Repossession during and then after bankruptcy

by Paul Staley
Sunday, 31 August 2008 20:52

Bankruptcy lawyers are seeing an up-tick in the number of creditors who are demanding that borrowers pay off completely the vehicles borrowed against. Or, the creditor demands the borrower recommit to the debt, meaning the lender and the borrower agree in writing to pretend like the bankruptcy doesn't exist, at least regarding the car lien. This is a fairly recent practice.

Why are lenders doing this? In the days before "The Reform" of 2005, the law allowed a borrower to agree to keep stuff and continue making payments on the stuff - usually a car or truck, sometimes a computer or appliance. You might think that's the same as a written recommitment to pay the loan, but it's different in important ways. With the "pay and keep the stuff" situation, the borrower who filed Chapter 7 would still have to make the payments in order to keep the vehicle, but was treated differently if he/she/they later couldn't pay. The lender could take the vehicle back (same as now) but could not sue for the difference between what's owed and what the lender gets when the car is sold. That's different from now, where the lender repossesses and CAN sue if the borrower recommits ("reaffirms") later fails to pay.

You might think a lender would be glad to continue receiving monthly payments on a vehicle instead of taking it back, even if the borrower didn't want to "reaffirm", especially where the borrower owes more money on it than it's worth. But no, often even when the borrower keeps the payments up and on time. Let me speculate a moment as to why. Lenders are using these strong-arm tactics because they CAN, and because they guess the likelihood is (a) the borrower can't afford to oppose their motion to take the stuff back and (b) the debtor / borrower, who is now a poorer credit risk, will be motivated to hit up family and friends to pay off the vehicle, getting the lender off the hook completely.

So, if it looks like you're going to have a hard time making the car payment even after your bankruptcy case is over, you may have to plan ahead to either let the car go away, and replace it; or to figure out how you can pay off the whole enchilada so you have clear title.