In the old days…that is, before 2005, car loans in bankruptcy were subject to the same rules as other secured claims.
Then, the loan balance was subject to being bifurcated: that is, divided into a secured claim and an unsecured claim.
The secured claim matched the value of the car when the case was filed and the unsecured claim was the balance of the loan.
Then came bankruptcy “reform” in 2005.
Car lenders got themselves a special deal from Congress that protected them from having their liens crammed down to the value of the collateral.
In other words, they wanted a better deal in bankruptcy than if the borrower had defaulted outside of bankruptcy.
Outside of bankruptcy, if there’s a payment default, the lender repossesses the car, auctions it off, and sues for the amount of the loan balance in excess of what the car was sold for.
The special deal for car creditors in bankruptcy consisted of two changes.
No pay and drive
Before 2005, the bankruptcy code had a provision that said that filing bankruptcy, by itself, was not a breach of a contract.
That meant that as long as a borrower who filed Chapter 7 kept the car payments current afterwards, he could keep the car. The car lender could not treat the discharge of the borrower’s personal liability as a breach of contract, entitling them to repossess the car.
BAPCPA, the bankruptcy “reform” bill in 2005, eliminated that part of the law.
Now, bankruptcy law does not prevent a car lender from treating the filing of bankruptcy as a violation of the contract.
The aim, on the part of the car lenders, was to require debtors to reaffirm their car loans.
A reaffirmation agreement reinstates personal liability for the car loan. If the debtor doesn’t pay after the bankruptcy, the lender can pick up the car and sue the debtor for any deficiency.
No cram down
The second “goodie” that car lenders got in 2005 changes to bankruptcy law affects car loans in Chapter 13.
After BAPCPA, the loan balance on a car bought within 910 days of the bankruptcy filing cannot be crammed down. By law, the loan balance has to be treated as if the value of the car equaled the debt.
The 910 days was chosen because it “just happens” to be the point at which most cars are worth the balance on the typical purchase-money loan. So bankruptcy lawyers often talk about “910 cars”.
While a Chapter 13 plan must now provide the secured creditor with the full amount of the loan balance on a 910 car, the interest rate may be changed by the plan.
Bottom line: you can keep your encumbered car through bankruptcy, if you follow the new rules of the road.
More about keeping a car in bankruptcy
Image courtesy of Fotopedia and Hyundai Motors.