scenario, is entirely up to the lender.  The debtor has no legal right to prevent a repo.


Picture by Moyan Brenn on Flickr

Should You File Bankruptcy? Three Steps To Consider

There is a right way and a wrong way to deal with debt.  The right way requires courage to take action.  This article provides an effective plan to determine whether filing bankruptcy is the right answer.   
  

1. How Many Months to Become Debt Free?

The answer to this question is essential and requires work.  We need to know household income and household expenses.  The left over money is used to pay credit card and medical bills.  Bankruptcy may be the solution if it will take too many months to become debt free.     

To help figure out household budget, here is a link to free budget forms from Dave Ramsey.  I am a huge fan of Dave Ramsey.  He is a great source to help get out of financial trouble.  He was forced to file bankruptcy and has since made a good living helping others deal with debt.  I offer his financial management course to all my bankruptcy clients.  

Now, we need to add up credit card and medical bills (unsecured debt).  Having trouble figuring out these types of bills?  These types of bills will be listed in a credit report.  Get a free credit report from www.annualcreditreport.com.  Ignore the offers to pay money for your credit score.   

Finally, we have the numbers to determine how long it will take to pay off unsecured debt.  Divide the total of all unsecured debt by the money left over from the monthly budget.  The answer represents the number of months it will take to pay off bills. Will it take more than three years to become debt free?  Tinker with the expenses that can be changed to see if you can become debt in a reasonable amount of time.   

2. Am I Being Forced to Take Action?

Are bills forcing you to take some action that will require an extreme financial consequence? Being sued by a creditor like Midland Funding?  Are your wages being garnished by a creditor?  Are you considering withdrawing money from a 401k to pay creditors? 

3.  Consult A Bankruptcy Attorney!

If it is going to take too long to become debt free, or if you are being forced to take some action that will have a financial consequence, go talk to a professional.  

I, like most Fresno personal bankruptcy attorneys, do not charge for the first consultation.  If you contact an attorney that wants to charge right away, try someone else.  Remember, your chief goal is to determine whether you should file bankruptcy.  It's also important to feel comfortable with the attorney.  Trust your instincts.  There are a lot of attorneys that file Chapter 7 bankruptcies in Central California. 

The first meeting can last anywhere from 30 minutes to 90 minutes.  Make sure you are meeting with the attorney, and not a staff member.  The attorney's goal should be to explain the bankruptcy process and determine whether bankruptcy is the best solution.  If the attorney pushes you to filing bankruptcy without evaluating your income and bills you are probably meeting the attorney.  If the attorney wants to pass you off onto one of his/her staff members, you might want to consider another office.     

You should have all your questions answered.  The attorney should have a broad understanding your personal finances.  These topics include your assets, income, and expenses.  At the end, you should feel more comfortable deciding whether you want to file bankruptcy.  You should be quoted a price to file bankruptcy.  I typically charge $1200.  I often quote prices that are lower than $1200.  Sometimes higher if your case requires more like you operate a business, have a lot of creditors, or if you make car payments.  Each case is unique.  The Eastern District of California Bankruptcy Court charges $335.  There are two online bankruptcy classes can cost as low as $35. 

It is helpful to bring copies of the following documents to your meeting: 

1.  Driver License

2.  Social Security Card 

3.  Last two years of filed tax returns

4. Last six months income stubs.  (Pay stubs, unemployment, disability, etc.)  

5.  Lawsuits, garnishments, foreclosures, abstract of judgments or tax liens.

6. Retirement statements (Your most recent 401k, PERS, STRS, and/or pension statements

7. Title certificates to all cars, trailers, Boats, etc.  

8. Most recent invoice statements to vehicles and real property

9. Life insurance policies.

10. Credit report from www.annualcreditreport.com (the free report)

11. If you are required to pay child support or alimony, than provide Marriage Agreement and court order.

12.  License of professionals, e.g. sales agent, truck driver, attorney.   

Photo credit: Marco Bellucci: Flickr