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How to Eliminate an Auto Loan or Lease Using the Bankruptcy Code

Posted by attorney Michael Koplen

Many people find themselves in a situation where they owe more on a car than it is worth. For instance, my client purchased a 2008 Porsche Boxter for about $60,000. He took out a loan of $55,000 when he purchased the car. Due to the decline in the economy, his business took a nose dive in 2009. He was unable to make car payments. By 2010 he found he was a nine months behind on his payments to Porsche. Porsche started pressuring him to return the vehicle. Due to arrearages, interest, and late fees, by October 2010 he now owed nearly $50,000 on a car that was worth only about $27,000. Porsche was bothering him constantly to return the car. They intended to repossess the car, sell it at auction, and sue my client for the balance of the money he owed on the loan. For instance, if they sold the care for $20,000, their intention was to sue my client for the balance owed on the loan, nearly $30,000! My client filed bankruptcy in October, 2010. The bankruptcy rules allowed him to surrender the car to Porsche and now owe them an additional penny! Without bankrutpcy Porsche would have certainly sued my client for money he did nto have. The judgment would have impaired his credit and would have resulted in garnished wages, bank accounts, etc. But with the protection of bankrutpcy, Porsche was unable to assert any claim whatsoever. They got the car back and that was that. This is just one of the powerful tools available in bankruptcy. Another alternative is the "cram down". In a "cram down" a borrower has the right to pay the bank exactly what the car was worth and nothing more. In our case, if the client had wanted to, he could have paid the bank $27,000 for the Porsche, its actual value, and keep the car. The balance of the loan would be discharged in bankrutpcy. This is a wonderful tool for those who can afford a lump sum payoff of a loan. You pay what the property is worth and not a penny more, regardless of what you owe the bank.

There is nothing like bankruptcy. It is powerful. You are entitled to the protections of the bankruptcy law. But bankruptcy is technical and complex. Make sure your attorney knows what he or she is doing!

Additional resources provided by the author

National Association of Consumer Bankruptcy Attorneys

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Filed under: Credit Debt