When a consumer buys a car, often they feel like they were transported off to a heavenly place. And then they start making car payments. Higher default rates for subprime car loans have led to lenders writing a fewer number of these loans. However, there still appears to be a potential for more subprime auto loan defaults. Subprime auto loans are loans given to consumers who would be ineligible for regular car loans for reasons like having a credit score of 600 or lower, or not having a high enough income. Subprime loans are riskier and tend to come with higher interest rates, higher payments, higher fees and longer terms. It’s not unheard of to see interest rates of 20% to 30% APR.
What happens after you default on a car loan? Usually, if you default on a car loan, the creditor will repossess the vehicle, sell the vehicle, and then sue you for the loan’s deficiency balance. The deficiency balance is the difference between what you owe on the contract and what the creditor sells your vehicle for, usually at an auto auction. Even if you voluntarily surrender the vehicle back to the car creditor, there will likely still be a deficiency balance as the lender will add fees and costs onto the amount you owe before selling the car often for an amount much lower than what is the total balance due. Once the deficiency is determined, the creditor will likely sue you for the balance due, which will add on additional attorney’s fees and costs on top of an already high deficiency.
A chapter 7 or chapter 13 bankruptcy can be valuable in dealing with and even discharge in full a motor vehicle deficiency balance. If you have the car in your possession when you file a chapter 7 case, you can surrender the vehicle to the car creditor and owe nothing. But what if you’re committed to keeping the car because it’s your only source of transportation? If you’re current with the car payments and you think you can afford the payments after the bankruptcy, you could reaffirm the terms of the subprime car loan. However, this may not be in your overall best interests. Usually, the car payments will still be too high, even if you could talk the lender into lowering the interest rate somewhat during the reaffirmation process. If you reaffirm the car loan in chapter 7 and then later default on that loan, you will be on the hook owing the balance due on the account after the creditor repossesses the car.
Chapter 13, on the other hand, may help you retain the car while avoiding the deficiency, providing you reach certain thresholds. In chapter 13 you may be able to change, or as they say, cram down the terms of an onerous subprime auto loan. If you purchased the motor vehicle more than 910 days before filing a chapter 13 case, you might have the ability to value the car down to its market value, which becomes the secured portion of the debt. The remainder of the total owed is an unsecured deficiency paid a pro rata portion together with the other unsecured claims according to the terms of the chapter 13 plan. The remaining balance owing would be discharged upon the completion of the chapter 13 plan. Even if you purchased the vehicle within the 910 days threshold, today you might have the ability to modify the interest rate on the subprime loan down to as low as 5.25% in the Tampa Division of the bankruptcy court. A 5.25% interest rate would likely mean lower car payments paid through the chapter 13 plan, even when you add on the chapter 13 trustee’s statutory fee. The interest rate in the chapter 13 case is determined by a formula known as the “Till” rate, named such after a U.S. Supreme Court case. The Till rate is determined by using the prime rate of interest and adding two to four percentage points to account for risk and the time value of money.
Are you mired down with a high-interest rate subprime auto loan and feeling overwhelmed by this and other debt problems? If you are, call me today for a free consultation and learn how you can get a fresh start and press on regardless.
