There are a variety of reasons why you might fall behind on a vehicle payment. When you owe debt on a vehicle, and fail to make your payment(s), the lender or finance company (I will refer to them as auto loan creditors) generally does not care why you fell behind on your payment(s); they are only concerned with whether you will catch up the past-due payments. Since vehicle financing usually involves big money, most auto loan creditors are diligent about enforcing their contract rights when a default occurs. When auto loan creditors finance a vehicle purchase, they usually acquire a security interest in that vehicle. Their security interest often gives them a right to repossess the vehicle if you default on your loan.
If you think your vehicle is in danger of repossession, here is what you can do:
- You can contact the auto loan creditor and discuss whether they are willing to work with you on a plan for catching up the past due payment(s). Such a plan may involve adding the missed payment to the end of your loan, or adding an extra amount to your next few payments that will catch up the payment(s) you missed.
- You can discontinue making any payments at all and let the auto loan creditor repossess the vehicle. This strategy comes with a high risk that once the auto loan creditor repossesses the vehicle and resells it, the resale will not generate enough money to pay off the debt you owed on the vehicle – this is called a deficiency balance. If that happens, the auto loan creditor may assert a claim against you for the deficiency balance. This deficiency balance is now an unsecured debt. The auto loan creditor may sue you and obtain a judgment against you for the amount of the deficiency balance. If you find yourself the target of a deficiency claim, you may be able to seek protection in a bankruptcy case. If you qualify for chapter 7, you can discharge the deficiency balance claim since that debt is unsecured. You will have lost the vehicle, but you will no longer be making the loan payments, and you will no longer be liable for the deficiency balance once you receive a bankruptcy discharge. There is also the possibility that the vehicle sale will pay off the loan and there will not be any deficiency balance. In that case, you would have lost the car but you will no longer be making the loan payments and the auto loan creditor has no further claim against you.
- You may be able to file a chapter 13 bankruptcy case and save the vehicle. Filing a chapter 13 case will allow you to repay the total debt owed on the vehicle over a maximum of five (5) years, and in most cases will reduce the interest you pay. If the vehicle loan is more than two and a half (2.5) years old, the chapter 13 case can allow you to pay the value of the vehicle rather than the debt that is owed. Paying the value of the vehicle rather than the debt is an obvious benefit if the debt exceeds the value, or you financed the purchase of an older model and value has decreased more rapidly than your loan balance.
- If option number 2 (above) involves more uncertainty than you can bear, but you are prepared to lose the vehicle, there is a safer way to achieve the same result without that uncertainty. That option is to file a chapter 7 case before the auto loan creditor repossesses the vehicle. A chapter 7 bankruptcy petition includes a document called “Statement of Intentions.” This document is where the chapter 7 debtor declares his or her intent as to their secured debts. For the secured debt that is your vehicle loan, you can declare your intention to surrender the vehicle. Once the vehicle is turned over to the auto loan creditor, you don’t have to worry about any deficiency balance claim since you are already in a chapter 7 bankruptcy case, the auto loan creditor will be prohibited from suing you for any deficiency balance claim and you will no longer be liable for any deficiency balance claim once you receive your chapter 7 discharge.
If you are unable to find someone who can help you make your vehicle loan payments or are unable to refinance the vehicle loan to get a more affordable payment, these are the four (4) options you will face. If you default on your vehicle loan, you should contact a bankruptcy attorney to discuss whether you qualify to file bankruptcy and if so, which type of bankruptcy case best suits your goals.
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