With the exception of a few select large cities, getting around without a car is next to impossible. In fact, having a car is almost a necessity in those places that lack any type of public transportation. However, cars are expensive and few can afford to buy one outright, which leads them to take out loans to finance their purchase. While having the ability to finance a car purchase is vital for many individuals, it can lead to later financial problems and eventual bankruptcy. Depending on a person’s credit and available liquid cash for a down payment, car loans can come with high interest rates and expensive monthly payments. Cars depreciate in value quickly, so it is not uncommon for the worth of a vehicle to drop below what the owner owes on the loan.

If the owner is unable to afford the car loan payments at some point, and voluntarily surrenders the vehicle, or it is repossessed, the owner may still owe money. Cars that are voluntarily returned or repossessed are usually put up for auction so the bank holding the loan note can recuperate the outstanding balance, but rarely is the auction price enough to cover this amount. This leaves the owner with a car loan deficiency, and the bank can seek to collect this debt by obtaining a judgment for a garnishment of wages or lien against other property. If the outstanding debt is high, bankruptcy may be the best option to relieve this burden. However, how easy it is to wipe out this debt in bankruptcy depends whether on bank already has a judgment in hand. A discussion of how Chapter 7 bankruptcy can stop the collection of car loan deficiencies both before and after a judgment is obtained will follow below.

Automatic Stay

If the bank does not have a judgment, any pending or future legal action is halted when the bankruptcy petition is filed through the issuance of an automatic stay. The automatic stay acts to immediately stop legal action against a debtor’s property by creditors, collection agencies or government entities. This stay includes phone calls, collection letters and lawsuits, both pending and unfiled, and remains in effect until the bankruptcy case is concluded. This procedure is intended to pause creditor actions until the bankruptcy court decides which debts will be wiped out, or discharged. Car loan deficiencies are dischargeable, so the debtor would not be responsible for any outstanding amount once the bankruptcy case is over.

Judgments

If a bank already has a judgment, the process for discharging the obligation becomes a little more complicated. First, the underlying debt must be dischargeable, which, as noted above, car loan deficiencies are. However, creditors can object to the discharge of unsatisfied judgments, and ask the court to find the debt is not dischargeable if there is evidence the debt is related to malicious acts (assault) or fraud. If not, the debt would be discharged. If a creditor has a lien against property, the debtor can avoid the lien if he or she can show:

• The lien was issued as part of a money judgment and not a consensual settlement agreement;
• The property has equity and bankruptcy exemptions; and
• The lien eats up some or all of the equity subject to exemption.

For example, the homestead exemption in Indiana is $19,300, and if a lien from a bank for a car loan is for $10,000, the bankruptcy court is likely to allow the debtor to avoid the lien if the debtor files a motion for this relief within the proscribed time period.

Consult a Bankruptcy Attorney

If you are overwhelmed by debt, bankruptcy may offer the relief you need to get your finances in order. Talk with a bankruptcy attorney about whether this option is right for your situation before committing to this complex legal process. Christopher L. Arrington represents clients in Chapter 7 bankruptcies in the Indianapolis area, and can help you stop creditor harassment. Contact him to schedule an appointment.