December 15, 2017

Relief From Your 72 Month Car Loan

cram downFinancial experts bemoan the “crisis” in student loan debt (over $1.2 trillion as of 2015) and the rising rates of credit card debt ($733 billion as of 2015) but no one seems to be talking about yet another debt bubble – the huge rise of auto loan debt.

In 2012, total auto loan debt in the United States passed $1 trillion. Currently, the average household owes over $27,000 to vehicle lenders. More problematic, many of these loans extend well beyond 3 or 4 years. According to Edmunds.com, as of 2014, over 60% of auto loans were for terms over 60 months, with nearly 20% of these loans using 72 to 84 month terms.

60 months, of course, equals 5 years. 72 months equals 6 years, and 84 months equals 7 years.

Why a Long Term Vehicle Loan Means Trouble

You may ask “why should I be concerned about signing a 60 or 72 month car loan if I can afford the payment?” The answer, in a word, is “depreciation.”

Cars and trucks are depreciating assets. This means that they go down in value with each day and each mile of wear and tear. When you sign off on a 5 year or longer loan, you won’t be break even on your loan for at least 3 years. All your payments through at least year 3 (and most likely longer) will be applied to interest only. And my experience has been that folks who pursue long term vehicle loans often have less than perfect credit such that their interest rates are 7%, 8% or even higher.

This means that if your vehicle breaks down, or if you want to replace your car or truck 3 or 4 years into the loan, you will have to come out of pocket to satisfy the loan. If your vehicle is totaled in a wreck before the break even point, you will have to come out of pocket to pay off the loan because insurance companies pay property damage settlement based on “low retail” value.

If the dealership offers to “roll your existing payment” into a new loan, you’ll end up paying even more, because the new loan will include the leftover finance costs from the original loan plus the unfavorable terms from the new loan.

In essence, a 5 year or longer car loan equals a long term rental, except that you bear all the risk of loss. In case I am not being clear, a 5 year or longer loan is a toxic loan, and almost never a good idea. Even 4 year loans are less than ideal. [Read more…]

Car Titles and Chapter 13

return of vehicle titleAn issue that that seems to arise in more and more Chapter 13 cases has to do with the release of car titles.  Even when the vehicle lender has been paid in full in the Chapter 13, there seems to always be a delay or problem getting the vehicle title released back to my client.

It seems that vehicle lenders are taking the position that they do not have to release a vehicle title back to the bankruptcy filer until the case is over, instead of when the lender is paid in full.  In my view, lenders are acting improperly when they do not return my client’s title, and in most cases they will back down, although it may take a letter or a phone call from me.

As you probably know, Chapter 13 modifies the installment contract between a debtor and his vehicle lender.  In effect, Chapter 13 allows a bankruptcy filer to refinance his vehicle loan.  In a recent case I filed, for example, my client owed $12,000 to her lender and was paying over $450 per month, with just under 2 years left on the loan.  I proposed a Chapter 13 plan that paid $275 per month to the lender.  The lender was going to be paid in full but under my plan, it was going to take just over 4 years to get the lender paid.  The Chapter 13 plan also set out an interest rate for the payout.

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Are Mortgage Modifications in Bankruptcy a Good Idea – Part Two

Earlier this month, I wrote a post on this blog setting out the question of whether Congress should enact legislation empowering bankruptcy judges to modify the terms of mortgages within a Chapter 13 bankruptcy.

Several of my colleagues in the Bankruptcy Law Network have argued that adding this power to the authority of bankruptcy judges will help stem the foreclosure crisis we are seeing in many cities and towns and that so called “voluntary” mortgage modification programs created by mortgage lenders has not and will not work.

Bankruptcy Law Network founding member Cathy Moran, who I respect greatly, has created a special advocacy page on her website that you can use to encourage your elected representatives to support mortgage modification in bankruptcy.  At  the same time Cathy notes that the judicial mortgage modification legislation now circulating in Congress leaves many unanswered questions.

North Carolina bankruptcy attorney Adrian Lapas, writing on the Bankruptcy Law Network blog, makes a compelling case in favor of judicial mortgage modification – click on the link to read Adrian’s post.

What, then, are the arguments against judicial mortgage modification.   A thoughtful and well reasoned argument against modification comes from Andrew Grossman of the Heritage Foundation.   Mr. Grossman argues that judicial mortgage modification will impose uncertainty and financial loss on mortgage lenders, thereby increasing the cost of mortgage loans in the open market.   Credit, therefore, would further tighten, causing additional limits on mortgage availability. [Read more…]

Are Mortgage Modifications in Bankruptcy a Good Idea – Part One

There has been a lot of chatter on bankruptcy blogs and bankruptcy lawyer forums about the possibility that Congress will amend the bankruptcy laws to give judges the power to modify mortgages.   To offer some perspective, bankruptcy judges have long had the power to modify vehicle loan contracts and other secured debt claims but never mortgage debt.

When I first started practicing bankruptcy law some 20 years ago, I was introduced to the term “cram down” which is a kind of bankruptcy lawyer slang for the process of forcibly changing the terms of a contract against a creditor’s interests.  In a typical car loan cram down, you might enter into bankruptcy with four years remaining on a five year note, a monthly payment of $530 per month, an interest rate of 12% and a total outstanding balance of $28,000.   After cram down the interest rate might be 6% and the outstanding balance may be $18,000 (which represents that approximate value of the vehicle) and the monthly payment to the creditor within a Chapter 13 plan might be $250 per month.

As you can see from this example, the purpose of a cram down is to bring a debtor’s obligation more in line with the value of the collateral and prevailing interest rates.  I suspect that Congress allowed cram downs on car loans because it saw a problem in the market place whereby consumers with poor credit were ending up with unreliable used cars at unreasonable terms in the secondary market.

Debtor’s attorneys also included cram down provisions in Chapter 13 plans to modify the terms of other secured loans, such as furniture and jewelry.  However, home loans were specifically excluded from cram down.

In 2005, with the enactment of the BAPCPA changes to the bankruptcy laws, Congress added restrictions to the power of judges to cram down vehicle purchase loans.   In other words the era of freewheeling bankruptcy cram downs was over.   Under the amended law, vehicles purchased less than 910 days prior to the filing of a bankruptcy case were not subject to cram downs.

These new restrictions on the authority of a judge to forcibly modify the contractual terms between a debtor and his car finance company were the result of extensive lobbying on the part of the automobile industry who argued that market forces, not bankruptcy judges ought to set the terms of vehicle purchase financing.

There has been no organized effort to change the rules regarding vehicle cram downs.   Instead, Congress has turned its attention to mortgage loans.   Perhaps this is not surprising since the federal government, through its mortgage guarantees, now owns or controls a fairly significant chunk of mortgages owed by Americans.

Legislation is now circulating in Congress that would allow a bankruptcy judge to change the terms of a mortgage, which would involve such things as:

  • reducing the outstanding balance to line up with the current market value
  • modify the terms (monthly payments)
  • change the interest rates

The sense among bankruptcy lawyers is that if this legislation makes it into law, Chapter 13 bankruptcy will become a viable and attractive option to middle class families who might never have considered bankruptcy relief.   Mortgage debt is often a family’s largest obligation and an opportunity to “re-write” one’s mortgage at more favorable terms while at the same time reducing credit card debt and canceling unfavorable leases and service contracts may very will put the bankruptcy option on the table.

Is it a good idea to enable mortgage loan cram downs?   If you have a mortgage and have been contemplating bankruptcy should you wait?  We’ll explore those questions next….

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