3 Options Regarding Financed Cars
When a person files for chapter 7 bankruptcy relief and they have a financed vehicle, the debtor has three options with regard to that secured debt. The debtor can reaffirm the debt on the vehicle, redeem the debt on the vehicle or surrender the vehicle in full satisfaction of the debt. In the majority of cases, I am seeing my clients reaffirm auto loans. They generally like their car, want to keep their car and they need their car to work and live in today’s society. In rare cases, the debtor can redeem the debt on the vehicle by paying the original lender the market value of the vehicle in full. This is done through an outside lender who steps into the shoes of the original lender. Although this may be a great financial move, it is rarely pulled off without major difficulty. This is because the original lender wants to litigate the issue of value. For this reason alone, redemption is not a widely used option. The third option is surrender. The debtor may realize that the value of the vehicle does not justify continuing to repay and be obligated for the debt on the vehicle. We see this commonly in upside down vehicles where the value may be 10,000 and the debt maybe 20,000 or 30,000.
Reaffirmation Agreements
An auto lender can offer all the different options and pose them towards the debtor through counsel. The lender typically wants to know if the debtor is going to reaffirm the debt, sign on the
dotted line and execute the contract in a timely fashion. Most reaffirmation agreements are tendered prior to the 341 meeting of creditors. The meeting of creditors is a great opportunity for the debtor and counsel to discuss the viability and feasibility of entering into the reaffirmation agreement. If the debtor wishes to reaffirm and the attorney believes it is in the best interest of the debtor and feasible, then the attorney and debtor will both execute the reaffirmation agreement at the meeting of creditors. Since the meeting of creditors is approximately 4 to 6 weeks after the 
case filing, the creditor gets the reaffirmation agreement signed, executed and returned within about two months of filing. The lender should also continue to receive regular monthly payments if the debtor is interested in reaffirming. However, many debtors do not wish to reaffirm.
Lender Options
So what is the lender to do in an existing chapter 7 bankruptcy case when the debtor has not executed the reaffirmation agreement? A smart lender will do one of two things. The lender can bring its own motion to modify the automatic stay. This will allow the lender to very quickly get into bankruptcy court and obtained an order which allows it to repossess the vehicle, sell the collateral and recover whatever proceeds the sale produces. The debtor has no defense to this motion to modify the automatic stay because he or she is not keeping the vehicle. The vehicle is not deemed necessary as in a reorganization case. And importantly, since the debtor is not agreeing to reaffirm, the bankruptcy code is on
the side of the lender which states that a modification can be permitted unless the debtor makes such an election. The lender can also simply wait until the discharge is entered before taking any action against the collateral. Since most cases last anywhere from 90 to 110 days, the lender has to wait a short window of time before moving forward by way of repossession. Often times, a lender will make a critical error with regard to recovering collateral.
Current Case
In a recent case, the debtor decided to not reaffirm the debt on a 2012 Nissan Altima. The vehicle had a market value of $9800 and an outstanding balance owed to the lender of nearly $22,000. This disparity made the debtor quickly realize that reaffirmation was not a good option. The debtor would be better off seeking another vehicle through another lender at a fair rate. That way, the debtor would have a vehicle with approximately the same market value as the amount owed. Unfortunately for the lender, it decided to send out a repossession order prior to the case being discharged. The lender also failed to bring a motion to modify the automatic stay. Thus, the debtor’s vehicle was improperly repossessed while the bankruptcy case still was open. Absent a discharge and absent an order modify the stay, the auto lender needed to wait prior to taking any repossession action. As of now, the debtor is without a vehicle, yet still under the protection of the bankruptcy court.
Lender Liability
Based upon the fact that the debtor’s vehicle was repossessed prior to discharge and prior to the entry of an order modifying the stay, I believe that the auto finance company is at risk for an order for sanctions. Although there was not significant time left in the case prior to discharge, the taking of the vehicle was still improper. We will contact the lender in a case like this to see if they are willing to return the vehicle to the debtor immediately. If not, we will bring a motion for sanctions in an effort to hold the auto finance company in contempt for violating the provisions of the automatic stay found in the bankruptcy code. The auto lender simply had to wait an additional week or two to have the legal right to repossess the vehicle. For some reason, they decided that they could not wait. They will now be hearing from my office. They will now need to take corrective action or be subject to sanctions.
